Prof. Andrés Rodríguez-Pose, Princesa de Asturias Professor & Professor of Economic Geography,
Director, Cañada Blanch Centre, London School of Economics

Around the world, cities, towns and regions are facing constant pressures to adapt in response to globalisation, technological progress, changes in industrial production, and new patterns of migration and trade. Yet, the dominant development policies are proving incapable of providing answers to these challenges. Strategies based on a mix of physical and human capital and technology that worked relatively well in the past have not succeeded in dealing with growing territorial inequality and its treacherous economic, social and political consequences. This makes it imperative, in Europe as elsewhere, to understand why territories diverge and why returns on public intervention targeting economic development keep diminishing.

In their search for answers, researchers have begun to look more closely at institutions. As experts struggle to fully understand why some territories fail while others thrive, the answer may lie in some deficiencies in our theoretical toolbox and how these have been affecting development policy interventions. In recent years, it has become clear that we are seeing diminishing returns from interventions in all three traditional main growth axes. This decline signals that a key ingredient in the growth and development equation is missing. Indeed, recent studies have shown that institutions trump traditional factors such as trade, resource endowments, and geography in significance and influence on economic development.

Yet large parts of how institutions shape economic progress still remain the ‘dark matter’ of economic development. In several areas, the literature on the links between institutions and development has faced considerable stumbling blocks. First of all, efforts to link institutional quality to economic development have been confronted with the fact that defining institutions is difficult and remains fraught with controversy. Concepts about institutions are often subjective, if not outright contentious.

Secondly, measuring and operationalising the institutional dimension is problematic for several reasons: a) many different types of institutions are contextually and geographically specific; b) time also affects the returns of specific institutional arrangements; c) institutions and development tend to be endogenous; and d) institutions are also closely connected to the three other determinants of growth, as well as with innovation and education.

Despite these serious barriers, significant strides have been made of late in assessing institutions at the subnational level, particularly in Europe. The biggest breakthrough came from the Quality of Government Institute at the University of Gothenburg, which has produced a solid and increasingly popular quality of government (QoG) index. Numerous studies have turned to the QoG measures and concluded that government quality matters for economic performance. In fact, government quality not only affects economic growth, but also the returns on European Cohesion policies and regional competitiveness.

Corrupt and/or inefficient governments undermine regional potential for innovation and entrepreneurship, and diminish the attractiveness of regions to migrants. Regional environments and decisions on the type of public good investment are also affected, while inclusiveness and participation in political processes suffer.

In short, institutions and government quality shape the outcomes of any sort of public policy in general, and of development strategies in particular. Improving institutional and government quality at the local level is, thus, a sine qua non to achieve sustainable and resilient development, and improve the well-being of the general population, wherever it lives. A country like the Ukraine can certainly benefit enormously from bringing institutional quality to the fore in the analysis of development bottlenecks.

This does imply that changes in approach are necessary and that, as a way to incorporate their institutional dimension into the Ukraine's development strategy, a number of objectives need to be met, including:

1. Better understanding of variations in institutional quality and the dynamics of institutional change: To make sure that institutional reform works in delivering greater well-being for citizens wherever they live, first variations in institutional quality across the country need to be examined, as well as how institutional change might influence regional and urban economic performance, focusing in particular on the impact of institutional change in lagging and depressed areas.
2. The role of formal and informal institutions in economic development: The impact of institutions does not end with formal institutions. While there is a need to understand and improve how the powers, quality and competencies of urban and regional authorities shape economic development, improving social capital, trust, tolerance, openness, work ethic, and creativity will have an equally important impact on the future well-being of Ukrainians.
3. Institutional mechanisms of economic development: Improving the returns on development policy requires an understanding the mechanisms through which formal and informal institutions affect urban and regional economic performance. Institutional regularities contributing to the sustainable success or failure of different types intervention across the whole of Ukraine need to be identified.
4. Institutions as part of development policy: Finally, the first three objectives have to be blended and transformed into viable policy recommendations that could be used in the design and implementation of territorial development policies. Specific focus should be placed on developing precise and workable policy recommendations to help improve returns on development strategies and public policy interventions in the country.

Copy edited by Lidia Alexandra Wolanskyj

All terms in this article are meant to be used neutrally for men and women

Prof. Andrés Rodríguez-Pose has participated at the International Expert Exchange, "Development of Municipalities: trust, institutions, finance and people", organized by U-LEAD with Europe Programme in December 2020. His keynote speech delivered during the conference is to a great extent depicted in this article.

In the name of the U-LEAD with Europe Programme, we would like to express our great appreciation and thanks for both inputs of Prof. Rodríguez-Pose. The article will be included in future online publication Compendium of Articles.

Compendium of Articles is a collection of papers prepared by policymakers, Ukrainian and international experts, and academia after International Expert Exchange 2019 and 2020, organized by U-LEAD with Europe Programme. The articles raise questions in the fields of decentralisation reform and regional and local development, relevant for both the Ukrainian and the international audience. The Compendium will be published online in Ukrainian and English languages on the U-LEAD online recourses. Please, follow us on Facebook to stay informed about the project.