RENT-SEEKING, INSTITUTIONS AND ECONOMIC DEVELOPMENT: A TALE OF RENT-SEEKING SOCIETY

Abstract

The institutional perspective of cross-country differences in economic outcomes gives contrasting explanations on the persistence of inefficient institutions in developing countries. Colonization, social fragmentation and the existence and use of natural resources are the most frequently discussed causes in the available literature. In this study, we analyze all the three explanations together by providing a case study of Nigeria. Nigeria is characterized by colonial legacy, social divide revealed by ethnicity and religion, and huge windfalls from oil. Based on our descriptive analysis, we find that the lack and incoherence of formal institutional order is the main factor for Nigerian underdevelopment. Ethnic politics has shaped the formal institutional framework which is inefficient and incoherent. Colonial legacy has reinforced the effect of ethnicity by failing to provide a national ideology and instead, providing a regional structure to rule. Similarly, the windfalls from oil have intensified the effect of ethnicity by invoking civil conflicts, arising mainly from the distribution of common pool. Thus, no single factor on its own can explain the persistence of inefficient institutions; rather, it is the combination of exogenous and endogenous factors that shape institutions.