society are limited and defined by institutions. They include “any form of constraint” that human beings devise to shape their interaction and thus they can be either formal (i.e. the US Constitution) or informal (customary interactions). Therefore, working on both directions (formal and informal) if we deliver the major role of institutions in a society to reduce uncertainty or transaction cost by establishing a stable (even though not necessarily efficient) structure to human interaction, we shall be on a right path to even establish a proper social contract with the aim of attaining regional cooperation or integration. This shows the salient role of institutions towards forming a social contract within a society and reaching a successful integration in a broader term within regional context.
In other words, to form such a social contract, institutional change would have a direct impact and an apparent role to play upon the formation of the social contract. Institutional change is a complicated process indeed because the changes at the margin can be a consequence of changes: a) in rules, b) in informal constraints, and c) in kinds and effectiveness of enforcement. In other words, formal rules, informal constraints and the enforcement mechanism are the key factors in delivering the kind of change we seek in institutions.
Moreover, institutional change typically occurs in an incremental fashion rather than a continuous one.
This means even discontinuous changes such as revolution and conquest are not quite effective mainly because of informal constraints in societies that are embedded deeply along the course of history. North well explains that even though formal rules can change overnight due to political and judicial decision-makings, yet informal constraints that are embedded in traditions, customs or codes of conducts would remain impervious vis-à-vis the policies or changes in deliberated policies.64
The Arab rising delivers a good example in particular the case of Egypt. The recent history few years after the revolution in Tahrir Square revealed that long-lasting embedded political institutions in Egypt were strong enough to resist the cause of a radical change as the result of an overnight revolution. Out of the views gathered from the Egyptian citizens at Tahrir square, one may realize that factors such as corruption, depletions of ethic and cultural values in the ruler’s traits and mismanagement through the wrongly adopted policies and strategies have been the main causes of poverty in Egypt. “We are suffering from corruption, oppression and bad education. We are living amid a corrupt system which has to change” says Noha Hamed a 24 years old worker at an advertising agency in Cairo.65 According to Acemoglu and Robinson, Egypt as an example is a poor country mainly because it has been ruled by a narrow group of elites who have organized the government and society in such a way to benefit
64 North, Douglass C. p. 6.
65 Acemoglu, Daron; and Robinson, James A. “Why Nations Fail: The Origins of Power, Prosperity and Poverty.”
Crown Business, N.Y. 2012, preface, p. 2.
themselves or their chosen groups at the cost of the rest of the Egyptian people.66 In contrast, for example, Britain is richer than Egypt because they experienced a revolution in 1688 that transformed the politics and consequently the economics of the nation.67 In Britain alongside their revolution the institutions were set up so as to result in such transformation bringing about economic growth and development.
According to Acemoglu and Robinson, such political transformation is fundamental for a poor society like Egypt to become rich. Reda Metwaly, another protestor in Tahrir Square, believes the revolution basically made Muslims and Christians united, as it did the old and the young all having similar quest.68 In accordance with the authors’ analogy if we get to realize “when and why such transitions occur”, we may be better in a position to evaluate that such movement might fail like many instances in the past, or
“succeed and improve the lives of millions.”69
In case of Egypt therefore, what is missing seems to be the strength of the institutional framework of their politics and society as the main root cause of the poverty that eventually triggered the revolution. Such institutional framework in fact persisted in different forms having it eventually bounced back on the political stage. Why? Mainly because of the path dependency and their persistence to stay on the scene in the course of a history.
Therefore, the time of writing the book was perhaps a bit premature to hope for drastic changes as expressed by Acemoglu and Robinson. From this angle, what should be appreciated about Douglass North’s work is the significance of history and the fact that he is aiming at “human cooperation” by referring to the evolution of institutions as a way to create a hospitable solutions thus leading to economic growth. This idea of cooperation looks to serve as a complementary factor to what Acemoglu and Robinson perceive as simply finding the right time to do the change or as they call it “the critical junctures.” Of course there are sections in time that would deliver the changes easier and more susceptible for societies, as it has been the case in many revolutions, however, generally speaking the effective changes should be viewed with a fundamental approach towards incremental changes of institutions for better. And for that, the human cooperation is highly demanded to deliver such change.
A mere replication of revolutions like what ‘happened in England, France, and the United States’ does not necessarily bring about the same fruit for Egypt or the MENA region in general but rather contemplating and studying the root causes of the poverty in that region and taking into account the gradual increment of institutional change in the course of time might bear out the solution towards an economic growth and
66 Ibid, p. 3.
67 Ibid, p. 4.
68 Ibid, p. 5.
69 Ibid.
sustainable development which indeed may also result in an institutionally constructed social contract.
When one refers to “economic history,” it should be the history of the country or the region concerned rather than exemplifying the replication of revolutionary models regardless of strong institutional bondage that resists on the way to the progress of societies concerned.
North also expresses the imposition of “constraints” that exist in societies from the most primitive to the most advanced… parallel to the same idea of imposed “chains” as expressed by Rousseau or
“discontents” as expressed by Freud. Put it differently; in our daily interactions with each other be it within a family unit or societal relations or business activities, there is a governing structure managing such relational issues which are overwhelmingly defined by norms of behavior, codes of conduct and conventions.70 Here is where the common cause or values seem quite relevant and terms such as language and culture as important criteria appeal when it comes to social cooperation or unification, because they form a major part of the heritage that we call culture thus applying transmitted information in a social sphere.71
The process of information in the mind depends on the brain’s ability to learn through structured natural languages that can code for perceptual, attitudinal and moral (behavioral) as well as factual information (Johansson, 1988, p. 176).72 Hence, culture is in fact a transmission from one generation to the next by way of teaching and imitation, which includes values, knowledge, and other factors important to social behavior (Boyd and Richerson, 1985, p. 2).73 Moreover, North provides that culture is a conceptual framework with language-centric basis that has the ability to encode and interpret the kinds of information necessary to be presented to the brain.74 Therefore, we may conclude that in case of MENA, with a view to commonality of language and culture in many countries of the region, the processes as well as the prospect for regional cooperation and economic integration based on a similar institutional framework can be promising and hopeful.
Besides, North seems to highly and positively consider the value of thoughts, beliefs and ideologies in forming human behavior; as such that human valuable actions including free blood donation, or dedication to a particular ideology such as communism, commitments to religious beliefs and sacrificing for abstract reasons could not easily be dismissed as many neo-classical economists try to dismiss them.
Such values are not isolated events and as such they should be counted for in our understanding of human
70 North, Chap. 5, p. 36.
71 Ibid, p. 37.
72 Johansson, S. Ryan. “The Computer Paradigm and the Rule of Cultural Information in Social Systems.” Historical Methods, 1988, 21: pp. 172-188.
73 Boyd, R. and P. J. Richerson. “Culture and the Evolutionary Process.” University of Chicago Press, 1985.
74 Ibid.
behavior especially within a social sphere.75 Such common cause of thoughts and ideologies are also well rooted within the societies of the MENA region, which can positively base a common principle to progress both socially (to be reflected on the social contract) as well as politically/economically forming more formidable inclusive institutions towards creating a new social contract and further cooperation.
North also proposes his transaction theory of exchange by which the place of institutions becomes salient when it is coupled with the theory of the costs of transacting. By combining them we get to realize why institutions exist and what important role they play in the functioning of our societies.76 If we add a theory of production (productivity and efficiency) we can then analyze the role of institutions in the performance of economies. Accordingly, the costliness of information is realized as the key to the costs of transacting, and beyond that, the costs of protecting rights and policing and enforcing agreements could also be added.
Such measurement and enforcement costs form institutions on all social, political and economic levels.77 In other words, formal and informal rules and constraint along with an enforcement mechanism are illustrated in measuring such costs.
Moreover, protection of rights connotes to the property rights whose status is well identified in North’s writing. Property rights are considered to be the rights that individuals possess as the result of their own labor and goods and/or services they hold. Such possession or appropriation has a legal nature which encompasses legal rules and enforcement as well as organizational forms and the norms of behavior, or in a word; the institutional framework.78 Adequate institutions can insure property rights therefore.
To illustrate the vital importance of the property rights, he mentions a good example comparing property rights in Beirut in 1980s with those of a modern small-town U.S. community to cover the spectrum. In Beirut for example, most valuable rights are defined within in the public domain which is in the hands of those with the more violent potential to be successful. Whereas in the US town, a large share of rights are defined by legal rules and such rights in the public domain are mainly allocated through traditional norms of behavior. In fact the differences between these two examples are to be seen in the functions of their institutional structure. In short, viewing the philosophical roots; when law and order exist, and the rule of law governs, public and private spheres are much more in their right places, otherwise anarchy of power prevails. As North explains; the productivity of a modern high income society may not accord with political anarchy.79 As such, it can be concluded from these lines that to sketch a proper model of
75 North, Douglass. “Institutions, Institutional Change and Economic Performance.” Cambridge University Press, 1990; p. 26.
76 Ibid. p. 27.
77 Ibid.
78 Ibid, p. 33.
79 Ibid, p. 35.
institutions we need to take into account all characteristics of informal constraints in societies along with formal rules and enforcement as well as the way they have evolved within such societies. Then we would be in a better position to put them all together forming the institutional structure that sets up the political as well as economic orders.
To further exemplify the existing correlation between property rights and that of institutional framework which sets the order in society, we may look at the striking deadlines in interest rates in the Dutch capital market in the 17th Century as well as the English Capital market in the 18th Century both confirming the high level of security in property rights which are indeed the fruit of the effective interaction of both formal and informal institutional constraints. The merchant codes of behavior along with its enforcement of contracts are also of significance as they evolved in the course of customary practices into the formal law.80 In other words, establishing proper institutional framework and practicing accordingly could make the formal and informal institutions emerge in the course of time thus shedding light on and insuring the important components of individual rights including the property rights.
Acemoglu and Robinson in their book Why Nations Fail divide institutions into two forms of “inclusive institutions” and “extractive institutions.” By such terms, they firstly connote to the political institutions which consequently would bring about the same kind of economic institutions. North in his book81 also has a similar notion to the significance of the political institutions as he explains the persistence of inefficient property rights that existed mainly because enacting efficient rules could jeopardize the rulers’
interest or simply because less efficient property rights could deliver more tax revenues than efficient property rights.82 Obviously the former could bring more benefits to the extracting group of the elite.
North then refers to the efficiency of the political market as the key to the above issue. In other words, with low political transaction costs and accurate models to guide them, the result would be the efficient property rights. In contrast the high transaction costs of political markets would result in the kind of property rights that doesn’t produce economic growth and from it no more effective economic rules can be generated.83 What matters here is in fact not only the incremental character of institutional change but an attempt to devise the kind of institutions that can provide commitment along with more efficient bargains. And efficient bargain will result when the bargaining power would be in the hands of those who
80 See Douglass C. North. “Institutions, Transaction Costs, and the Rise of Merchant Empires.” in J. Tracy, editor, The political Economy of Merchant Empires, Cambridge University Press, 1991.
81 North, Douglass. “Institutions, Institutional Change and Economic Performance.” Cambridge University Press, 1990.
82 Ibid, p. 52.
83 Ibid.
a) wish to act towards a positive change, and b) would be trained and educated to that cause and c) be immune of corruption; all reflecting same conclusion which was the fruit of Rousseau’s social contract.
Moreover to the importance of property rights, North is of the belief that effective rules arise from polities to property rights or to individual contracts. Contracts reflect the kind of property rights structure including the enforcement characteristics, and the structure of property rights would dictate the opportunity set of the players as well as the forms of organization they devise in specific contracts.84 And for this, the language that economics presents along with its theory is “simple, complete, and straightforward.” Or simply put it, economics can adequately be the common language of development.
In short, the important moral lesson drawn from the above discussion can consolidate the major role that institutions play in the performance of an economy.85 Moreover, Douglass North is in fact trying as well to show the important role of the markets within such institutional framework as, according to him, the market too would be a mixed bag of institutions that either increase efficiency or decrease it.86
Comparing the institutional framework in case of the advanced economies such as the United States, England, France, Germany, and Japan with those of the Third World confirms, as exemplified, that how importantly institutional framework plays a key role in delivering relative success to the economies both from a cross-sectional point of view and in the course of time. Such institutional constraints and the way they evolve through time would be the key characteristics of economies in delivering success or failure as, many examples from the above two categories of the advance and developing nations can prove this claim by showing how institutional change can lead to incredible result towards economic success.
However, there are perplexities on the way of such institutional changes which are well explained in many works including North’s and Acemoglu/Robinson’s. They can guide us to the relevancy and important position of the formation of social contract in the context of legalizing the rights and freedoms that may have positive and direct impact on the process of institutional change in society.
Moreover, with reference to the significance of freedom as explained by Amartya Sen in all aspects of society including the economy, such institutional change should be nurtured within an environment that is well exposed to economic freedom which then may result in economic success and development. There is some good literature making the link between economic freedom and that of growth and measures of well-being. They include some studies by Scully (198887, 199288); Barro (1991)89; Barro and
84 Ibid, p. 52 (Section IV).
85 North, Douglass. “Institutions, Institutional Change and Economic Performance.” p. 69.
86 Ibid.
87 Scully, Gerald W. “The Institutional Framework and Economic Development.” Journal of Political Economy, 1988, vol. 96, issue 3, 652-62.
Martin (1995)90; Knack and Keefer (1995)91; Knack (1996)92; and Keefer and Knack (1997)93 all showing that overall the rule of law when coupled with measures of well-defined property rights along with public policies that do not attenuate such rights, are among the factors that generate economic growth.94 Oman is a success example within the developing world where economic reforms programs coupled with economic freedom resulted in its high rates of growth and the flows of FDIs into the country. Chapter (9) delves in detail into some examples of economic success in the MENA region including Oman.
2.2- From Institutional Change to Economic Behavior
In the first Part of this Chapter, I tried to show that institutions due to their social and cultural strength and influence play the key role in guiding the societies towards forming a new social contract for MENA. And such social contract can then shape the economic behavior leading to a successful economic performance.
Reciprocally, achieving a proper social contract would yield the field for institutional change in society.
In other words, institutions are the forming components of a feasible social contract. The way I interpret;
in fact, institutions are presently the actual effects of history in every society.
Douglass C. North in his book on institutions argues that investing on and shaping the institutions could lower transaction costs in a society. The act of individuals is based on incomplete information as well as subjective models that can turn out to be erroneous, and that incomplete information is not enough to correct such models.95 Therefore, he concludes that the significant role of institutions in shaping the economic behavior is inevitable. In the societal sphere, institutions are not created to be necessarily efficient; they are in fact the reflection of the interests of those with bargaining power who are to devise
88 Scully, Gerald W. “Constitutional Environments and Economic Growth.” The Princeton Legacy Library, 1992.
89 Barro, Robert J. “Economic Growth in a Cross Section of Countries.” The Quarterly Journal of Economics, Volume 106, Issue 2, May 1991, Pages 407–443. Retrieved from: https://doi.org/10.2307/2937943
90 Barro, Robert J. and Sala-i-Martin, Xavier. “Economic Growth.” (McGraw-Hill, 1995), 539 pp, Journal of Economic Dynamics and Control, Elsevier, vol. 21(4-5), pages 895-898.
91 Knack, Stephen; and Keefer, Philip. “INSTITUTIONS AND ECONOMIC PERFORMANCE: CROSS‐COUNTRY TESTS USING ALTERNATIVE INSTITUTIONAL MEASURES.” Economics and Politics, Wiley, 1995, pp. 207-227. Retrieved from: https://doi.org/10.1111/j.1468-0343.1995.tb00111.x
92 Knack, Steve. "Institutions and the Convergence Hypothesis: The Cross-National Evidence." Public Choice, Springer, June 1996. vol. 87(3-4), pages 207-228.
93 Knack, Stephen; and Keefer, Philip. “Why Don’t Poor Countries Catch-Up? A Cross National Test of Institutional Expectations.” Economic Inquiry, 1997, 35 (3): 590-602.
94 Looney, Robert E. “The Omani and Bahraini Paths to Development: Rare and Contrasting Oil-based Economic Success Stories.” Achieving Development Success: Strategies and Lessons from the Developing World; 2013, p. 15.
95 North, Douglass, C. “Institutions, Institutional Change and Economic Performance.” Cambridge University Press, 1990; p. 16.