Paul Robinson — Institutions Rule, But Which Ones?

A couple of pieces published last week – one by John Herbst, director of the Dinu Patriciu Eurasia Center of the Atlantic Council, and the other by Forbes’ Russian affairs blogger Mark Adomanis – provide a neat contrast which aptly displays the illusions of many Western liberals about the prerequisites of economic progress. Before getting to them, however, we first need to make a little digression into economic history.

As I explained in my book Aiding Afghanistan, in the 1950s, 60s, and to a lesser extent 70s, economists on both sides of the Iron Curtain tended to believe that economic development was a simple matter of capital accumulation. The reason why underdeveloped states were poor was thought to be that they lacked the capital to get the process of accumulation going. Development assistance therefore consisted of providing them with financial capital (normally in the form of loans) or physical capital (dams, roads, factories, etc) in order to kick-start the process.

By the 1980s it had become blindingly obvious to almost all concerned that this wasn’t working. Economists therefore had to revise their theories. Rather than capital, what matters, some concluded, is ‘institutions’, a word which is somewhat misleading as it includes not just what ordinary people consider to be institutions (government, banks, etc), but also less tangible matters such as laws and culture. You can pour almost any amount of capital into a country, but if the correct institutions are not in place, it won’t make a jot of difference.

But which institutions? To those in the West, the answer was evident – Western ones. Clearly, the prerequisite for economic growth must be the establishment of a set of institutions similar to those in Western Europe and North America. That meant that in order to prosper, underdeveloped states first had to introduce democracy (multi-party elections, a free press, transparent government, etc), liberalize their economies (via privatization, elimination of price controls, the opening of borders, etc), and liberalize their societies (granting equal rights to women, racial minorities, etc). Success would surely follow.

What could possibly go wrong?

Following the collapse of communism, the purveyors of institutional economics found a market for their ideas in Eastern Europe. Things did not quite work out as planned. Institution-building is a slow process and inevitably involves a transition period in which some institutions are present and others are not. This can create some strange incentives as well as significant distortions in the economy. Meanwhile, the establishment of a new set of institutions requires the destruction of the old set, but if these are destroyed too rapidly before the new ones are in place, economic and social collapse may ensue. This is indeed what happened in many post-communist countries....

Did reason and common sense prevail?

At that point, the logical response might have been a pause to reflect whether one size really does fit all. Instead, the West has by and large chosen to redouble its efforts in the same direction as before. If institution-building hasn’t worked as planned, then that must be because it wasn’t pushed hard enough.....

Irrussianlality

Institutions Rule, But Which Ones?
Paul Robinson | Professor, Graduate School of Public and International Affairs at the University of Ottawa