Discuss the significance of the institution
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It is hard to deliberate on the key constituents of a functioning society and economy when you are hungry. And it is even harder to believe in the importance of these institutions when the same society or economy has failed to provide you with an education, or a job, or the means with which to feed your family.
There is a wide range of institutions that support societies, incorporating structures that defend property rights and the legal framework, including the court system; the political system and the framework within which government operates; institutions which regulate economic and financial stability; and those that provide social insurance and safeguard security (including the police and military). As such, these institutions make up the fabric within which citizens, businesses, political parties and the economy operate, and provide a framework of rules, social norms and understood processes that are both explicit and implicit.
State institutions are an economy’s primary facilitator of social and economic development. Research shows that these institutions can be a major source of growth; effective institutions aid investment in physical and human capital, in research and development, and in technology. Institutions also have an important redistributive role to play in the economy – they make sure that resources are properly allocated, and ensure that the poor or those with fewer economic resources are protected. They also encourage trust by providing policing and justice systems which adhere to a common set of laws. Properly functioning institutions are a signal of a well-managed economy, enabling governments – and businesses – to borrow money more cheaply. In turn, higher growth and lower borrowing costs give governments the resources to spend on social needs as well as on investment into infrastructure, health and education.
The reverse is also true. Failed or ineffective institutions undermine trust, raise the cost of doing business and increase the cost of government borrowing, limiting the ability of government to spend. If a government does not carefully manage its expenditure, rising borrowing costs can quickly lead to a debt spiral from which recovery is difficult, and where everyone suffers, but the poor the most.
One of the biggest challenges for the first democratic government in SA was stabilising and reinforcing a very weak economy. The government inherited an enormous stock of debt and a budget framework with persistently large deficits. Ongoing massive government spending fuelled a large external deficit too, and the currency was vulnerable and prone to weakness. Inflation was rampant and interest rates volatile. Wealth and economic resources were highly concentrated along racial lines, and for the majority of the country, basic needs were not met. All of these issues reflected a failure of state and economic institutions under the apartheid government.
At the time, the ruling ANC government took the tough decision to rein in spending, to recapitalise the state pension fund (which had been plundered), and to create a transparent long-term budgeting process which anchored fiscal policy to a sustainable path.
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