Institutional adaptability

Why this theme — the scope

The development and quality of institutions are crucial to the coherence and stability of a society, its economic performance, and overall well-being. Institutions can be strong or weak, trustworthy or corrupt, resilient or rigid — and they never operate in isolation. A society's institutional structure consists of many public, private, and hybrid organisations across many sectors.

Weakly designed supervisory mechanisms in the financial world can induce banks to take undue risks, encourage the design of financial products with undefined risk characteristics, tolerate corruption, and accept low buffers — witness Silicon Valley Bank's recent demise. When a crisis occurs, trust in the financial sector and the performance of the market system is severely damaged. The global financial crisis further stimulated the attractiveness of populist parties, exploiting distrust in politics and institutions.

Trust as the invisible mechanism

Trust holds communities and societies together. While embedded in laws, regulations and ethical codes of behaviour, trust is not a given. The 2008 financial crisis and the spillovers of Silicon Valley Bank's troubles to other banks demonstrate this. The SARS-CoV-2 pandemic is a textbook example: state vaccination policy and coverage suffered from negative sentiments regarding politics. Worldwide there was a significant increase in endorsement of conspiracy theories, with social media as the fast intermediate instrument fuelling distrust towards authorities.

High-functioning institutions are crucial to protect societies against political capriciousness and for maintaining trust. Institutions interact with preferences, expectations, incentives and behaviours in a dynamic environment. We need to understand, on a fundamental level, the drivers of institutional change so we can develop, design, strengthen, and maintain institutions and policies that adapt quickly to changing circumstances.

How we engage — our work

Change implies the need for institutional adaptability. Many institutions operate in the economic realm — both private (multinational enterprises that do or do not take responsibility for climate footprint, taxes, and population well-being) and public (financial supervision tightened after the global financial crisis — but probably not enough). The key is building robustness against vulnerabilities that threaten economies by enhancing adaptive capability.

Six challenges and vulnerabilities

• Demographic developments — A substantial decrease in working-age population will seriously affect an already tight labour market and make it hard to finance and maintain the welfare state, public pensions, and healthcare.
• Mitigating and adapting to climate change — Climate change and biodiversity loss are linked to increased frequency of climate disasters. Transition costs put an impressive financial burden on private and public budgets.
• Public debt — Related to climate-mitigation needs, public debt could exceed safe margins of a country's debt capacity, putting public budgets under pressure when interest rates rise.
• Uncertain interest rates — Very low rates make monetary policy ineffective; rising rates can throw financial institutions into trouble (Silicon Valley Bank). Fluctuating rates are generally harmful to economic stability.
• Geopolitical tensions — A rapidly changing geopolitical landscape triggers new sentiments and stimulates a shift from globalisation to national/regional orientation. Unease and uncertainty lend a hand to polarisation.
• New technologies — Rapid digitalisation and automation bring progress but can quickly devalue the raison d'être of specific institutions and organisations, with potentially severe consequences for economic and social inequality.

Key research areas

The Economics and Business sector contributes through several key research areas:

• Role of public policy in enhancing institutional adaptability — including the importance of educational goals and policies for a well-educated, adaptive labour force.
• External environment and internal organisation of institutions — how policies influence them and vice versa.
• Robustness of the financial sector — how financial institutions can operate prudently in changing markets with ongoing digitalisation and wide-ranging regulatory policies.
• Trust and competition — balancing strategy, profitability, and moral values; how traditional multinationals adjust to markets with low societal trust while facing competition from Big Tech and platform rivals.
• Growing polarisation — causes and effects on democratic functioning; linking macro-level issues to micro-level challenges like institutional leadership.
• Digitalisation demands — how organisations function and adapt in a digitalising world.

What to expect — our contribution and impact

The aim is to provide leads for private, public and hybrid actors on improving the resilience, stability, and proper functioning of the Dutch economy and our democratic society. The financial sector exemplifies the need for a coherent approach — the role and functioning of banking, insurance, and pension sector must be considered both in isolation and in interaction, affected by regulatory setup and government role.

Our work covers all aspects of the broader welfare concept, including ecological sustainability and social equality. We build bridges across micro, meso, and macro-level issues. We develop extensive knowledge of good leadership practices and strategies, including the social licence to operate. The focus is not only on large enterprises but especially on the economic backbone of society: SMEs, independent contractors, and freelancers.

Stability and adaptability

History shows freedom cannot be taken for granted; democracy requires constant commitment and a sense of responsibility. Strong and trustworthy institutions can be viewed as the signature of democracy — the foundations and the safety net. Stability cannot be without adaptability. And without that, economic prosperity will be out of reach for many.

Institutional adaptability is essential to all four other themes: climate change, digitalisation, equity and equality, and health. These issues require a solid system of institutions to serve society's well-being as the ultimate goal.