2003 November Report of the Auditor General of Canada

November 2003 Report—Chapter 9

Exhibit 9.1—Why do institutional arrangements matter?

In the 1990s analysis of the economic development challenge facing developing countries concluded that ineffective institutional arrangements were at the heart of the problem. The strength of institutional arrangements affects the performance of the economy through production and transaction costs. For example, if officials can change the terms of leases or royalties at will, then businesses will avoid their jurisdiction, or pay additional costs to buy extra leases or resources in case access is restricted.

Institutional arrangements reduce costs by establishing stable structures around economic interactions. These findings have led to significant changes in intervention strategies. For example, the World Bank now focusses on strengthening institutional arrangements rather than supporting businesses or infrastructure.

In 1987, researchers in the United States established the Harvard Project on American Indian Economic Development. The project has researched and collected a wealth of case studies on a range of American Indian nations and, in recent years, has begun research in Canada.

The three main findings of the Harvard Project are that First Nations prospects for economic success are increased when

• they make their own decisions on the use of their resources and on their strategies for economic development;
• they have capable institutional arrangements, that is stable political structures, a fair dispute resolution mechanism, the separation of business from politics, a competent bureaucracy, and a strategic orientation; and
• their institutional arrangements fit their cultural identity and unique way of doing things.

Source: World Bank and the Harvard Project on American Indian Economic Development