Eggertsson - Imperfect Institutions; Possibilities & Limits of Reform (2005)

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Imperect Institutios



This seres provides a for theoretcal and empirca

of henomea. works that

ocus o te teactos aog cogtve ocesses, dv-

da behavior and socia otcomes It is eseciay oen to

interdscilnary ooks that are genney integrative

Eitor:

Editorial Board

Timr

Tyer Cowen

Diego Gametta

Avnr Greif

Vanerg

Tyler Cowen. Markets and Cultural Voices: Liber vs. Power in the of

Mexican Amate PaintersThinn Eggertsson. Impeect Intitutions: Possibilities and Limits

o ReoVeo Social Science Knowledge and Economic Develoment:

A nstitutional esig ersectivePhip J. Neson ad Kenneth V Greene. Signaling Goodness: Social Rules

ad Public Choice

Stephen Edito Democrcy, Goveance, and GwthOmar Azfar and Chares A Cadwe, Editors. Market-Augmenting

Te Intitutional Fouations for G. Fm to Democrcy: The Transformation of

Amercan Goement Davd . Beto Pete ad Aexade abao Edtos. he

Ci: Choice Communi and Civil Socie Aeander J. Fied. Altruistically Inclined? The Behavioral Science

Evolutiona Theo and the Origins Reciproci David George. Preference Pollutio: How Market Create the Deire

We Dislike

Juian L. Simon. Te reat Breatug and Its Cause Gwth Ecoomic Change in World

L. egon nstttons and Agan Change n

Euean ito

Lee J. Aston Gary D. Liecap, and Bernaro tles Conict and

Land Use The Develoment of Rights and Lad Reform on theBrazilian Amazon Frontier

Eirik G. Frubotn and Rudof Richter. Institution and Ecoomic Theohe Contribution of the New nstitutional conomics

Danie B. Kein, Editor. Studies in the olunta licitatio of

Good Conduct

Richard A. Easterin. Growth Triumhant: The en-first Centu in

Hitorical Persective



Iperect Institutos

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Acknowledgments

For more than twenty years I have inspiration and motivation inthe work o who is always years ahead o me i hisideas. Dog is an intrepid thinker and a tre riend. It is to him I

dedicate this book.I see Imect Institutions as an extension o my previos book

Economic Behavior and Institutions, which amed atemerging contribtions to the new istittionalsm in economcs. Thenew book explores the implications or poicy o new instittional eco-nomics reectig on recent deveopments in the ed as wel as inmy own thinking.

Coleages at home and abroad have given me invaable hep inwriting this book. They a have my thanks bt their nmber is argeand ony a few are mentoned beow Recenty I have spent mch timeaway rom my roots at the niversity of cean . Initialy my riensat Washington niversity in St. Los pt me on the instittional path.Two years with Lin and Vincent Ostrom and their at Indiananiversity's Workshop in Political Theory and Poicy Analysis wereivaluable both intellectaly and Similarly two years atStanord niversity's Hoover Institution were important and deightf. O the otstanding people at Stanord niversity I owe speciainteecta debts to Barry Weingast and Avner Grei. One semesterwith Steven N. S. at the University of Hong Kong s School oconomics and my to the ast. Twosemesters at the Max Planck Institte or Research into conomic Sys-tems in ena opened a door to Geman and modernGermany. Unortnatey my assocation with the ena Institte was

ct by the ntimey and tragic lness o its director and esteemedcoeage Manred .In recent years I have spent the fa in Iceand and the spring ter

n ew York nitially Olin Felow at niversity's Schoolo La. The to learn more legal aspects o instit-tions and enjoy sperb intellectal company o proessors and



vi Acknowledgments

students at the aw schoo was a wonderu experence The same s trueo my contact wth the potca scence department For a ths thankVctor Godberg Rchard eson and many other rends atba My current home away rom home s Po-

tcs Department where am parttme proessor enjoyng a greatnteectua and generous supportve coeagues ampartcuary ndebted to the department char Bruce Bueno deMesquta

The nversty o ceand has treated ts wayward son wth patenceand generosty menton ormer presdentSvenbjrn and oer dean gst Severa omy coeagues n ceand have read ndvdua chapters o the manu-

scrpt sger Jnsson Thorvadur and Tryggv Thr Her-bertsson Gy oega read the entre manuscrpt thank them orvauabe suggestons aso thank nnumerabe proessors graduatestudents and conerence partcpants n varous countres who haveasssted me wth ths book

The edtor o the seres Tmur uran has crtcay vrtu-ay every paragraph o my as we as ts overa structure andogc. The book has beneted enormousy rom hs suggestons. amaso thanku or thoughtu comments by two anonymous readersThe sta at the nversty o Mchgan Press has been exceptonayecent hepu and encouragng my nta nhouseen M McCarthy and her successor Raphae Aen MarcaLaBrenz was n charge o copyedtng and dd a ne job I aso thankKey O'Connor edtora assstant or her hep

Fnay go to persona rends and memberswho have supported me n varous ways



Contents

PRT I Impeet IsttutosTeoy

Imperfect Institutions an Growth Theory inMoern Economics 9

CATR Barriers to Growth: Institutions anSocia Technoogies 23

CAT Competing Socia Moes

CATR 4 . Stabe Poverty an Unstabe Growth

CATR 5 . The Political Logic of Ba EconomicsCATR 6 . Inecient Socia orms

34

47

5974

PRT II mpa Iteude Poety Tap ase Study

CATR Why Icelan Starve

PRT III Isttutoa Poy

CAT 8 . Appying Socia echnoogies Lessons from

99

the Ol Theory of Economic Policy 27

C AT R 9 . Degrees of Freeom in Institutiona Reform 38

Euing Poverty raps Escaping History 52

CHATR Property RightsTranspants 74

COCLO he Subte Art of Maor Institutiona Reform 9 1

NotesBibiographyAthor InexSubect Inex

20323 1255261



IntroductionOpportunities Lost

the ast two and a hal centies , a and technological evo-tio has ceated astonding oppotnities o hmanity, he

enes have acced pmay to peope in the indsia conties.he majoity o he hman ace ives in he socaed deveopng con-ies hat enjoy ew o opponities even economicayadvanced conies have egons and ndsies that lag ehind . In thisook I am concened with lost : the o why mostnatios have not eoyed l enets o technological evol-on. social nsittions, I popose, ae he oot o hepoem.

his vome contines and extends the wok hat I egan with Eco-nomic Behavior and Institutions (1990 which ied ode and synhesize vaos contions to he sudy o social instiuions. hemldiscipinay line of eseach tha I evewed in 990 had come oage i the 980s , and I imited my to that modied neo-cassica economics while eaving coe methods he newinstittional economics sets ot to explain how instittions coodinateehavo, aect tansaction coss, and enae o ock economc actvty. My 990 ook toed he so speak fom he valleyso the montainops eginning y examning economc estsow om dieent kinds of popey ighs institons then movng p to exploe the o exchange, contacs, ms,and maket pactices and naly looking at the social and politicalamewok that enveops the economy. Focsing on andnvontay tansactions and tansaction costs has poved to e a

fifu mehod fo analyzing the o oth economic andnoneconomic acvty.Many peope seem to hnk hat nheen in the new nsttiona

economics is an o cam he is ecient.mistaken, this view is ecase a segment o

the iteate asks the olowing qestions: the stcte o



mperfect nsttutons

ecient economic (and soca) oganizaton die om one type oactivity o exchange envionmen to anothe? I diences exist, dothey aise ecase dieent monitoing, and enoce-ment poems eqie dieent sotions? These stdies attempt to

test the ogic o the tansactioncosts appoach and o exampe, toexpain dieences in the o ms and contacta aangements in competitive makets as sotions to vaios tansaction po ems. The ndeying assmption o these woks is that maket competition seects ective aangements and weeds ot moe costy ones.Othe even potay the instittions o tia societies as eec-tive sotions to tansaction polems in a wod o imited knowedgeand technoogy. Withot ecient oganization, pimtive

societies wi not svive the oces o nate, it is assmed.Mechanisms o teing socia aangements when they exist, wi

seect ony om avaiae (and oen impeect stctes and theseection citeion is not aways economic eciency. When eciencyias contaminates the iteate, it eects not the asic methods o thenew instttiona economcs t the mindsets o indvda schoas.In act, the tansactoncosts appoach is an eectve way o anayzing waste soca aangements that has heped s ette ndestandthe poems o open access pevese egatoy egimes and destc-tive economic systems.

When socia stctes stae and socia systems yied expectedand desiae ests, thee is eativey itte demand o new know-edge aot the deepe ogic and inne mechanisms o schand systems. The it is know how to theisystems and is sge o inteest in instittionaanaysis at the end o the 1 980s shod e ndestood in this context.t that me, insttions an economic sysems had come nde cosesctiny. In Eope and Centa sia the Sovet states and theieconomes had coapsed in the deveoping wod cetain economieswee in steep whie othes wee economic miacessevea indstia economies seemed to se om economic sceosisa new ecoogica movement was aoot, pocaiming sideeects o ndstiaization; and nay, advances in compte science

and iotechnoogy wee ceating hitheto nknown poems o own-eship and popety ights.he new instittiona economics was o iediate inteest to scho

as eomes the y oeing a esh way othinking aot economic oganization and its oade socia context.Yet, as it tned ot, the did not y satisy eomes' expecta



Introduction 3

onso my own. he new nsona economcs sveyed n my990 ook s essenay a sac heoy ha anayzes he ogc o pa-

and he soca ocomes ha hey yed does sowho oeng a pocy pespece Banejee n an essay on

he "ses o economc heoy aves a a sma concson. Ds-cssng he od qeson o whehe economcs s a posve o nomave dscpne he saes ha each sdscpne whn economcs hasmade s own choce: "Fo exampe he eaed seds o posvepoca economy and nsona anayss ae expcy ocsedowads nepeng he wod And n a oonoe he adds"Canonca o hs sye o ncde Sge (986)Oso ( 965 and oh ( 98 (2 . We ae heeoe e wh he

neesng qeson o why he new nsona economcs dd nogve moe wegh o he pocy mpcaons o s conons .

Imerfect Institutions anches as an ogowh o Economic Behavior and Institutions n wo decons. Pa I and pa II a case sdy)expoe ae pa III seeks ways o hnk sysemacayao nsona pocy w now ey smmaze he man ea-es o my appoach n hs ook.

Moden gowh heoy n economcs s my sang pon o sdy-ng why some cones ae eavey poo. Gowh heoy has gonehogh hee phases n he as ha ceny has nwavengy

echnoogca change he engne ha dves ssanedeconomc gowh. conomss ke o hnk o echnooges as pcgoods ae nonva n and aaae o a ae heyhave een nened deveopng ceay have no nsaed

echnooges My appoach o hs pe desced nes and 2 s o dvde echnooges no podcon echnooges andsoca echnooges. I age ha anaycay s essena o make scha ecase podcon echnooges have chaacescs o

goods echnooges do no ave we. Foexampe s a ease o a poo cony o eecvey appopae oeceae he podcon echnooges sed y amnm smees hano appopae he soca echnooges epesened he Cons-on o Wesen conac aw Moden podcon echnooges

howee ae no eecve ness y soca echnoogeso mnma qay. Reasonng aong hese I concde (as oheshave done ha nanca and engneeng sses ae no he mae

o poey n ha soca pocaacos assocaed wh mpeec nsons ae. he concep o socaechnoogy emnd some eades o soca engneeng o age



4 mperfect nsttutons

scae socia panning, t tha is not my intention. As I se the tem,social technologies descies the mechanism o the decentaizedpocess wheey socia socia(see especiay the thid section o chapte age that impeect

instiions povide y a he most signicant expanation o the e-aive povety o nations .

My ocs in this ook theeoe is on institions that geneatepovety and ackwadness . It may appea hat instittiona pahoogyis a topic withot mch genea inteest. I eieve, howeve, that coseexaminaion o maadies wi yied insighs and knowedgeno ony aot he nate o sond institions t aso aot ces.

In chaptes 2 and 3, I modiy standad methods

inseting what I ca socia modes into the decision pocess . My ag-men is tha oth odinay peope and poicymakes ehave ike socia

when they sive o ndestand socia and makedecisions in a socia envionment they compess compexity into sim-pe socia modes. Socia modes speciay o poicymaking (y actos o one type o anohe) ca poicy modes. i isassmed hat actos in tems o hei poicy modes,the compexity o hei choices depends on he compexity o the mod-es The appoach does not excde the possiiity that actos some-times oow oines . I am inteesed in ideoogica dicoeated movement o modes o distinct gops in compaaediections, sch as towad a moe eigios (seca) state o towadcentaizaion (decenaiation) o economic acivity.

Chapes 7 expoe aspects o povety aps and seachieate o expanations Povety taps, which say invove

poitica, economic, and ca eemens, ae socia eqiiia withow eves of technoogy and income. The chaptes discss o exampe the poitica ogic o impeec economic oe oinecient socia noms and how aditiona instittions oth eecient in the static sense and inecient thatock scta eom. o sppement the ook's theoetica secionand o cimax the o taps, I a case stdy,"Why Iceand Staved. The conty's deady povety tap had oth

oeign and domesic eements, and my anaysis centes on he mysteyo a missing indstya scae shing which emegedony towad the end o the nineeenth centy.

In pat III, I to the poem o instit poicy and how toappoach it. I egin this expoation in chapte 8 y oance o the theoy o poicy, emeged ae Second



Introduction 5

Word War to spport macroeconomic poicy and panning . Actay,the theory o economic poicy is an appication o mathematica deci-sion theory and advises poicymakers how to poicy modesto reach the est avaiae macroeconomic otcomes Athogh the

approach is independent of any particar economic theories the pio-neers istrated with Keynesian macroeconomics which was in voge at the time. I riey trace how rationaexpectations macroeconomics transormed or thinking aot poicyy assigning poicy modes to representative economic actors and y

that private actors are capae o conterpoicy. I aso dis-css ondedrationaity which stdies how var-ios actors orm, adjst, and coordinate poicy modesa

reqirement eore rationaexpectations eqiirim is reached.Finaly, I sggest severa essons or instittiona poicy rom morethan a ha centry o thinking aot macroeconomic poicy.

Chapter 9 discsses how endogenos poicy imits easie instit-tiona reorm and even precdes reorm, i the ogic o standard ratio-nachoice theories is taken iteray When socia strctres are com-petey known the Bhagwati paradox tes s that in sociathere are no who are wiing and ae to reorm socia instit-tions eyond what aready has een done or panned. Limited know-edge and poicy modes provide some reie rom Bhagwati' y creating opportnities or advice and persasion(especiay in times o heightened ncertainty) that may ead to revisiono poicies. Yet one o my main concsions is that economists areprone to nderestimating the importance o poicy and the

or reormFoowing a discssion o varios shocks that sometimes make

povery raps oosen their hod chapter 1 0 arges hat a conrys history aects oth the sccess o reforms and the they take.Whe economists ook at an economy in isoation rom the rest o soci-ety, they sometimes to caim a sch China,is mistaken in oowing its particar path instead o choosing someother economic reorm strategy that apparenty has greater pay-o. Sch argments are oen awed ecase the repath was not

freey chosen rom a arge set o aternatives grew ot of argain-ing and cashes among socia grops with conicting interests. Reorpaths are sippery, reversas are common and history casts a ong shadow, how nations hande instittiona reorms. Ithree cases to this viewpoint: China, the USSR and



6 mperfect nsttutons

hapter examines why transpanting or otherwise introcing new socia technooges (or exampe, a modern aw code) is a deicatetask with We need to know more aot the cases oage negative tanspant eects, the mnimm eves o egaity

reqired to sstain economc growth, and the eastcost strategies thatpoor contries cod oow to reach the reqired eve. I arge that theares o new nstittions oen have airy straightorward casesthat need not invove irreconcae conict etween tradtiona sociamodes and modern nstttions. Governments may simpy invest tootte in the and the opeations o moden socia systemssch as ega athogh the centa govenment iswiing, tradtiona (oen oca centers o power can act to

new systems that directy chaenge traditiona athority.here are other considerations . The evidence sggests that the easi-

e road to progress the avaiae openng varies or historica andpoitica reasons rom one contry to another. There is no singemethod or a transition to a modern economy. With incompete poicy

the poicy pocess invoves againing ndencertainty as we as earnng seqentia o andprivate poicy modes Litte is known aot the drection that schdynamics may take. Economic systems oen perorm we or a con-sderae period o tme ony ater to ecome scerotic and smp tsocia scientists are etter at expaning these trning points ex postacto than at predicting them. Fnay I concde with an empiricacase that the at o major reomattempts y the Iceandic govenment the end o the twentiethcenty to intodce eements o excsive propety in the con-try's 200mie sheries zone.



P A R I

Imperfec Institutons- Theory



C H A T R

Impefec Institutons and Gowth Theoy nModern Economcs

Introducton: The Dependent Variable

In this stdy, economic gowth is the dependent vaiae of pimayinteest, t that is not the whoe stoy ecase my chief concen iswith the socia cases of economic faiein patica wth the oeof instittions n the pathoogy o economic stagnation and decine. Inmedicine, pathoogy is a discipine that the o diseases,the cases, pocesses, and conseqences . he goaof eseach in pathoogy, howeve, is not to stdy fnctiona manifes-tations of diseases fo thei own sake t athe to nd ces anddeveop peventive medicine. My motivation fo stdying economicdecine is sma the eief knowedge of economic egess wiimpove o of economic pogess .

o assess the economic heath o a nation I se a conventona timpeect indicato, the income (o pecapita. Ofca natona and income aesotons to task o in one ge netotput of a podces in a conty. ! Yet data fom nationa incomeacconts adjsted fo cased y exchange ates , pemit swith oeae accacy to ank conties accoding the otpt pe

an to tack thei peomance thogh time. It is unikey thatfte in measng economic wi sgncantychange the anking of nations in tems of thei pospeity o ate oideas the socia o eative economic

In the twentieth centy, the distition o nationa economic pe-

foance meased y aveage otpt pe peson has ecome moeneqa than at any pevios time in histoy (DeLong 2000 720). Ifocs on the ow end of this neqa t domestic neqaty I ony fo its possie oe as an in thegowth eing that economic may eeated to ehavio economic gowth.



10 Imperfect Institutions

Redistrition within a contry from rich to poor hosehods ovi-osy improves the iving standards of the poor, t sstained eco-nomic growth is o a dierent he historica increase inincome and otpt per person in the States istrates the over-

wheming importance of economic growth reaive to redistrition.Best esimates show that on the eve of the American Revolion77583 gross domestic prodct per capita amonted to $765 in992 doars t y 997 gross domestic prodct per capita aso in 992 doars was $26 847, aot thirtyve times greater Hten 2000 . he errors in these estimates party cance and theresida ias is nikey sstantiay to distort re pictre.

In the of economics, of per capita or per

capita income is known as intensive growth, and growth in the totaotpt of an economy is known as extensive growth. In theextensive growth aowed he hman species to mtipy spi ot ofArica, and popate the varios continents Roerts 997 , chapter .Prior to the mode era neary a workers everywhere were primariyoccpied in arming and hnting, t extraordinary sstained inten-sive growth, originating some 250 years ago in Western Erope, hasrevotionized economic performance and daiy ife in the indstriaand postindstria economies . he economic revotion was feed ytechnoogica change yet a the eginning of twentyrst cerythe deveoping contries in many parts of the word have noteen ae signicanty to pgrade their methods of prodction andthereore have aen ehind Jovannovic 2000, 67 . In 2000, averageincome eves in the word' s poorest and the word' s richest nations di-ered y a actor o more than

he mode growth experience presents s with these two asic pzes. First there is phenomenon of growh eaders. Why o somecontries for a period of time ead the rest of the word in deveoping and appying sperior methods of prodction? For exampe ding the Revotion 750830, position oftechnoogica eadership, which it ater ost Mokyr 990, chapters 5 0). What actors the timing and path of technoogica andeconomic revotions? Mowery and Neson 999 chapter 9. Second

there is the pzzing variaion among nations in their aiiy to orrowadapt ad appy prodction methods that innovatig nations areadyhave deveoped. What coditios and forces prevent some contriesrom empoying of his stdy is not con-cerned with the o growth eadership the o new tech-nologies, or strategies o secondtier nations R. 996.



I m perfect I nst itut ions a nd G rowth he ory 1

Insead, I acke the second pzze, he inaiiy o eiher creae or imi-ae new echnoogies .

his chaper riey anayzes the o modern growth theoryin economics and ooks or expanaions o economic stagnation in

owincome conries. According o he division o aor in he ed oeconomics, growh heory has he ask o ongerm economicgrowh and is hereore a ogica saring poin or his inqiry ino heproems of growh aggards. We wi see ha growh heory is concerned with eqiirim properies o sccess growing economiesand does not expicity examine the roe o socia ingrowth. its atest version, the socaed new or endogenos growthheory, impiciy expains poor growth performance appeaing to

nspecied socia arriers ha preven conries rom drawing on hesock o word knowedge o pgrade heir prodcion mehods. In hissdy I eween wo caegories o appied knowedgeare reevan or economic growh, prodcion echnoogies and sociaechnoogies, and that inaiiy or o appy appro-priate socia technoogies is the main case o reative ack-wardness. he proem o sccessy introdcing new socia tech-noogies is the organizing theme o his vome.

Chaper 2 oines he asic argumen ao why socia echnoo-gies raher echnoogies consie crcia arriero growh. he inroduces key oos and conceps Ise to anayze these isses. My approach is a modied version o henew economics. he tradiiona toos o economics areno or stdying important aspects o socia technoogies.I eieve that ninking to standard economics wodias he seecion of variaes and possiy make s rn a ind eye oimporan socia phenomena (Sigiz 999 . Ideay he o insiions and socia echnoogies reqires a ros heory of socia sysems, which economics and socia science in genera ack. he res ismy ececic approach.

Learnng from Growth Theory

he h ree Waves

Since i rs appeared arond he midde o he wenieh cenrygrowth heory three phases, a

on he reationship etween physica and raher than onhe socia environment o prodcers . As a genera re, theory




idenies wo ways o aising a county's aveage ouput pe woke.Fist i a conty's economy is inside the podction possiiiies on-tie which is detemined y the est avaiae echnoogiesthe theoy sggests that the conty is comining its inpus in

inecient popotions. In his instance the conty is ae o aiseaveage oupt pe woke and move owad he podcion oniey adjusting its aco (inpu atios which usuay means aising theatio o physica and human capita o asic o unskied ao sevices.Second when a cony is on its podcion possiiiies onie onynew technoogy tha moves the ontie can the aise pecapita. theoy new is the imate engine ogowh.

In is s two phases the theoy simpy assumed hat new echno-ogy oowed a ime end and did no atempt to expain echnoogicachange. he hid phase endogenos heoy does no expaingowh in tems o xg technoogica change and ais to anayzein any detai what socia cicmstances avo the and appi-caion o knowedge. gowth heoy howeve has aan-doned aditiona assmption a conties have eady accessto stateotheat podction echnoogy which impied hat vaiaionin nationa economic peomance is aways cased y dieen acoaios.

In sum gowth theoy es us tha counies ae eaivey pooecase they have aied o accmae inpts paicay capa inis many oms except hat ecent gowth theoy ec-ognizes hat poo somehow ae no ae to wod know-edge to pgade thei podctio capacities We now ook at hesendings in moe detai.

The H arrodDm ar Mod el Creates Path Dep ende nce

gowth theoy in the theoeica wod o J. May-nad Keynes (936 he athe o moden macoeconomics. heGea Depession o 929 and the paae ascendance o Keynesianmacoeconomics changed the wodview o most economists and

ecpsed the idea o a secoecting maket sysem. Equiiim at oweves o empoyment now appeaed o e an empiica and heoeicapossiiity and hoght peope wondeed whehe gowing economies even moe stationay ones wee pone to unempoy-men o oveheaing. Evsey Doma ( 946 set to answe thistion and wok (and eaie wok y pt main




steam gowth theoy on a path that t has oowed thogh the chang-ng andscapes o the ast ha centy.

he HaodDoma mode emeged n esponse to concen aposse maance etween a conty's gowing podction capacty

and the incease in tota demand eqied to keep p with inceasng capacty. he eason o the neasness was hatnceases when the capacty to podce gows ase than the demando otpt. As the ogna ocs o he anayss was no on the soceso economc gowth, HaodDoma modes simpy assme that someate o technoogica change is gvenand that t is o the aosavng vaiey. he theoy aso makes ctica that ao andcapia mst sed n xed popotions the npts canno

sstted fo each othe.I oows om he stngen assmpons o the mode hat a Ha-

odDoma economy no intena eqatng mechansmthat gaantees aanced gowth. Baanced gowth depends on theeationships among vaiaes: the saving ate, ; thep atio, ao saving echnica change, and popaon A these ae otside the mode they ae exoge-nos. Fomay, aanced gowh eqes

= a the two sides

ae eqa ony y mee chance. he poem o aancng aggegate sppy and aggegate demand

n a gowng economy cetany s an mpotant sse, t t s not theheat o the matte when we ty to ndestand hid Wod povety.Yet economists ost no time appyig the HaodDoma modeside ts ntended (and in etospect sphee o competenceto povide ondatons o view that capta accma-on is he key to economic deveopment. he pemse tha capta andao ae sed n xed popotons appeaed to make sense fo deveopng contes ndegong stcta change especay when comne wth W. A. Lews 's ( 954, 955 amos aeconomy model oeconomic wth o ao By megng thetwo mages, economists made ack of savng the pmay case opovey and o savng key pocy

he stoy goes ike this. Deveopng conties typicay have a da

economy made o a moden manacing secto which has a ea-vey high and xed captaotpt atio as we as a tadtioa aontensve agcta secto whee the magna podcto ao is (cose to zeo, In st-

economic deveopment invoves tansomation,especiay tanse oao he tadiona secto nto the




(saly manfactuing) secto. Althogh the social ate of etn inthe manufactuing secto is hgh in pat because of the low maginal

cost of labo vey itte new investment and expan-sion occus in the moden sector The reason is that developing coun-

ties lack investment funds (domestic saving o foeign funds andlabo cannot be substituted fo captal in the moden sector. Yet if theysomehow cod manage to incease the nvestment qota developing conties with sps abo cold fo a while achieve vey high ates ofgowth smply by expandng the moden secto and shinking the ta-ditiona secto. Late we will have moe to say the image ofinsucient investment unds as the main barier to gowth.

he Capita lOutput Rat io Becom es an En doge nous Vari a le

The second stage in the evoluton of gowth theoy neoclasscalgowth theoy oiginated in the wok of Solow (1956) and Swan( 1 956) and esponded to the HarrodDoma vson of a gowing ma-ket economy as being nstable and prone to overheatng onempoyment. Technically the way to avoid gloom ofHaodDoma gowth theoy is to model as endogenous at least oneof the fo ndelying vaiables and hope that the equation f= awll then have a soluton most of the time (Soow 1 994 46 . eocas

gowth theoy mae the captalotpt atio enogenos btlet the saving atio population gowth and technological changeretain thei as parametes. An implies that laboand capital ae in production and thatceases to be a labo force of a contry grows fasterthan its captal stock labo substitutes fo capital and the exible capitaoutput atio simply shinks. Having made v endogenos economsts some thty yeas o ntil the 1980s befoe they agantie to fndamentally emoe gowth theoy the folowing section

eoclassical gowth theoy fomally models the economy of a coun-try as a single nction. A simple nctionmakes nationa poduct Y depend on the level of production technol-

ogy and nputs capital and labo L which we can wite asY = ( K L) Impoved poduction technologytechnologcalchangeis intoduced as an incease n When a conty arives atthe optimal technoogcal is the only souceof incease in pe capita the theoy makes no attempt toexplain why is an exogenous vaiable



I m perfect I nst itut ions an d G rowth heory 5

the theoy boldly assmes that all conties have access to modentechnoogy; they al have identical poduction nctions.

The lack of concen fo both the oigins and dision oftechnoogies may seem cuious but again it is best explained by the

initia motivation of the economsts who deveoped neoclassicalgowth theoy. The oigina pupose and use of the theoy was to anayze ongte gowth paths fo mate indstia economies and neocassica gowth theoy offes some stiking ndings. The theoy pedicts that the ongun (steadystate) gowth ate of a county isindependent of its saving ate that all will achieve the samesteadystate ate and all eventually will con-vege on an identical otput pe head.

The oiginal intentions wee soon and economists inthei eageness to geneaize impopely applied neoclassica gowththeoy to the study of poo conties in the hid Wod einfocing the ndings of the HaodDoma appoach about the causes of

If all employ the same nc-tion and have value fo n Y= diffeences in out-put pe peson -:, mst esult fom diffeences in theatio assmi

�g constant etuns to scale in the func-

tion. Developing conties ae poo because on aveage thei wokesae suppoted by few capital asset s.

The st two waves of gowth theoy seeme to to econo-mists and policymakes that the pobem with the poo is that they lackcapital. By a xed (aveage o incemental)atio the HaodDoma model made it easy to even on theback of an envelope how much new investment is eqied to meetshottem goals fo inceasing the nationa poduct. Empiical estimate of the aveage atio of capital otput and also the incemental capitalotpt atio ae easily available fo most conties. If theincementa capitalotpt atio 4 (a common then newinvestment be fou times than in theput level. Ae the necessay level of investment is detemined the nextstep is to whethe domestic saving and foeigninvestment add p to the equied incease in the county's captal

stock When these calclations eveal a gap and additional fnding iseqied many have concluded that ling the "nancing gapwith foeign aid will enabe developng counties to meet thei tagetsfo gowth 999). Intenational oganizations sch as theWold Bank have eied on the nancing gap model as a pimay toolfo linking gowth tagets and foeign aid: 90% of county desk




economsts at the Wo Bank fo exampe se some vaant of thenancng gap moel today to make gowth and nancng gap pojec-tions (Eastey 1 999 44).

In m ntl the 1 990s many eveopment expets who ha eceived

taditona taining n economics hed athe mechanical views of theeveopment pocess and famed the poblems of poo conties ntems of captal accmlaton an macoeconomc elatonshps payng lttle attenton to ndvda ncentves o socal nstttons. Thenancng gap model assmes mpcitly (a) that ad tanslates atomat-ically into investment pojects an that n the shot n thee is a

linea between gowth and investment.(1999) nds neithe satisfactoy theoetical no empiical sppot fo

the nancng gap appoach. Compaing actal gowth ates in con-tes that eceive ai with gowth ates pedcte by the nancing gapmode Eastely (1999 43436) shows moe fals entely topedct gowth pefomance of these conties; in fact thee is a sightnegative elationshp between and pedicte Thecase of Zamba is a stikng exampe of the ielevance of a ce capi-ta accmlaton appoach to economic eveopment. Athogh Zam-bia has eceive sbstantial evelopment ai its pe capita income hasemane stagnant since the conty's independence in 1964 hoveing aon $600 mease n 1985 pces . The conty' s gowth emmaobvosy nvoves factos othe than nancng. gap calc-latons that take accont of all aid eceived by Zambia inicate that by1994 the aleady have eache pe capta income of

$0000 mease in 1 98 5 pices. The dabe nence of nancing gap moel ilstates one of

the man themes of this vome obodynot social scientsts notaminstatos and not the genea pbliccan gasp the fll complexty of socal Instead we al ey on smple mages bothfo nestanng an to pot eatonshps between means anens. tests of socia theoes ae com-pae wth tests in many of the natal sciences an people oen

ely on famla models . Also actos may stick wthla models fo stategic easons (pehaps to avoid social sanctons)

and in some instances socia moels ae even a signicant soce ofemotona gatication.

A ote on G rowth Accou nti ng

the 1 930s and 940s images of national economy as a hge fac-toy that tns inpts otpt and the lanching of natonal




income statstcs invited a new acivity caled growth acconting:attempts to measre the contributions of various types of inputstoward economic growth. In the 1 950s and 1 960s growth theory withmathematical formlation and statistical testing of national prodc-

tion fnctions frther enhanced the prestige and poplarity of growthacconting among economists . The basic model Y= (A; K L) wherethe national prodct depends ony on the level of technoogy A, andinpts of capital K and abor L was modied to introdce among other things more negrained denitions and measrements of

Missing from all these was an explicit ofA. growth acconting contrbtion of changes inogy o growth in per capita income is not measred directy is

assmed to eqal the nexplained residal remaining aer all contri-btions of measrable inpts have been acconted for. The growthacconting iteratre refers to this indirect measre as the growth intotal factor prodctivity.

The early growth Solow'sinvestigation indicated that capital dened narrowly to incde onlyphysica capital made a very smal ontribtion to growth in the peri-ods examined; the nexplained residal acconted for nearly allgrowth. Solow's ( 1 956 neoclassical growth model however is not anentirely cear gide to what one should expect growth acconting ies to revea. In economy that is moving along itsgrowth path otpt per person aborsaving technological changeand capitalabor ratio al grow at the same rate. Aternativelywhen an economy is edging toward he optimal capitalabor ratio itsgrowth path shis up as capita accmate and dring sch adjst-ments both capita and otpt can grow at a faster rate than technology or tota factor productivity (Eastery 1 999 .

In any case the economics profession saw the very arge growthacconting resida sggesting problems with the andreecing a need for better researc methods. Theknown as the "measre of or ignorance . The ensing rsh to

the led to a comprehensive denition of whichnow inclded hman capita and to ndings showing that investment

in edcation skils and training is an important sorce of growth.International organizations sch as the World Bank and the Organization for Economic Cooperation and Development responded swily tothese ndings by reqiring to present edcationand manpower plans to qai for aid. The story was essentially thesame: the poor are poor because lack capital now inclding hman capita .




The Th i rd Wave: Techn olog i ca l Cha nge Becomes an

En dogenous Var ia le

By the late 960s signicant new contibutions to neocassical growth

theoy had become scace pobably because thee was not much e tosay in tems of this paticua paadigm. Fo macoeconomic gowththeoists the geat emaining challenge was to explain one of the theoy's exogenous paametes technical change but othe schoas wondeed whethe macoeconomic modes at the highest level of aggega-tion wee appopiate tools fo exploing conditions thatinovations Vaious histoical developments inthe late 1 970s and ealy 980s heped ceate demand fo a new gowth

theoy developments that incuded a puzzling slowdown in poductiv-ity gowth in the industial wold gowth miacles in Asia economicfaiues in Afica and signs of economic collapse in the Soviet Unionand socialist Easten Euope. The new o endogenous gowth theoy

in the mid 980s (Rome 986; by newtechniques and on the empiical font by a ecent avail-

of massive county data that includes not only economic vai-abes but also socia and poitica ones (Maddison 982; Summes andHeston 988 The foma models of new gowth theoy ae ig-oously built fom taditional economic vaiabes but an emeging lit

of cossconty gowth egessions is ess oenadding poitica social and geogaphic vaiables to the egessionswithout even infoma systematic theoetica

o new gowth theoy is a eseach pogam fa moedivese than neocassica theoy and i by a commit-ment to explaining ongtem equilibium gowth in a fomal economicmode that does not ey on exogenos change. Economists initialy used thee appoaches to westle gowth theoy fom thetheeayeed of constant to scae exogenous tech-noogical change ongtem gowth ates that ae ofsaving and investment ates . Conside st neoclassical gowth the-oy's wellknown nding that (developed) cannotlongtem gowth by aising the atio of capital to labo because

shapy diminishing etuns to physical capital eventually set in as theeative scacity of labo inceases . To counte the effects of inceasing eative scacity of abo new gowth theoy has developed modelsthat alow even those with a stationay foceto incease the supply of labo sevices investment incapita. With this addition show that longun gowth no




onge is inepenent of the saving an investment atios, as neoclassi-cal gowth theoy concludes, and nationa gowth ates and incomeeves need not convege (Rome 994).

Second othe new gowth models have intouce economies of

scae and made gowth selfpopeling. ompae with smal makets,age makets ae capabe of accommoating moe extensve speciaizaton and suppotng poucton unts of a lage optimum size. hetheoetical appaatus of the basic neoclassical model, howeve,assumes pefect competition, which equies constant etuns to scale,and pefect competition s a coe assumption of neoclassical gowththeoy. gowth theoy foun a way both to etain pefect compe-tition and to intoduce inceasing to scale assuming pi-

vate and competitive investment n physica and human capita givesise to postive spove (extenal effects. In othe wos, when theynvest n human an physca capita economic actos opeating incompetitive makets, aise not only thei own poductivity but alsothat of othe actos. ew knowledge asng fom these investments,including the knowlege that wokes acquie when they lean to usenew equipment, spils feey ove to othe actos in the same maket,aising A (total facto poductivity in the aggegate pouction func-tion. he intoduction of positive spiloves howeve, makes competi-tve makets inefcent. Pivate nvestment s at suboptimal evesbecase investos not eceve the fll benets owing fom theipojects (Rome 994).

What o these stands of new gowth theoy about thepoblems of gowth laggads? Fist, we encounte once again the oldstoy that counties ae poo and gow slowly ecaue they have lowinvestment atios now involving both physical and human capital,which may esult fom a low saving fom failue to subsize pivate (ncung investment in education , o fom a lack offoeign investment an foeign ai Secon, thespilove thesis pe capita is positively elate tothe sie of the maket. Spilove benets that ow to each economic

incease as the total of investment activity lage,and the volume of investment usualy nceases with the size of the

maket. In othe wods assuming closed economies, the poductionfuncton shis upwad moe apdy in age counties than n smalcounties . Smal counties howeve, can avoid unfavoabe smalscaeeffects by opening thei economies to

In its thid libeatng mode, gowth theoy patly sevesits competitive makets by intoducing potoi




en te actos that opeate in makets with monopolistic competitionand poduce new technologies (Rome 1 994) . Unlike thei teatment inneoclassical gowth theoy, new technologies ae no longe fee goosbu ae costly outputs of business ms that pouce innovations by

using scace esouces and compensating input ownes. The idea thatpivate ms pouce innovations obviously has an empiical countepat in the eseach divisions that many lage ms opeate. Accoding to economic theoy, pivate ms lack the incentive to ceate new technoogies unless they somehow have popietay contol of the knowl-ege they ceate. A m opeating in competitive maket oes notinvest in a costsaving innovatio that automatically becomes avail-

its competitos an educes thei costs Why shoul a pivate

m pay fo an innovation that lowes the cost cuves of all the ms inits inusty and fails to impove the innovato' s elative position?

ew gowth theoy solves this ilemma by assuming that ms inthe maket fo innovations have some degee of monopoly powe. Theoiginal models oten that the innovative activity involvesinvestments that incease the quaity o vaiety of goods.The socia potabiity of these investments inceases with the size ofthe maket because the eman fo quality and vaiety is elativelygeat in a lage maket which again intouces economies of scale intothe aggegate poduction function giving gowth avantage to lageconties an to conties open to tae. The lesson heeis that, othe things being equal, povety is associate with small and

economies.The new in gowth egessions emege con-

cuetly with endogenous gowth theoy many such sudiesbea ony a token eationship to new gowth theoy. The cosscounty egessions oen intoduce a age numbe of economicand social vaiabes fequently o so only on the basis of intitionhches, an of Othe sties expicitly on va-

banches of socia science, the new eco-nomics.

Summary: Growth Theory and Growth Laggards

In his 994 suvey "The Oigins of Endogenous Gowth Pau Romecals fo a gowth theoy that goes beyond "the stana neoclassicalpesciptionmoe saving moe schooling (20. Rome wants agowth theoy that examines etailed as the impicationsfo gowth of the link between an univesities an that seeks



I m perfect I nst itut ions a nd G rowth he ory 2 1

answes t o sch questions as "In a eveoping conty ike the Philip-pines what ae the best institutional aangements fo gaining accessto the knowledge that aleady exists in the est of the wold? Inspite of such hopes a macoeconomic gowth theoy that has ome-

thing novel and impotant to say about govenance stuctues andinsttutional envionments has not emeged sggestng the anaytc level and modeling methodology of moden gowth theoy maynot be well sited fo exploing the soces of gowth. ew gowth theoists seem to pefe to wok with poximate o immediate gowthvaiables and athe than to concen themselves with basicoganizational vaiables o institutional envionments. ae sim-py chaacteized by the type of maket n which they opeate and the

980s intoduction of noncompetitive makets in gowth modes wasseen as a majo theoetca beakthogh in the study of gowth. Whennew gowth theosts ty to expain why a paticla county doesadopt supeio technologies fom aboad the explanations usually

on vaiables that ae fiendy to the theoists' stye of modelingas the pice of capital tempoay shotage of skilled wokes and

pocesses 1998. In othe wods whenstudying the deepe souces of gowth mainsteam gowth theostsseem to be handicapped by the eignng methodological standads(R R. eson 1998.

In thei most ambitos moments enogenos gowth theostsasset that thei theoy offes o soon wil o explanations of tech-noogica pogess and the dision of knowledge. Rome (1994, 1emphasizes the fact that "technoogical advance comesfom what people do and that we shold be able to explainand pedict such behavio. Whie he ecognizes that individa sccessn eseach and development oen appeas to be a andom eventRome (1994 13 ages that the "the aggegate ate of discovey isstil deteined by what peope do . Robet Solow ( 994 47 ecently

soght to explain the ogc behin his oiginal ecision whenbuilding neoclassical gowth theoy to assume instant dision ofknowledge and technological pogess as an (exoge-nous) vaiable In defending his appoach Solow expesses doubts

about the ablity of fomal aggegate gowth models gounded in stan-dad economic theoy to pedict technological change athogh technica pogess "might be entely undestandabe in some easonabe

way ony not a of the itse(48 . Solow does not deny Rome's point that people seektechnoogica pogess fo example by alocating esouces to eseach




an eveopment o by intoucing patent laws, but he questions"whethe one has anything use to say about the pocess , in a fomthat can be made pat of an aggegative gowth moel SimilalyRicha 998 ) agues stongly that new gowth theoy is con-

cened only with the immediate causes of gowth, a phase coine byAbamovit (1 952) . eson s main concen is that endogenous gowththeoists' sefimpose neocassica) modeling stanas wil give iseto new theoies that fail to incopoate an theefoe ten to obscueimpotant insights of moe infomal micolevel theoies an empiicalwok concening the oigins an tansmission of technological knowl-edge, the of business oganization and systems of popetyights on the incentive innovate, oe of univesities in techno-

logical pogess , an national innovation systems.



C H A T R

Barrers to GrowthInsttutions and Social Technologies

Theories and Ther Spheres of Competence

ew gowth theoists and othe scholas sometimes claim that theyhave aken the st step towad a geneal theoy of economic systemsyet a satisfactoy geneal theoy has not emeged. Lacking a uniedtheoy of economic systemsone that explains how divese economicsystems opeate how they ae nested in a wide social system and howthei intenal dynamics ceate though timesocial science elieson specialized Each of these specialied theoies has a spheeof competence a compaative advantage in analyzing a paticulaof issues at a paticula analytic evel. The intellectual histoy ofgowth theoy (outlined in chapte ) as well as the histoy of otheelds shows that scholas ae to apply thei favoed theoiesnot only inside but also outside thei sphees of competence. Sphees ofcompetence admittedly ae discoveed though tial and eo whentesting theoies in new domains but in scholas sometimes aeblinded by thei pet theoies o act in a selfseving impeial manne

Social scientists sometimes make outlandish claims fo thei eldsfo by aguing (a that thei theoes and methods have univesal applcaton; (b) that sphee of competence fo theoies

all questions woth asking (economics offes in point) ;as esot (c) that thei fo

poblems is the only legitimate scholaly appoach. Issues that esistthis way of modeling le alone scholas ae to fo-mulate them in the one and only appopiate manne. At the end of

the 980s when the Soviettype economies of Euasia collapsed one omoe of these thee vewpoints encouaged mainsteam economists toush in wth advce on the tansitions fom socialism to makets . With

a theoy of economic tansitions ignoing political socialdynamics these expets condently povided advice on how to build a

system dawing on oiginally intended fo analying




maket echange in envionments of solid ecsive popety ightsand stable epectations (Stigitz 1 999) .

In this of socia and economic pefomance Ise a mltidisciplinay appoach associated with the new instittional

economics and limit myself to agments that bild on individa deci-sions and thei conseqences (methodoogical individalism. In addition to elying on economics I boow theoies insights and empiicaleslts fom othe elds sch as political science sociology anthopology histoy law and cognitive science.

Stict ationachoice methodology which standad economicswoks best when choice sitations ae stable stcted andepeatedfo eample when people shop fo thei daiy hosehold

necessities 1998. Howeve decisions abot fndamentalchanges o efoms of economic and political mechanisms and systems

on moe ncetain fondations than do hosehold decisions ootine bsiness decisions. When dealing with socia systems o thephysical wold actos have incomplete of theelevant casal elations and not even know all the elements in

sets . My appoach to sch o ncetainty is toassme that actos cope by elying on simpe and incompete (mentalmodes of thei physical and socal envionments bt then act atio-naly in tems of thei mental Social models ae sed to

evaate social stctes.

Socal Technologies a s Barriers to Growth

As we saw in ding its evoltion since Second WoldWa gowth theoy consistently has boght a single nifying themeto he foe Intensive economic of the 200250 yeas is besteplained in tems of the discovey and appication of new knowedge.Fthemoe pominent theoists fom Ma toJoseph each in thei own saw new as theengine of gowth and so do most moden economic histoians (Moky1990). As fo the emegence of new tech-noogies the hisoica evidence shows hat a small nmbe of con-

ties have ed the way with the eadeship position peiodicaly passing fom one conty to anothe (Moky 990 .Economic theoy sally classies new knowedge as a pblic good.

By pe goods ae feely avaiableto eveyone these popeties of knowledge impinge on



Ba rr ie rs to G rowth 25

the baic pzze with which we gapple in thi tdy What facto pe-vent poo contie fom acceing aleady avaiabe wold knowledgeand thei technoogie? Conide j tati elatively poo In conty j the potential maimm otpt pe pe-

on * i a fnction of the cent tate of wod knowledge W *. Wecan wite * = (W* . If the acta otpt in conty j i ony y and *> y '

it appea that we ave a cae whee = fW) whee W* > W Inothe wod j e only a bet of available wold knowedge. Wen * > y'

we obvioy need to know moe abot the facto that dete-mine a willingne and ability to abob adapt and applyelevant podction technologie fom te gobal tock of knowledge.We need to know how W i detemined.

My anwe i that y Je capita otpt in conty j depend o n theJconty' ability to impement two compementay type of technoogie ocia tecoogie and podction technoogie. Late in thechapte I dene key concept ed in thi tdy bt I wil imply aynow that ocial technologie decibe method o mechanim wheebyocial intittion ceate patten of behavio . technologie

method fo tanfoming inpt into otpt podctionpocee ae eective only appopiate intittional fame-wok . Podction technologie tave elatively we between contie(a pe pbic good do bt the tak of tanplanting ocia intittion i moe diclt (ee 1 1 ) . Gowth theoy in economicbeen concened almot entiely with podction technoogie eceptfo occaional efeence to ocial technologie and oga-nizationfo eampe by monopolitic competition.

In ti tdy I age

1 . Socia technologie and phyical technoogie complementeach othe to fnction effectivey podction technologieneed the ppot of appopiate ocial intittion (o one ofevea compatible intittiona famewok .

2. Scce tanfe o intodtion of new ocial technologiei a moe comple phenomenon tan tanfe of new po-dction technoogie becae peetg intittiona

aangement oen ndemine the effot. Sccefl intit-tiona efom depend on active ppot fom a age potionof eevant acto which may not be fothcoming. ompli

oen pio of poltical conicta well a ynchonization of ocial mode .




3. Poblems with applying new social technoogies ae the citicalbaie to gowth in poo counties. Athough sececypatents and othe estictions can tempoaily slow the di-ion of poduction technoogies the technical poblem of

tansfeing methods of poduction between counties is a el-ativey simple matte involving domestic and pehaps foeignenginees technicians and scientists; foeign consultants;multinational ms; and investment in human capital.

Key Concepts Revisited

My analysis of how social instiutions to povety taps

daws on the new institutional economics and with somemodications uses its famewoks concepts and theoetical insights(Williamson 985; Libecap 1989; Eggetsson 990; oth 990;Fuubotn and Richte 1997). The following is a synopsis of the eyconcepts in this

Social models ae a geneal tem fo vaious types of mental con-that actos use to cope with uncetainty and complexity

in thei social envionment. Social modes descibe causal ea-usualy and povide justication fo

vaes . Actos also ely on (incomplete) to copewith thei physical envionment.

Social technologies ae social models that descibe how socialceate social

models ae opeational that guide decionmakes whethe in the pivate o public sphee . Poicy modelsdene fo acto his o he choice set ank the elements in

choice set and descibe elationships between means andends (instments an tages). Poicy moels ae mod-es ange fom being to elaboate plans andinclude the concept of social outines.

Social institutions ae made constaints andenfocement mechanisms (oth 990 that geneate incen-

behavio and outcomes in social goupshave both obsevable and unobsevabe aspects. Outcomesules and foma enfocement mechanisms ae elatively visible elements of an institution but policy modelsthat behavio ae less visible. ueslaws and egulations as wel as social noms. is



Barriers to Growth 27

both decentaized elfetaint thidpaty enfocement odyadic enfocement) and with foma oganization police

pivateProert rights ae ocia intittion that eglate the e of

cace eoce by aigning and enfocing ight and dtie(Baze 1 997. Legal theoy e a naowe denition of popety ight than doe the new intittional economic.

Organiations ae ocial mechanim fo pooling eoce anddiecting podction in the widet ene of the tem. he inti-

famewok in which oganization opeatethei om o tcte bt oganization a legilative

alo "podce intittiona change 1990.Institutional olic i the at of impementing ocial technologie

to ceate new intittion o emedy exiting one. Law eg-lation and fomal enfocement mechanim ae the alntment of intittional poicy athogh attempt ae alomade to ocial and belie ocial tech-nologie. polcy except o adjt-ment i a knowledgeintenive activity compaed with policyaimed opeating etablihed ocial ytem.

Transaction costs ae the cot of conto in a ocial ytemanaction cot aie when individal ty acqie newownehip ight defen thei aet tangeionand the and potect thei eoce againt oppotniticbehavio in exchange elationhip.

ontracts ae tool in exchange o loweing cot Intittional amewok and oganizational alaffect tanaction cot. When analyzing oganization andexchange in all not only in the economic one new

economic emphaize the ole ofcot intittion contact.

he concept o tanaction cot ha ceated cetain confion in theepecially when we ail to ditingih clealy eal-

ized in pinciple meaable tanaction cot and expected o

potentia tanaction cot. It i enogh that tanaction cot be antic-ipated fo them to have pofond impact economic oganization andotcome Alen 199 Kae 000 Fo exampe in longtem con

eaton between and elle of inpt expected tan-action cot ea o behavio by the othe ide) oenceate powel incentive to vetcally integate o




abandon pomising pojects (Wiiamson 98 5) . At the national levelgowthpomoting institutional efoms oen ae not undetaken

it is too costly (the tansaction costs ae too to makecedible ageements fo shaing expected costs and benets

fom the efoms (othImagine a faming uses social institutions (and

undeying socia technology) Y which ae so ineffectua that the typica fame spends a thid of he woking hous guading the popetyand anothe thid of he abo time potecting heself against

and sellesfo example by checking thei iden-tity and tying to enfoce contactual clauses. othe wods two-thids of the fame' s suppy is assigned to potection and only

onethid is alocated to egula poduction. Futhemoe the fame' schoice of poduction types of and makets is likelyto be stongly inuenced by the elative cost of defending he assetsagainst the and cheating If tansaction costs become high enoughmaket tansactions may shink and vitually disappea which is likelyto educe ealized o actual tansaction costs. Fames may decide toavoid cash cops and engage only in subsistence faming tofeed thei families. With no output contacts to monito o valuablepoducts to the fames' actual tansaction costs may sink to avey ow level . he poo ae now vey poo expected high tansaction costs le out all plans to evese the tend podce valuablecommodities fo the maket.

ext conside social institutions (and technology) Z that is muchmoe effective than Y it povides the aveage fame withstong potection of asets and contacts feeing labo and ceat-ing incentives to select lines of poduction that have high consumevalues (net of standad poduction costs athe than choosing poducts and pocesses that ae easy Now the fames decidepehaps to use thei and fo ochads athe than fo gazing because socia technology Y fo potecting thei popety ightsgazing was attactive only because of elatively low monitoing (tans-action costs) . his example tells that a compaison of tans-action costs unde popety ights egimes Y and Z does

not eveal much about baies to pogess and may even misead us.ota tansaction costs of opeatng elativey poductive social tech-noogy Z may even be highe than the costs of opeating unpoductivesystem ' technology Z might invove costly (but effectiveenfocement by specialized actos wheeas Y enfocement costsae at a low level because thee ae elatively few valuable assets and



Barriers to Growth 29

tanaction to potect. A the following ection age compaativeintittional analyi i conceptually the appopiate way to evalatethe to ytem.

Comparative Institutional Analysis

Fo evalating the elative economic effectivene of ocial technologie Y and Z moe appopiate than attempting to meae ealiedtanaction cot i ing compaative intittional anayi and con-tating total benet and total cot net of aggegate eco-nomic activity nde two intittional Theoetically thereare two way of making ch compaion. Holding

contant at ome we can compae all cot (tanfomation cotand tanaction cot nder Y and Z to dicove which arangement icheape o holding total (tanfomation p tanaction cotcontant at ome level we can compae otpt nde Y and Z.

If a learn of a new intittional aangement o a y-of poperty right Z that i more wealth enhancing it cr-

ent ytem Y, doe not witch to Z what cold ceatech inetia in a ociety of intendedy rational goaoiented individ-al? In anweing ch pzzle the new intittional economic allyemphaize vao type of tanaction cot ba efom. Relevant acto ee a being vey high the anticipate tanaction cot ofnegotiating coecing o othewie aanging a tanition fom ytemY to Z. When high tranaction cot make it impoible ex ante for thepotential winner to cedibly commit to compenating the loer thoewho expect to loe intittional efo will the popoedchange. Intitutional eform are fthe complicated by pevaivencetainty abot the identity of potential winner and loe that theefom meae will ceate.

It ha ecently become tanad fae in the to analyze howcommitment pobem abot winne loendemine intitutional efom. Wile emphaizing thee ie thitdy alo identie imperfect ocial model and pervaiveabot ocial technologie a additional barie to efom.

Imperfect Knowledge and nstitutona eform

Chapte 5 how politcal economy explain theo inability of ational political leade to ceate envion-

favo economic growth. Thee vaied explanation ally




have one thing in common they do not expain faied tansitions oefoms in tems of incomplete poicy models and ignoance of socialstctes. Instead they emphaize constaints and naow (athethan encompassing) inteests of political leade and poitica coali-

tions. Sometimes howeve gowthoiented govenments fail in theiattempts at efomthei meases do not each the desied goalseven when thee is no oganized politica esistance. I will now discssthee ovelapping explanations of sch failes micolevel incompatibity macolevel incompatibility and ideoogical dift.

Microlevel ncompat i i ty

Pblic o pivate efomes who desie to pgade instittions thatgoven activities at the mico eve (fo exampe in pbic o pivateoganizations withot changing the basic stcte of society salyattempt to do so by changing elevant pblic aws egations andenfocement mechanisms; by new pivate laws (les andbylaws of pivate oganizations); and by tying tothe playes' social models and socia noms. hese attempts can failwhen the new instittions cash wth od and stil pevalent instittionsness the efomes know how to solve the conict and ae able to do

ecessay toos fo emoving dysfnctional instittiona elements(inclding social noms) ae sometimes o when they aeavailable the efomes with thei incomplete models sometimes maynot know how deep to dig the new take oot.

Conside simple example of policymakes in a hid Wod citywho want to lowe costs of feqent accidents by imi-tating the social technoogy that egates vehicla and pedestiantafc in Swiss city of Geneva. How adical ae the eqied meases? Is it enogh to simply thow existing tafc eglations andenact into law the les of Geneva o ae measesnecessay? Exactly what is

Let s assme that the efomes nd ot that the impoted tacles do not nction popely in thei nless genealdives and pedestiansadjst thei pesonal policy modes and

stategies. In patica the new tafc les wil not become an effec-tive instittion ness both pblic enfocement ocials and the genealpblic comply and by and age phold the new system. Fo the policymaes it is theefoe of centa concen to pefeaby ex

whethe the new witten es wil bing von-tay and spontaneos enfocement. little is known



Barriers to Growth 3 1

abot the nteactons between new fomal les and peexstng socalnoms. If spontaneous enfocement does not emege policymakesnd themselves n a they have little diect conto ofsocial noms o othe factos that mght bing compliance

The effectveness of new es and enfocement mechanismsdepeds on how ndividuas peceive the new ccumstances ae thenew meases have been ntodced Actos espond to les amed atceatng new nstttons by fomng () peceptons abot the tanston path fom the old to the new egme; () peceptons abot thepopetes of the new system when t is in example

it will involve had o so constants; and (3) peceptionsesponses fellow actos to issues () and (2 and how to

adjust to these esponses. Indvdas daw on thei soca models toevaate the popetes inclding legitimacy of new institutions andan efectve sh to a new socal eqes eadstment andcoodination of individual modes though tial and eo and othefom of leaning. Ideally eomes want to know how individ-uals adjst and coodinate thei social models and how those pocessesaffect the outcomes .

acroevel Incompat i i l i ty

hee s no obvos lne mico level macolevel nst-tutona efoms but the latte genealy involve fndamental changesn a economic and/o poltical systems. Moden social sci-ence has elative advantage in explainng the opeations of stable

(such as the opeational popeties of a maketbasedeconomy Less s known abot the elationship between individalstuctua components of a social system how they o compement each and how coevolve. he has lookedat the way n whch economes co evove wth the genea socal systemn which they nested m lackng. We notlly ndestand fo example how n the long n a maket economympacts a nondemocatic polity o vice vesa; how synthetc capitalis-tc maket institutons (such as the ones that the Chinese and befoe

them the Ygoslavs have tied wil evolve o decay; o whethe intems of economc effectiveness the longtem dynamcs of a maketsystem in a democacy ae selfcoecting o selfdestctive. Withncompete of the popetes of soca sys-tems mistakes and ae a common o nstttional polcy




Ideologcal Drift

Micolevel and macoeve incompatibilities be avoided i poli-cmakes ll ndestood sch poblems pio to intodcing instit-

tional eoms. In act o knowledge o socia technoogies is limitedand ncetain and social modes oen change ove time becase o both advances in knowledge and ashions and ads. In chapte 3 I discss the phenomenon o coelated shis o individal social modelseven at times when (in etospec) the changes ae not motivated bimpotant new discoveies in socia science. Readiness to damaticallevise social models emeges especiall in times o cises. pivotalactos come believe cent sstem is citical awed thei

intense ncetaint oen gives ise to coeated dits o individalsocia modelso exampe along the centalizationdecentalizationaxis . Models o the phsical wold (inclding belies podctiontechnologies) and ae less pone to dis o this nate; at an giventime expets and othe eevant actos agee moe closel onphsical than on socia models .

Ding mch o the twentieth expets policmakes andthe pblic debated whethe decentalized makets o cental manage-ment podces bette economic otcomes. Eal in the peiod themedian socia mode shied towad centaization; then in the lastdecaes the penlm swng back towa And twen-tieth cent social science has done little to emove pevasive nce-taint social sstems: the twentst began shapdisageements economic eects o tax

longtem eects o paticla social on wok incentivesand abot the appopiate seqence and speed o instittiona emsin tansitions om centa management o economies tomakets. o solid theo exists hat expains wh onl some o theeoming conties in Eope espon wel to thei meicine.

complex socia sstems invites emotionalinvolvement with social modes which contaminates attempts toempiicall test hpotheses concening ocial technologies. Dsnc-tional social technologies oen gain poplait while the iding

appeas be good wheeas andom shocks can ceate panic and makeconities do awa with elativel eective social aangements.

Conclusion: Social versus Production Technologies

that pobems with new socialdwa those o instaling new podction is somewhat



Ba rr ie rs to G rowth 33

exaggeate becae the two technoogie ae coey intewoven. heintouction of new pouction technologie oen evatate tadi-tiona a an oppoition to new fom ofpopety ight in land may alo eect oppoition to mechanize agi-

cute. It may theefoe appea a bit capiciou to aign to theomain of ocia al ocial an poitical involvein the tanition fom one mode of podction to anothe bt my eaon fo thi claication i imple. I want to pt to one ide the conventional phyical and eouce containt of the tanition poce,which ha been the taitional topic of economic analyi , an examineothe facto that economic analyi ualy take fo ganted.emphaizing dichotomy, I iect a focu on poitica, ocial, an

even cognitive facto withot enying the impotance of the tadi-tiona concen of economic .

he ditinction between ocial and phyical technoogie i a way ofepaating immediate explanation of economic gowth (accumulatonof capital an technoogical fom eepe o undelying

inabiity o unwillingne to intall appopiate ocialtechnoogie. Having aid two qualication mut mae. Afuleged theoy of economic ytem obviouly mt eventuallyfocu jointy on ocia and pouction technologie . by ditin-gihing between the two technologie we not obcue the

new poction technoogie oen give ie to new ocial tech-noogie, and vice vea. he ie of the moden copoation i a com-plex of inteacting innovation invoving both ocial and phyicaltechnoogie (limited iability; bill of exchange; telephone; aiway).Looking towa futue, new technologie (eectonic)may make it pacticabe to monito chool of h in the ocean aneven individa h. New monitoing technoogy coul then conceivably ceate new fom of ownehip in live h in the ocean that eembe cent popety in cattle.

In while phyical technologieae cloely elated, thi tdy examine the hypothei , agely ignoedin the moen gowth that inappopiate ocialand inability o unwillingne to adopt new ocial technologie ae the

citica baie to gowth in lowincome countie . Accoding toagment the nancia an technical poblem of implementing foeign poduction technoogie i a ee baie than the ocia poitical, cognitive poblem of appopiatepot fo new technologie. Phyical pobem andcontaint, eal a they ae, come econd to intitutional ilemma.



C H A T E R

Competg Socal Models

ntroduction: How Much Do the Rulers Know?

Rationachoice analysis rarey appeals to uncertainty about social

modes and social technologies to epain institutiona change.Instead, rational choice emphasizes redistribution. Actors may lackdata oen know probabilty density functions for particularvariabes, but the analysis typically assumes that they understand thebasic ogic of their socia environments. Olson' s (000, 0 54) recentwork on structure of classic Soviet system under Stalin fallsneaty in this category. Olson caims that Stalin's system was aresponse to new industrial technology that had created opportunitiesfor an unprecedented eve of eploitation. The novelty of the systemlay in a new social technology for modifyng the supply ofeploited citizens an channeling more economic resoces to the ic-tator and his winning coaition (see chapter 5) than had prevouslybeen possibe. To overcome disincentives of private investorswho fear appropriation, the Stalinist state took over the ownership ofphysical assets and directly managed the entire economy including investment decisions. To modify disincentives in the laborwages and salaries for skiled and unskilled workers were set so lowthat people had to work overtime to meet their basic needs. Becauselow skil ifferentias of aytime wages discouraged peope from

capital, the it to workersstimuated them to work long hours by maintaining huge skill dir-entials for overtime work. In addition, highly skiled worker weregiven reativey eay access to durable and other scarce conumer

goods which also rewarded human capital. Privileged groups couldshop in specia stores stocked with uury goods and otherwiseunavailable commodities.

According to Olson (000), Stain his crones no illusionstheir system, and they its longterm dynamics.

structural features of early twentieth century production



Compet ing Soc ia Mode ls 35

technoogies (especialy in heavy insties) facilitate Soviet leaes'task of unning thei economies (moe o less) as one lage factoy,oppotunism in agency eationships ceated a aay ofunsolabe poblems Stain s hoion of a noma human lifetime

made these pobems ielevant to him pesonally becase he expectedthat the difculties wold come o a head duing that time.

Olson s model is an insightf and cleve etospective analysis but i talso obliteates the biggest politica and economic debate of the twentieth centuy the woldwide intellectual confontation between thosewho favoed state owneship and centa management and thees of decentalied makets. Olson's analysis, the Soviet system issimply a moden vesion of divideandule expoitative

equilibium in a feda society (see chapte 5. What has changed isthat new monitoing methods and new poduction technologies havemade the moe efcient the exploited ae made to wok hade andgive p a lage supus than peviously had been possible.

It is to econcie the Olson stoy with widespeadfo the Soviet system both at and aboad. Westen econo-mists the least Hayek and von Mises gave highly neg-ative atings, at time many othe intelectuals of high standing,including majo ges in the economics pofession, saw Soviet eco-nomic and socia as a magnicent beakthough. he sppotes beieve the Soviet system vasty speio to the ma-ket economy fo geneating economic gowth, not to mention(economic) In fact, Olson 's intepetation of the Soviet system

be (which it is not) if he wee descibing only howthe case is iewed.

Mainsteam economists and many othe ationalchoice socia scientists ae euctant to associate poo economic pefoance withncetainty abot socia technoogies. Beno de Mesqita and(000 1) concede that ntil late in the twentieth centy, poo eco-nomic sometimes by theappopiate economic mode; by the end of the centuy, howeve, theyclaim that

Substantial vaiation in economic pefomance can no longe beattibuted to ignoance abot what makes an economy gowobseves must look elsewhee than at competing economic theoies to economic failue. the key to eco-nomic o failueindeed, to a boad aay of policycesses o faileslies the political instittions of soveeign




states. Political aangements ceate incentives fo political leaesto foste gowth o steal thei nations pospects fo pospeity.

Only the te can tell whethe the eemaket model has pema-

nently caimed the wold stage fo itsef as the ideal economic system foceating wealth o whethe seios contendes wil eemege. Modenhistoy indicates that intellectal competition among social models isnikey to podce an ltimate winne that eveyone acceptsfoexample by ecognizing makets and democacy as the victos with ni-vesal pospeity as the payoff. Instead ecent histoy ecods cyclicalswngs in the sppot o and fee maket that to belinked to changing mateia cicmstances powe poitics and the ise

and fall of ideas. The poitical science liteate identies thee waves ofdemocatic tansitions fom 828 to 1 926; fom 943 to 964; and fom1 974 to 1 990 . In between these psges we nd evesals o antidemocatic waves (Diamond and Plattne 1 996) . In oghly the same peiodslong waves of pomaket and antimaket aangements

passed thogh the wold economy political and eco-nomic waves ae not synchonized. Moeove Siegmnd ( 1 996)detects empiical evidence wodwide in the twentieth centy fo shot-tem nationaizationpivatization cycles of entepises .

Social instittions ise and fal becase of ( 1 ) changes in the politicalbaance (2) new mateia cicmstances o (3) the changing fotnesof social models. hese factos can be inteeated in a complex man-ne involving both edistibtion and eoganiation ofScholas wedded to the standad economic appoach (o ational

and motivation) sally take pide in demontating thatsocia modes ae a neta facto in economic and poitica deveopments . Othes scholas pefe to let ideas have the dominant oe. uta compomise sotion which I pefe has actos make ationalchoices concening thei economic an political inteests in the contextof mpefect social

his chapte focses on shap changes in the oganization of po-dction and the of govenments in patsof the wold to evese athe sddenly thei instittional poicies in

this aea which can lead to cycing and sometimes synchonos changeacoss egions. Instead of the sal attention to owincomethe focs hee is pimaily on st and secondtie economies that tilize echnologies. I that shapevesals in the oganization of ae likely to eect both

o ncetain social models and emedial




enhancing) autment of intitution to new prouction technologieor new material circumtance. A look at the hitorical evience ug-get hat maive indutrial reorganization oen i tied to reviion ofocial mode although new production technoogie alo play a

important roe.

Why Do Social Institutions Cycle?

If we look to tanar neoclaical economic for an explanation ofwhy countrie make major change in the organization ofometime in a cycling maner, the theory point to pure remedialadjument a the caue . There i no other explanation given

the uual aumptionnamely, that the economy utiize the etavaibe prouction technologie, reache it productionpoiilitiefrontier and adjut ocial to efcientlyaccommodate new production technoogie. When ocial moe are

harp change in oganization mut reect dicotin-uou in prouction technologie .

There i, however a genera impeion that production technolo-gie tend to change graualy n piecemealnatura non facit altum.In purely neoclaical term, outright uden policy revera (forexample from centralization to decentraization of ecoomic management) unlikely if we conider ony chage;rather, we expect to ee graua adjutment i economic intitution.The main exception when innovation come in epe-cially when maively in reearch and evelopment toupport war or pretige proect uch a pace program nhighpeed tranport. The fruit of uch project uualy hit the generaleconomy with a coniderabe lag ometime icontinuoutructura change lthough motly n elect inutrie. For exampe arge numer of innovation clutering in the year of the Secon

War were commercialie een to twenty year later. heeinnovation owered etry arrier n indutrie (microwave technol-ogy) increae aircra), changed economie ofcope (electronic tranfer of fund, automatic teler machine), an

altered perception about market filure and the need forregution in particuar (Vietor 1990 7). (1994,1 820) for dicue how in the late 1960 ew techologybegan to the natural monopoly in inthe Uite State.

A icu in chapter 5, political cotraint and ditriutional




motive oen act the organiation of prouction an pulleconomie o their production frontier, making them decline relativeto leading economie . force interfere witheciency to varying degree in all countrie, the dicuion here i lim-

ited to highincome countrie that are relatively free of thee impei-ment: in word, their politician are inclined to eparate production an ditriution, maximie the ize of the pie, and then ivideit according to their political preference. Here one would not expect toee arupt change in the organization of production unle uchchange erved to wealth id not eriouly impact pro-ductivity or unle uncertainty exited aout ocial technologie.

ew ocial model oen come to the fore with new political leaer,

and political change i uually although the forceunderlying political change uually move lowly. Economic contrac-tion or expanion in an a regon, or a country; populationgrowth; expanion of the uran working cla; an increae in the rela-tive importance of ervice worker; an comparale factorgenerate mooth erie, ut conequent political change gener-ally have harp turning point. Expanion of the franchie an otherchange in electoral ytem, revion of procedure oflegila-ture, coup, and reellion can produce rapi change in the politicalalance a well a wing of the pulic policy penulum. heBritih iron an teel inutry, which went through two roun ofnationaliation and denationalization in the period aer the SecondWorld War, i a notale example of policy cycling (Singleton 1 995) . Iti that thee reveral reect only truggle overand not iea aout organization of prouction

ew ocial moel of indutrial organization do not emerge olelythrough change of government; for variou reaon, oen involving peruaion and learning, itting government ometime make raicalchange in their policie. New iea alo emerge from complex iffueocial procee in which actor initially their for ofocial and other anction (Kuran 995) . Aer a ucient numer of

omehow ignal their true ocial change canrapidly, a it did in Iran in 197879 an in Eatern Europe in 989.

New ocial model, however, are likely to involve efciency andditriutional iue, and the tak of empirically iolating the two i aformidale tak. Yet I argue that changing ocial model have ha a

role for the eciency of economic organization,oen aruptly.

our knowledge of ocial i carce, policymaking




can become a walk in the ark. he intelectual hitory of the goltanar which in the late nineteenth an early twentieth centurielinke the monetary ytem of everal major countrie with xeexchange rate illutrate thi metaphor Speciait oth at the time

an later (Unite Kingom Parliament 1 9 1 8 ; Mclokey an echer976; For 1989) offer conicting expanation of why the ytemworke wel from 870 to 1 9 1 3 "in the ene of eiminating balance ofpayment imbalance without exchange rate change in a rapilychanging worl economy (For 989 97). he iatrou reintro-

of the gol tanar in the interwar perio i a telling exampleof how affect outcome989) i virtualy impoile to argue that thoe for

reviving the ytem i o to erve the hortterm interet of a partic-uar upport group knowing al aong that the experiment woul failmierably.

Iniviua with comparable experience an interet uually havefaith n imiar ocial moel an ocial their moe clu-ter. we aume ocial moel are incompete ifferent anvolatie an that the ivere moel favore ifferent group ome-time make correate hi along an policy axi (or axe)the hift can reut in icontinuou intitutional change irrepectiveof which political group i in power. If cuter of ocial moel bothwithin an acro countrie hi in the generalirection globa icontinuou change in intitutiona poicy may

e an Root (2000), writing at the en of the twen-century conten that olution to economic pro-

em have forever lot their luter but in the year immeiatey prior tothe Second World War the market mode wa at ow ebb and manypeope believe that the future belonge to central In the

era even the Britih onervative ha acale for the introuction of form of central manage-

ment. In hi 1938 manifeto The Middle Harol Macmilan aof the party an later it prme miniter lit ervice

an inutrie that he ee a eing ripe for nationaization

Macmillan wa concerne about the high level of malnutritionin Britih citie. He thought that private wholealer an hopwere incapable of goo foo at price which working-cla mother affor. Uner Macmillan' plan brea and

woul have een elivere to the houewife' oor y




an oganization esembling the Post Ofce. High technologyationa Bakeies would be built in ode to secue economies ofscale, the and of scones andancy cakes would emain in piate hands 995 ,

In the social science liteatue, Hischman ( 1 982 offes pehaps thebestknown eplanation of mediumtem pivatepublic cycles.Hischman daws on socia psychology to eplain how these cycles aecaused by coodinated shis in pesonal pefeences. Hischman'seplanation is based on the notion that eposue to goods,especially cetain types of duables, ceates comfot plea-sue and that satuates ad disappoints consumes, who then

tun to othe activities, especially to public life, to meet thei needs fopleasues. Similay, fustations of public life eventualy discouageactos and send them back to pivate action and consumeism.Accoding to Hischman, this evesa is coodinated acoss nationsthat ente the phase of mass consmption at about the same time.

is based on a single obsevation that cetainlyweakens the wok. Hischman began his study in 1978,the pule why the "Spiit of 1968 had tuned into apathy ten yeaslate. His wok does not eplicity analyze whethe these pivatepub-lic cyces, dien by satuation, maintain constant eplode,o pete ot, bt thee is pesumption of constancy. Howeve, i soci-ety does not eceie epeated impulses of a magnitude compaable too geate than the initial enty into mass it is cocei-able that people lean o balance piate and action,

would dampen the cycles Although thee is a gain of inthe Hischman thesis, I do not conside his shiing consume pefeences as the funamental foce iving the pivatepublic cycles of thetwentieth centuy (and pobably neithe did he.

When policymakes come to believe that thei institutions malfunction ae willing to evise thei policies, aious factoscan delay emedial actions. he net section discusses thee easons fo

lags.

The Declining Years of Failed Social Models

he intoductio of incomplete and eoving social modes into thecausa chain of economic is not a decisive beak with the meth-ods of moden economics (see chapte In its initial models, ational-epectations assumes economic actos




compete accate) moe of the economy, enabing them to antici-pate and oen avoi coty pubic poicy meaue. Athough theeeteme wee initiay they impiemathematica fomuation an bone with tana genea equiib-

ium anayi in micoeconomic, the ationaepectation hypothei"doe not impy that a agent have the ame infomation, o that aagent know the tue economic mode it impy mean that agentue avaiabe infomation in the bet way an coect futhe infomation ony if the epected benet eceed the cot (L. E. O. Svenon996 3 ).

Countepouctive poicy need not hamfu effect ifpoicymake pompty ecognize eut and make appo-

piate adjutment in thei mode. Yet govenmenteven in theadvanced indutia countieoen eay coective meaue, animpefect intitution eem to become emipemanent. hee aeeat thee eaon fo uch deay. Fit , poicymake, typicay ack-ing knowege of meium and ongtem impact, oen

to upie that eguatoy egime that function eativeywe at the The eoion eut fomcumuative of epectation an by acto iving une the egime, and decae may ometime eape befoe uchintittion become eiouy dyfunctiona in a manne obviou toa. Stie of the eguatoy egime that the aiine inutyin the nite State fom 93 8 to 978 povide evience fo a negative

poce. A the govenment compeed the aiine toefain fom pice competition, choe to compete on vaio non-pice magin, and pevee compeition gauay pead onemagin to anothe. owad the end of the peiod, attempt by the . S .Civi Aeonautic Boad to conto vauabe magin of evice povie by the induty invove "witing eguation that dened theize of a coach ca eat the amont of meat co be awfy

on No Owen 9 83 56) he pathceate an upwa ten in opeating cot an ent eeking among empoyee and poitica fonay aoe .

A econ, eated epanation, which oe not neceaiy epenon intitutiona ecine i the dicty in a compe wo of etabihing unambiguouy whethe intitutiona faiue o andom hock

tanient foce ae the caue of uneiabe ancome . Setback can be eithe a onetime bip an a epaabe pobemo a ign that the eevant intitution to be icae an




eplaced with new ones . Inability to coectly distingish the two sit-ations is paticulaly likely to occu when the institutions wee oigi-nally chosen delibeationwithot epeimentation,ealuation and intenational compaisons Knowledge about possi-

ble altenative institutions and how they wold function is likey ini-tialy to be scant. Ae a community installs specic institutions, itseeks additional knowledge pimaily abot aspects of the eisting aangements athe than abot altenatives, at least whie the going isstill good.

When impefections ae nally ecognized, political impotence is theeason why goenments continue to lie with social instittions

that fai to meet thei oiginal goas. Poicymakes may discoe that

they ae politically nable to efom the elevant social stctes theyae ocked into the stats qo (Kilick 1995. hose who benet fomimpefect instittions ae oen well oganized and contol the policypocess, and feas of sanctions may sometimes even compel people towithhold infomation

Economic Institutions: The Modern isory of Long Waves

he histoy of goenment conto of the economy in Euope and theStates duing the moden age is with the idea that

coelated shis in instittiona policy diven by the conence oftechnological change, powe politcs, and shiing beliefs in social mod-els ae oen peceded by social deelopments.

thee is no eidence ndicate that the comple ofpowe politics, technology, and impefect social models ceates any-thing esembing mechanical cyces, looking back at two centuies ofEopean and oth Ameican economic histoy many schoas discen a ong wae of decentalization and anothe of centalization,with wave not fly synchonized and asting

centuy. In the last two of the twentieth cen-ty, the wold seems to ente a new phase of decentalization with theeival of economic and the collapse of most Soviettypeeconomes.

he vaious contibutions in volume 8 of the Cambrdge EconomcHstory of Europe (Mathias and Pollad 1989 which deals wih thedevelopment of economic and social policies in the indstialeconomies, to sppot the of the two long of goven-ment contol and decontol. Schemme (1989, 362) poides cudeqantitatie eidence in a showing in the shae of cen



Competi ng Socia Model s 43

ta govenment ependite in goss national podct. ime seies oBitain and Fance, which etend back to the 1 780s , ae Ushaped andbottom out somewhee the middle o the nineteenthae deceasing by about ha om the peious high o mecantilim

and mutua waae. he Fench, howeve, hit the low point ealiethan the Bitish, and in the 1910s both seies etn to eighteenthcenty levels. In Pssia and in the Geman Reich the atio o centa govenment spending to goss national podct shows a shap incease thatbegins in the last quate o the nineteenth centuy.

he wok o Adam Smith, JeanBaptiste Say, James Mil, andas wel as the Ameican o

in 1776 and the Fench o 1789 mak the emegence o

dominant cstes o aisseaie o ibea modes (Baioch 1 98 9, 45 .Yet the long libeal wave contained mch vaiety and moe state inte-vention (especiay at the ocal eve han many peope assme. Bitainmoved towad ee tade late in the eighteenth centuy, the tend wasinteupted by the Fench was, but it in the epeal o theCon in 846, maked beginning o a eetade ea inBitain that lasted ntil 1 9 1 4 (Baioch 1 989 , 1 3 . The othe counties oWesten Euope and the United States leaned moetionism than Bitain, the wods indstial eade. he phase o Euo-pean ee tade was shot asting om 1846 to 861 (Baioch 19893650. Pio to the Second Wa, the nited States olowe apoicy o potectionism ecept o a phase o libealism o modeatepotectionism that lasted om 1 846 to 1 86 1 (Baioch Yetthe histoical eidence makes clea that the emeging nationsntied the knots o put ewe estaints on piate pop-ety, eeased maket oces, and encoaged competitioni notntenationally then domesically o within eetade zones, sch asthe Geman Zollverein he state s diect oe in podction distibtion, and was compae with ate pei-ods, when the state was active, the activity genealy was concen-tated at the local athe than national level, which is paticulalyelevant o Ameica (Letwin 1 989 .

A stong move towad geate state contol in the indusia con-

ties began late in the nineteenth and ealy in the centy.he tn eected not only a shit in poitical powe om the midde tothe woking class which the state gadualy enanchised but also n

evision o these nations with newmethods o and economic ealities. ization had bought new poblems and new oppotunities . Among new




pobems wee apid decline and disocation in agiclte, indstialaccidents, seious spilove ects such as pollution, and dissolution oftaditiona ual social netwoks. Thee also was concenabout the ole of women and childen in industial society, the low edu-

cationa level of the abo foce elative to the new poduction tech-niqes, ack of infastctue sevces fo indsty, and insfcient sevice tilities and hosing fo fastgowing ban aeas.

The Indstial Age, with its new podction technology, mechanization, and scae economies, saw vast inceases in weath, which atthis time of bewideing change gave cedence to caims by politicalentepeneus and utopia peddles that end of scacity was nea.Impovement in communication and tanspotation, the concenta-

tion of economic activity in ban aeas, and a huge incease n thescale of poduction suggested oppotunities fo centa panning. Itnow seemed feasibe that some fom of cental diection by the statecold acceleate industialization and, at the same time, bing the

pocess contol. Ronald Coase 992 99] epotsbeing pepeed in by the appaent conict between a denia ofthe of effective cental panning and the cuent sccess oflage copoations . In paticla, Coase fond it puzzling that in theindstia counties, the copoation had in pat taken ove the coodi-nation function of pice mechanism.

The Russian Revoution had taken place ony fouteen yeas ea-ie. We knew then vey little how planning actuallybe caied in a system. Lenin had said theeconomic system in Rssia wold be un as one big factoy. How-eve, many economists in the West maintained that this was anmpossibility. And yet thee wee factoies in the West and someof them wee etemey age. 7 6

The of emeging society, an phe-nomenon, was pooy undestood, and, as the nineteenth centuy woeon, opinion leades inceasingly diveged in thei views ofappopiate social technologies fo the new society Eay in the twen-

tieth centuy, social modes favoed by eades in Eope and Ameicaspanned a spectm fom a decentalized maket economy with fewestictions on pivate actos thogh a egulated maket system with

policy to f state contol of cen-tal panning. As we know, statist emphasizing vaying degees of cental contol won the day. intodced etensive



Competi ng Socia Model s 45

egtion of mny of it indutie, epecilly inftcte eiceindutie, whee Euope ntionlized mny of thee indutieVieto Ntionl goenment in Ameic nd Wetenumed eponibility o the helth nd welbeing o thei citizen,

with Euope tking lge tep towd wefe tte. And in 928,folowing n intene indutiliztion debte, the lede of theUnion embked on mie centlly mnged pogm of focedindtiliztion Die 989.

Duing the 970 nd 980, tend wy fom tte contolbecme ppent . Hope fo the effectiene of centl pnning dwin-ded, did belie in tteponoed indtil policy. Fncediemboweed it once dmied ytem of indictie plnning

ning in 976 with the eenth pn (Hl 986, 85. he nited Stteenteed phe of deegtion of io inftuctue eice indu-tie nd in 979 Bitin nde the htche goenment begn moe towd ibeim. By the 980, few people belieed tht tteownehip of entepie w n effectie wy to chiee economic

ccountbility, ecey etcting, nd ple-nt wok enionment. Hitoy eemed uppot the wby 949 Toy pmphetee:

he wee nee moe wong thn when they belieedtht ntionition wold end thei mine pinting to the pit-hed nd keep them ogging l dy long meiy the SeeDwf. Singeton 995 , 25)

A public ownehip nd iou egultion o pite indutyinceingy ot thei uppot becue they becme peceied wedocil the populity of decentied oution nd mketoiented ytem inceed. he colpe of the Soiet Union in99 to e thee deelopment.

he eel o fgoenment conto o f the economy in the -te of the twentieth centuy, which in ome wy i compble to themoe towd tht ome 200 ye go, ie thefolowing etion:

l . Doe the di beginning in the 97080 ignify fundmentl eel of the peiou centuylong tend towd pbiccontol? I the economy heded towd new centuy(o mny of libelim, iding downwd cue ofeduced public contol?




2. What foces boght abot this new diection in social ogani-zation? In paticla, does evision of individa social modelsplay an impotant ole in ecent evesals of instit-tional policies o does the eplanation entiely est with shis

in poitical powe, new technologies, and eqiements of newpodction methods?

My esponse to these ples is no moe eliabe than ae my ownincomplete social models. I have a hnch, howeve, that in modendemocacies, with thei lage winning coalitions and ising levels of edcation, the political incentive to pomote economic gowth is veystong. Moden democatic societes ae nlikely to eject libeal

economic tends as ong as citizens and thei leades believe that eve-sal of feemaket poicies wod cetainly bing seios economicdifclties and shap decine in gowth ates . A majo evesal of instittional poicy, if it occs, is likey to be peceded by a cisis peceivedightly o wongly as catastophic, ceating ndamentalabot social models. Sch an event wold be an opening o alena-tives to the libeal egimefo altenative social models waiting in he wings fo thei ce. At the end of opposite the lib-eal maket egime ae modes tha pedict calamitos conseqences folife on Eath if the wold economy contines to gow at its cent ateand genealy see envionmenta amage as being ievesible. In thisview, positive economic gowth, as it is saly dened, is a negative

pocess. The associated policy models oen sggest a com-plete evesal of cent policies involving an end to economic gowthas we know it, stict limits on ee intenational tade, diect edistib-tion fom ich to poo conties, and etn to the simpe lifestyes ofol. Hence, may be too soon to elegate the concept of cycling socialmodels and instittiona egimes to the dstbin of histoy.



C H A T R 4

Sable Povey ad U sabe Growh

This ees to social as "impeect when they aethought to cause elatie economic backwadness o economic units,age o smal. This chapte consides two aspects o impeect institu-

tions stability and agilitythe stabiity o dysunctional institutionsand the agiity o gowthpomoting institutions . Fist I discuss howtaditional societies hae nonmaket institutions to lowe thecost o dangeous isks om natue and othe souces. These institu-tions which oen play a ita ole in at ealy stages o social

usually become deeply embedded in the cul-tue. Howee, when oppotunities aise oeign technologiesbecome aailable because new makets open, o o othe easons, ta-ditional institutions oten block change: they ceate a poety tap.The latte pat o the chapte consides the poblem institutiona agiity. Many societies tht hae scceeded in intodcing popety ights suppotie o gowth ae unable to weathe eogenousshocks thei systems ae agile and liable to colapse. Intenationalstatistics eeal that gowth is common, and incontet I tun to an study by Dani Rodik 998) o epa-nation o the phenomenon.

The discussion o stable poety nd unstable gowth does not conside the moties o those who set institutional policy the topic takenup in chapte 5, which tuns to political science to eplain whyeades tolete impeect

Coping with Shocks from Nature and from Trade

When asked to eplain why some counties ae poo whie othes aeich a natual esponse o many people is to mention adese etenalcicumstances Counties ae poo because o hostile o changing climte histoical Aica) o epoitationby coonial powes leading counties ham deeloping counties by manipulating the te o intenationa tade




because the counties ack abundant natual esoucesJapan while it was still elativey poo because of an unfavoablegeogaphic location landlocked and oo disease and oeign invasions In socia science, the impotance o

such etena factos in economic development wanes and ises withthe times. Some studies, fo eample, indicate that abundantnatua esouces actually ham athe than help the longtem gowthpospects of a county Sachs and Wane 1999 Gylfason 200. Ofcouse, etena shocks have oen had devastating consequences, pa-

o poo that pimitive technologies, theebylimiting such counties' ability to avet incase of unavoidable events, it is elevant to ask whethe a

county, ich o poo, empoys sound govenance and effective institu-tiona policy given its eve of development to cope with adveseimpuses o whethe inadequate policies actuay aggavate etenashocks.

Seveal ecent intepet social in taditiona soci-eties as a ational esponse to the physical given the lowlevel of technology in these communities. Because specialization hasno advanced fa in taditional societies, social institutions oen simul-taneously seve sevea functions Institutions fo maintaining potecting popety ights and suppoting and eguating echangesometimes also insuance isks fom natue. he sec-tion on emeging economies in this chapte povides an intoduction to

o this kind by looking at methods in poo fam and aga-ian to againt isks. As an I eplain

taditional society in histocal Iceland oganized to cope withhamfu events. The histoica Iceandic which in moden timeshas paallels in the hid Wold allows us to conside how taitonal

oen seve thei puposes eativey we yet ate, whennew oppotunities become baies to gowth. hese institutions

pevese path Hoff 2000, 78) daws the following lessons om moden infomation and tansactioncosts economcs:

A vey geneal insight of ecent theoetical wok is that while

nstitutions may have, as thei intention, the impovement in eco-nomic outcomes thee is no assuance that that wi be the case.Institutions may be pat of an and yet be dysfunctiona. Fo eampe, Anott and Stiglitz (1991 the con-

o the socia that aise as a o thencomplete insuance povided by makets because o moa haz



Sta l e Poverty an d Un sta l e G rowth 49

a poblems. hey show that infomal socia insuance maycowd out maket insuance and lowe social welfae. Developing

may be in a vicios cicle in which low levels ofmaket deelopment esult in high leels of infomation impe-

fections , and these infomation impefections themselves give iseto institutionsfo eample infomal, pesonalized ofechange elationships (Kanton 996that impede the development of makets .

Pemoden Iceland elied on a decentalized system of social secu-ity coped toeably well with most types of given thecounty s poety and pimitive poduction technologies, when

the shocks wee sevee and widespead. Yet I ague that hamful disin-centives wee embedded in these institutional aangements. I bieyoutine the dynamic inefciency of te system at the end of this chapteand continue the case in chapte 6, which discusses inefcient socialnoms and economic deelopment. I claim that Good Samaiannoms suppotive of wefae baed systematic livestockmanagement and stategic stoage of hay. The faultypoicies of fam community had die consequences becauseage of fodde duing cold spels fequently decimated the livestock.Chapte 7 then discusses in ow the county's welfae institutions wee a contibting facto in a with etenal ancomponents that bocked the development of a specialied shing industy in Iceland.

Rsks, Institutions, and Disincentives in Traditional Societies

Respon di ng o Gen era l a nd Speciic R sks

Ranom envionmenta factos sch as o iseasecan vaiation in the of poothat opeate with low levels of technology. As ives may be at stake,taditional societies have a incentive to seek ways to con-sumption vaiability ove time, but high costs of tansacting in these

communities usually pevent o limit the use of insuance, cedit, andothe intetempoal makets . Recent studies show that taditiona societies stabiize thei consumption an lowe the cost of isks by elying on vaious an in

ypicaly, this wok has ignoed the poitical poblem ofcoodinating social esponses in a isky envionment, but it is oen




implicitly assmed that the aangements eect spontaneos o ocaldecisions that ae motiated by theats to the community's eistence .

The on isk management between coaiateo geneal isks and ncoelated o specic isks If the isk faced by

indiidua economic nits hae high posiie coaiance (misfotunestkes most of unis simultaneousy, they ae geneal isks, andmuch of the gains fom pooing and shaing isks ae emoed.Weatheeated isks, fo eample, hae a positie coelation whenal economic nits in a communiy beong to the same climatic one,and isks of disease ae coelated when poimity eposes hman oanimal poplations simltaneously o infection fom contagious dis-eases. Conside a community of fames on an island, al opeating in

the same cimatic zone and facing a high positie yied aiance fothei cop. Althogh pooling thei yied isks in the cuent actiitywod not help (een if coss wee low, the fames mightbe able to educe thei isks by desifying into new lines of poduc-tionfo eample, by eallocating some of hei o coastal

the coelation between outcomes in the old and new acti-iy is less han each has educed his o oeall isk butpobably has done so at the epense of foegoing output de lack ofspeciaization.

Specic isks ae indiidual mishaps such as accidents, nonepidemicdiseases , localize es, o downing of peope and animals. The mem-bes of a social goup can educe the cost of specic isks by pooling and shaing the isks. Infomal systems may coe etendedfamilies, the labo foce of a fam, the membes of a illage, a town-ship, o a whole nation Infomal insuance in taditiona soci-eties tend to coe elatiely smal goups because pimitie measuemen techniues and weak foal enfocement mechanisms usuallyconne social netwoks of ecipocal obligations to smal gops.Howee, the coaiance of isks oen falls when the sie geo-gaphic span of the inceases, and the choice of insu-ance goups inoles a tadeo between insuance costs and tansac-tion costs.

Although the liteatue on nonmake insuance aangements in

taditiona societies sualy assmes that gien thethese institutions ae efcient inecient institutions ae not unknown.Because knowledge is incompete societies may intoduce impefect

then get into an sociathat efoms. Additionally, that ae efcient atone point oen become inappopiate cicumstances change




fo eample with the intodction of new makets o new technolo-giesand may block necessay estuctuing of the economy. hedecentaized system of social that peailed in histoical Ice-land i a good eample of the ambialent natue of taditional ocial

institutions.

Local Inst tut ons for Coping with Risks in Historca l Iceland

he taditional system of socia secuity in histoical Iceland was basedon eatiely sophisticated local institutions fo shaing and loweing the cost of isks fames cultiated gassto poide fodde fo in a climate that was etaodinaily

magina fo faming. In the pemoden peiod the majo souce ofgeneal isks in the fam commnity wee andom cold spels athougholcanic euptions and epidemics wee also impotant souces . o dealwith geneal isks fames stoed food. hey also diesied podc-tion by enteing the county's ich coastal sheies but only in smallopen boats on basis and ding the offseason inhe poity suppoted the aangement enfocing a on specal-ization in the sheies.

Fo coping with specic isks which can be pooled and whichinclde ilness accidents es oods aalanches and loca weatheconditions the elie on local instittions. he oigins ofthe socia safety net ae found in the laws of the commonwealth930262), which ae collected in the G<gs and pobably wee

in witing in the eleenth and twelh As is intaditional societies the Icelandes wee esponsible fo the welfae ofthei elaties and kn was dened boadly but when family suppotfaie local goenance units some 160 o hrepparbecame the centepiece of the socia safety net he law eqied adjacent fams to fom a hreppur, bt these communes wee faily

selfgoening bodies. he law each hreppurwith ta eenue a shae in the tithe which was intoduced in 096) ,and pecied in detail ights and of andmembes in dealing with isks The old law of Iceland shows sophiti-

cated awaeness of moal hazad fo eample in its stipulations of howto compensate fo e damages on famsteads .In the labo maket genea use of linked o tied longtem employ

ment contacts was an insuance mechanism wheebypowe was echanged in fo a payment that linked basic emu-neation with cedit and social secuity 983 ,




Hu ger I su ra ce: I ncentives a d Outcomes

they wee esponsible fo the welfae of all in theicommune, Icelandic fames became peoccupied with potential

abuses of the system. he fames feaed not only that the systemwould make people lazy and iesponsible but also that would ceateincenties fo epeimenting with new actiities and leae the cost offaied epeimentsfo eample in the sheieswith the fames.he fam establishment is on ecod as opposing technologicaladances in the sheies (see chapte in pat to peentupwad pessues on the pay of fam seants. fames also usedinfomal methods to enfoce population contol , most peo-

ple fom maying befoe they could affod to ent o buy a fam. In1 703 , some 44 pecent of all Icelandic women y yeas and olde hadnee been maied (Gunnasson 1 98 3 1 6.

his decentalized system of hunge insuance, which geneallywoked well fo specic isks not cope with the most seee gen-eal isks centuy waswost One in nine Icelandes peished in the famine of 75657, some24 of the population peshed in famine of 178485, andeen moe people died in a smallpo epidemic of 1 7079. Vasey344 epots that the ecess death ate in 178485 was double the sizeof most estimates of motality fom the Iish Potato Famine an wascompaable to the wost local famines in ealy moden Euope.

he Icelandic system, with its outcomes, is notedeeming he county's welfae system appeas to haedone athe well, gien the county' s pimitie poduction technologyand the isky subactic climate. Within these constaints, the socialwelfae system was elatiely egalitaian and not blatantly dysfunctional . In his study of the famine of 1 78485 which is associated withone of the most in human histoy anbelongs to the of geneal isks , ( 1 99 1 , 34043 epotsthat seants, adopted childen and people on assistance geneally didnot hae lowe ates than fames and thei immediate fami-lies.

Fom a dynamic howee, Iceland's ancient social poli-cies and institutions contibuted to an undedeelopment tap. hecounty aoided all economic epeiments and peseed Vikingagefam technology oganization well into the nineteenth centuy. Inchapte 6, which social noms I that noms of eci-pocity that suppoted the county's infomal welfae system con




tibuted to a dysnctional equilibium in faming by ceating incen-tives fo fames not to maintain stoes of fodde (hay) beyond the

of a nomal yea. The social technology by the famcommunity to maage liestoc made it unpepaed o cold spell and

othe andom shocs with dastic consequences. As mentionedaleady and discussed late i geate detail the county's welfae system was also oe of two citical factos peventing atioalization andtechnoogica impoement in the county's shing industy whic atthe time was the county' s only feaibe way out of a vicious cyce ofpovety and its best agaist stavation.

Emergng Economi es - Fragile Growth and Trade Shocks

he Record: Punctuated Growth

Obseving contempoay economic gowth ove peiods of thity ofoty yeas economists have noted fo woldwide tatgowth in the ealy pat o a peiod i a poo pedicto of gowth in theatte pat. In othe wods the gowth pefomance of a county vaiesconsideaby fom one subpeiod to anothe even when thee ae nomajo changes in its domestic institutional envionment o poicyegime. Eastely et a. (993 who dew attentio to pheomenon suggest that punctuate gowh is cause by exogenous shocssuch as was o extenal tade impulses that at times inteupt eco-nomic pogess .

Economic theoy is concened with technical economic of howto espod to tade shocs wheea political istitutions political cal-cuations and poitica bagaining shape the actual esponses.Depeding on thei seveity adustments to extenalshocs sometimes equie oly scal ad monetay measues in othecases howeve majo stuctual chages neee including the

of new the shining of andoen politicaly powefu industies. When advese tade impusessuch as a shap all in the o a mao expot edceea national income govenmenta attempts to allocate the buden

oen costy stuggles amog socia goups. When develop-ments i extena makets udemine established industies its ownesmanages wokes and even supplies fequetly seek potectio ad

fom the When macoeconomic aesome favo impot contos ove of the

cuency while othe goup may pefe devaluation accompaied y




wage contols (Rodi 998 When eduction in aggegate spending is alled fo oganized goups oen call fo highe taxes on othes thanon themselves o advocate govenment spending in aeas wheethey ae not afected The wost sceaio fo gowth is ceated y gov-

enments that espond to these vaious pessues y allocating the costof extenal shocs though ination and y ad subsidizing declinig industies without povidig incentives fo new industies todeveop. Ineffective poicy esposes can magnify the ecoomic cost oftade shocs and mae advese ects linge long ae the oiginalextenal conditions have evesed themselves and ecome favoaleaga.

Eastely et al. (993 conclude fom thei empiical evidence

fo the medium tem exogenous shocs ae the chief cause of punctu-ated gowth. Rodi ( 998 59 povides evidence indicating that dif-feet esponses to tade shocs explain why gowth in East Asia(excluding China) diveged in the mid970s fom gowth ates inLatin Ameica the Middle East and to some extent Aica. Fom 960to 973 the gowth n all these egions except Aica wasoughly The Midde East led with 4.7 pecent gowth ingoss poduct pe capita ut even many counties in Aficadid wel. In Afica eight suSahaan counties had gowth ates ofgoss domestic poduct pe capita that exceeded 3 pecent. The datashow that duing 97394 poductivity gowth colapsed in all theseegions except East Asia whee gowth continued at about the sameate as it had 96073 . Rodi ( 998) contends that duig the 970s temsotade shocs diffeent esponses in East Asia

in the othe thee egios His detailed of policyesponses in South Koea Tuey and Bazil eveas that Koea thecounty duing the 970s was hit hade by changes in wod picesthan the othe two couties made efcient adustments in its macoeconomic policy Bazil Tey failed to adust . And onlyKoea ept gowing at a ate compaabe to the pe 970s

The R odr k Mod el o Punctuated G rowth

This section a theoetical mode that Rodi ( 998 9 3)uses to expain puctuated gowth i tems of socia conict anddescies how the model was tested empiically. The chaptes last section discusses explanation and how it ts with ou view ofimpefect I dwell o this it suggests thatpuctuated gowth is a citical fo nations and fu




themoe, that the poblem is lined to impefect institutions Rodi'sstudy, howeve, does not isolate the basic political factos that pevent

fom esponding to shocsRodi 9 3) oes two baic explanations o why counties

fai to adjust thei economic systems to shocs oiginating in theiintenational tade eations The counties (a) ae constained byatent social conict and (b) lac effective institutions fo conict management Using a simpe fomal mode, he pedicts that extenalshocs have the agest impact on gowth in counties that both aeplagued by seious social stie and ac effective of conict

Successul counties ae elatively ee om socialstife o expeience social that causes itte ham stong

institutions of conict management neutaize the conict Rodi'smodel is typical of the inteestgoup appoach in publicchoice theoyThe expectations the and the behavio of oganized pessue goups dive the stoy, but the state is in the bacgound, povid-ing a paying eld fo these A simple cap-tues the essence of model:

latent social conict gowth = extena shocs x

institutions o conict management

Given the of the model, the of two vaiablesdetemines whethe the political system will magnify the negativeimpact o an extenal tade shoc One, efectiveness onational o conict management, and the othe, mea-sues the expectations y each goup that the othe goup willthei expectations about atent social conict Low (wea institutons) causes dominant stategy fo both of the model' s two goups,A and B to be ghting high maes coopeation a dominantegyin both cases egadess of the value of When taes on an

the of the of latent social conict,dives the outcome Coopeation is dominant fo ow values o andghting is dominant o high o

The ecent availability of data sets containing compaable social,

poitica, and economic vaiabes fo a lage numbe of counties hasmade it possibe to test empiicaly vaious conjectues about the gen-ea impact on economic gowth of both economic and noneconomicvaiables hese econometic tests involve high levels ofelatively cude poxies o socia and poitica vaiables, potentiallylage measuement eos, and doubtul statistical




Undelying the appoach is the pemise that we can deive genealpinciples about the longtem development of economies by compa-ing at diffeent levels of development. we maydot te ability o intenational cosssection egessions to give eli-

abe answes they ae fuitfu tools of discovey and insights and fogeneating new hypotheses. Findings fom cosssection egessionscan be etested by othe means such as timeseies anaysis fo individua counties statistical studies of individual industies in seveal counties o in deep case studies that ely on vaious methods of inquiy.

In Rodi's empiical test of his socia conict theoy the dependentvaiabe is the gowth diffeential between 96075 and foeach county. His poxies fo atent socia conict ae (a income

inequality (measued by Gini and an index of the eth-no inguistic divesity in a county. The quaity of institutions ofconict management is measued by the Intenationa RisGuide index (ICRG) which fo each county coveed gives numeical

to factos such as ue of law qaity couptionexpopiation is and govenment epudiation of contacts.ICRG index theefoe measues the quality of socia outcomesthesecuity of economic popety ights. The othe main poxy fo mea-suing the quality of institutions of conict management is the Fee-dom House index of democacy which is composed of indicatos ofcivil libeties ights. Again the index is otcome oientedbu its emphasis on political outomes povides a deepe explanationof gowth does the ICRG index. The of politicalpesumably expectations secue popety ights

in tun inuences ehavio and allocation ofesouces.

The egesson analysis appeas to stongly suppot Rodi' s thesisabout the in social conict and economic pefomance. In

vesions of the egession mode ey coecients have the pe-sign nealy aways statistically signicant . Many of the

egessions explain (as indicated y adjsted R) abot twothids ofthe vaiation in gowth pefomance. Howeve vai-abes fo egions such as Latin Ameica and East Asia emain

signicant ae the social conct and institutional vaiabes haveenteed the egessions suggesting that gowth pefomance isinuenced by egionspecic factos .

When they ente the egessions the socia conict andvaiabes ende statistically insignicant the vaiableing the sie of the tade tuulence that a county faced in the 970s .




The appaent lesson hee is that extena tade impulses haveinsignicant impact on economic gowth when latent social conict is

contol. The also empiica evidence showing that tade shocs do not aect gowth pimaiy by educing a cou-

ty's ate o investment but do so by aecting the poductivity oinvestments.

Finaly Rodi ceates an (outcomeoiented) idex of macoeconomic mismanagement that combies the inceases between 96075and 97589 in the ate of ination and in the pemium fo foeign cu-ency on the blac maet. he index o bad policy has a vey stong negative coelation ecoomic gowth suggesting socialconict and poo institutional aangements inuence

gowth by aecting the quality o macoeconomic policy (and poomacoeconomic policy pesumably educes the poductivity of invest-ments)

The ndings of the Rodi ae stiing and diect attentonto an featue o economic declne that new institutionaleconomics oen neglects: the inteaction the quality o theinstitutional envionment and the eectiveness o macoeconomic pol-icy. The study shaes with othe compaable wo the assumption thatpoicymaes possess coect economic poicy modes fo designig measues to neutaize extenal shocs 998 2. In othewods it is assumed that the policymaes now exactly what policymeasues must be taen to ectively limit the impact of tade distu-bances on the economy avoid when poo economicpolicy is good politics Yet in the 970s (and late) politiciansappeaed to believe sinceely that "bad poicies such as impot contols and subsidies wee the ight way to g.

Ifwe accept the ndigs of the Rodi study we stil have some wayto go to undestand why some counties suffe gowth andothes do not. Fist ethnic divesity income ae oen ta-gets of govenment policy athe than xed paametes. Second thestudy does not tell us what some tocombine high levels o ethnic divesity and income inequality with

secue poitica and economic ights. Thid Rodi's main nding ispehaps that govenments that suppot secue popety ights alsohave the icentive to folow sound (gowthiendly) macoeconomicpoicies. The is not supisig the of popetyights is closely eated to macoeconomic stabiity. Missing fom theaalys howeve s an o bung question of




some governments tolerate insecue property rights an pursue imper-fect macroeconomic policies The absence of such topics in the stuy isno a single essay cannot explore growth at allanalytic levelsfor example by examining the motives an constraints

of political leaders Chapter 5 tuns to political science exploring thequestion of why bad economics is sometimes good politics



C H A T R 5

The Politica Logc of Bad Economics

Introducton: The Poltical Rationalty of nefficient

Economic Sysems

Socia scientists sedom expoe simultaneousy al dimensions o aage eseach question. Instead eseaches bing avaiabe toos tomanageable aspects o the poblem One aspect o impeect institu-tions that is we o standad ationalchoice anaysis is thequeston o ational ules suppot poicies that ae nown to

economic decline. This chapte discusses theoies ationalules who see bad economics as good poitics. These theoies doappea to incomplete nowledge (impeect socia modes to accounto economic policies but intepet the poicies as ationapoitica stategies. The pessimisticaly conclues that utiity-maximizing eades wi soone o ate emba on destuctive eco-nomic policies unless they ae appopiately constained. I sample

and begin by two conditions give ues ea-son to sacice economic gowth: thei time and size othei suppot goup. Uness they ae constained ues who discountthe utue have an incentive to appopiate deay avaiabeesouces and ignoe ongtem gowth. Simiay ues who ely on

suppot goups thive by tanseing esoces tothei o even amid economic

Rues who need to pease a age goup o suppotes have ess etom the nationa supus o thei pesonal and gandiose plansthan those who ey on smal goups . Theeoe uness doing so theat-

ens thei poitica lives ules have eason to pee a smal coaition toa lage one which they can achieve by setting poweu socia goups ateach othe's thoats and theeby divde and ule. I we accept this negative view o the basic popensities o ues it is that the onlyway to ongtem gowth is o society to constain its leades.The tas o constaining ules cals o coodination and




coopeation among vaious goups and avoidance of pisone's-diemma situations.

The chapte's na section consides the following Can weexplai the logic of limited govemet puel i tems of inteactions

between selsh ational actos without appeaing eithe to ideas(socia modes o costaints imposed o histoica paths?Recent studies of the emegence of limited govenment in Engand andelsewhee indicate that the paticula way in which actos model theisocia envionment has been a citical eement fo the emegence ofdemocatic institutions.

The orizon Effect and Bad Economcs

The ationachoice stoy about poitica pefeences fo bad econom-ics oe begins with an aaysis of the stategies of an autocatic uein a simpe setting containing only two types of actos: a ule and sub-jects. Oson 's (000 analsis of oving and stationa bandits which is

b histoical example of China's walods in the 90sis a cooful example of such studies . Oson was stuck b the puzze ofwhy people wee paticulay eage to l ive unde a cetain Feng Yu-hsiang an unscupuous bandit. The appaent answe is that he sup-pessed thievey by othes than his ow gang in the distict that he cotolled. In this lawless peiod Chinese waods usually asoving bandits o thieving amies on the mach though a foeign tei-to stealing all vauabes the ca. Feng Yuhsiang appaent milita powe to claim possession of a sub-stantial geogaphic aea ad eep othe badits out He chose thee-foe to become a stationay bandit a Maatype ue who does notimmediatey punde his egion but invests in potecting and expanding the economy the tax base.

Roving and bandits compaable to shes befoe andae a shey becomes exclusive popety: with open the shesplunde the she; unde exclusive owneship thei stateg is opti-mal havesting. Olson (000 a simple neoclassical model tooate wh the selfinteest of a stable autocat eads he both to suppl

pubic goods and estain taxation. A ationa ue who wants tomaximize tax evenues must ecko both the negative supply effects ofhigh taxes (because high taxes educe effot and the positive impact otax evenues fom gowthenhancing Aue to invest in goods as ong as new sevicesield tax evenue (thoug economic gowth than the cost.



he Pol it ica l og c of Bad Econo mi cs 61

Similay, the ule inceases tax ates as long as highe ates yieldgeate tax evenues and stops when disincentive ects of taxes out-weigh highe ates . This means that a stable may be inclinedto pomote gowth but that such faoable outcomes ae inheetly

unstabe. With time vaious factos usually mae autocats lowethei hoizons and behave lie openaccess shes. These factosinclude aging and pobems with succession new militay technologyand extenal o intenal theats.

Olson aso uses his model to analyze the dience in behaviobetween an and a democatically elected leade when bothleades tae the long view. The model suggests the leade of aselsh majoity in a democacy invests moe esouces in gowthoi-

ented pubic sevices than a gowthfiendly autocat because the auto-cat i inteested ony in the impact of gowth on tax evenues. Ademocatic maoity is inteested in both the impact of public seviceson tax evenues (which it contos) and on its pesonal incomes. Ademocatic maoity theefoe, eceies moe benets fom each dollainvested in public goods than does an autocat and theefoe is eadyto invest moe Howeve Olson's teoetical insight that democacieswil lead the gowth ace may fail when fo pesonal easons, autocatsgive highest pioity to gowth. Yet autocatic gowth paths ae unsta-be. At any time leades ae liable switch pioities to suitimmediate needs.

The citical poblem with autocatic ues who conto an economyis tha they ignoe the extenal effects of thei actions. To thesheies metapho, open access both atocats and shes aeisoated fom full etuns and full costs of theimeans that they do not alow fo extenal effects (fail to maximize jointweat. Economic theoy tells us that extenal effects emege whenexclusie ights ae incompete o missing paticualy theights of exclusion, use and tansfe. Extenal effects can be modied,the theoy aso tels by new popety ights andedening existing ones o by egulaing the actos. Pactica conside-ations (high tanaction cots) sometimes ule the denition andenfocement of exclusie popety ights . In ocean sheies , fo exam-

pe exclusive owneship of individua sh befoe they ae caught hasnot been pactical with existing technologies dening andenfocing exclusive owneship ights ove an economy and its tax baseae not We hae that

owneship of economies is to bing gowth. A maet fo economies o counties could theoetically aise




the level of efciency uner autocracy, but that soution is not reevantor esirable in the moern worl.

The ownership rights to a an its economy can alsorest with the nation, implying communa ownership where a repesen-

taive government acts as an agent of the citizens. In a worl of fullknowege an ero transaction coss, joint ecisions by the cizenowners woul accoun for all costs an benets an maximze the jointwealh of he nation In practice, the probems of internal governancean agency rule out such iea outcomes . Consier rst the problem ofinernal governance. When resouces belong to or millionsof ational an coowners, actors will free rie an ignoregroup inerests nless effective regulations or other instituions moify

their behavior. Similar reasonng applies o a mutiue of shers whocoown their shng grouns. Agency problems arise because he cii-ens are oo many to recy manage state . They must appoin anempower agents to run the poice, the courts, the arme forces, another organizations. The evience makes clear (see, for example,

literaure) even in mature cii-enowners are no fly in control; he usually have consier-abe leeway. Ye limite governmen is a reality, an alhough less hanieal, emocracy oen works wellpropery rghs are secure an rep-resentaves of the people promote he general wefare. Moern socialscience unerstans rather wel the strengths weaknesses ofcratic governance; ess is known about the art of ectively transform-ing the of nonemocratic staes into emocratic ones .

The following section yet heory tha exlainspulic policy an poor economic outcomes in terms of the personalincentives of government eaers. The focus is now explicitly on thelogic of poica survval an on how the survival logic varies from oneregime type to another which s as an exogenous variable. Thechapter's na secton looks at sties that explain the rise of limitegovernment in terms of strategic choices

Wnning Coalitions Seectorates and Inefficient Poicies

Al rulers rely on groups or their poiica surviva. The polt-ical ife of a leaer or a government epens on the loyalty of whatBueno e Mesquita refers to as the winning coalition. Thenecessity of its winning thebasic poiica an economic strategies hat a governmen chooses.Accoring o e selectorate theory, a govern




ment buys support from its wnning coalition in exchange for publican private goos. In this context, public goos refers to social ser-vices, economic property rights, an sonmacroeconomic polcies, whereas goos are grats to specic

iniviuals of money, commoties, an various privieges, such as theright to monopoize inustres or be exempt from specic laws. Inenition publc goos are growth frienly but private goos represent ebilitating cronyism. It follows that a theory of how regmes buysupport through mixes of private an pubic goos can also accountfor the political ogic o ba economics an the political o eco-nomic growth.

The political economy iterature has long recognie that the harm-

fu efects of pressure groups are relate to their size (Olson 1965) Asmal group usually expresses narrow interests, but a relativey largegroup is more ikey to have encompassing (Olson 1982).Groups with narrow interests oen request government avors or pro-grams that benet these the national economy. Thetraitional o rent seeking is concerne primarily with theeman sie, eaving the supplier of favors, the government, n thebackgroun as a passive player. With the theory, Bueno eMesquita et al.(2000, 2003) take the aitional step of anayzing thesupply sie giving the an actve role in eteining howsupporters are

The selectorate moe rests on three pilars. The theory assumes thatthe primary goal of eaers is political surviva, that al governmentsface (there are limits to taxation an borrowig),an that leaers minimize cost o buying support It ollowsifferent strategies are appropriate for buying support from small winnng coaitons than from large ones whch eas to the theory's basicpropostion Al else beng equal the supply of (growthfrenly) pubic goos by the government is an increasing functon of size of thewinning coaition, whereas the of private goos is inversenction of coalition size.

The reason is simple. A ruler who relies on a small ocronies minimies costs if he buys their support mainly with private

goos (money, commoities, an various iniviual privileges).Whe a government epens on a very arge winning coalition, particuarly a emocratic majority buget constraints an cost minimization on goos. The optimal ofsecuring the loyaty o a large winning coalition is togoos, incluing eectve property an soun




poicies. In these cases, the government ors general economic pros-perity rather than benets designed for particular individuals.

to exploration o the politics o imperectthis parsimoious model suggets that al else beig equal economic

stagnation is inversely related to the size of a regimes winning coali-tion (holding constant) . As small winning coalitions are atypica feature of various nodemocratic polities such as monarchiesdictatorships, and juntas, the theory suggest that the economies ofsuch regimes tend to perform poorly. Bueno de Mesquita (2000) and

de et al. have empirically tested these proposi-tios in a study using data or a large number of countries . stud-ies furnish evidence of signicant positive reationships indi-

cators of economic performance (including growth rates) and the sizeof a polity s winning coalition.

The seectorate like all social models relies on various simplications. For example, a thin red line does not separate the winning coalition o a regime rom other social The political survival oeven brutal dictators, such as Stalin or Sug, depeds in part onwidespread social acceptance i additio to support rom ther keycronies. Dictators require a substantial mass of popular support toenforce their programs because soe reiance on naked force is costlyand impractica. Compliance is admittedly oen a manifestatio ofoutright fear, but other forces aso play, incluing those embe-e in the reward mechanism. Individuals in arge num-bers these regimes, brutal dictatorships , to lll thepsychological and material need to be accepted. At stake are bothsocial acceptance and access to job promotios ad other carceresources . Yet criticism along these ines is not fata for seector atemode which emphasies predictive power rather than realism. Whatmatters is whether it is feasible to unambiguously rankaccoring to the sie of their wining coaitions whether empirical

the hypotheses from theI statistical tests reveal a great variation in economic performance

among regimes that rely on winnng coalitions o the same size(holding population constant), the nding would chalenge the theory.

To reduce such variation for regimes that have small winning coali-tions a new the seectorate is added to the mode. The seectorate is the set of individuals from which the leaders of a natio andtheir (winning are The relevance of theselectorate derives from the that political eaders miimize

cost o paying for support: pay the members o winnig coali




ions ony he bare minimum necesary o keep hem from efecing.For regimes where he winning coaiion is small (primariy variousnonemocratic regimes) , he price that a government pays forepes irecy o the folowing raio

size of coaliionInex of he price for loyalty =

size of seectorate

The size of this ratio inuences he ture poitica chances of inivi-who plan to efect from a winning coalition. The proba-

bility a efector will belong to nex winning coalition epensirecly on the size of the winning relative to the size of he

selecorae. To faciliate empirica ess, selecorate theory makes hesimplifying assumpion tha naure ranomly assigns members of heselecorae to the winning coaition when a new governmen emerges.For example, when a poiica system has a winning coalition tha con-ains 100 an he selectorate contains 100,000a efector sees he probability as 1 : 1 000 that she wil beong o he win-ning coaiion of the nex government. A very low of join-ing he next governmen coalition is an incentive not to efec from hecurren one. The moel assumes ha he members of a winning coali-ion calcuate the coss a benets of efecing anwhen a prospecive governmen offers them a beer eal than he c-rent one. Al oher things being equal, when the ratio of he winning coalition to the selecorate increases, offers from opposiion leaersbecome more temping, an a sitting raise its price tosupporers o prevet them from efecig provie it i willing anable to o so.

I conclue by ciing a few of the insighs offere byheory (Bueno e Mesquita a. 2003). Consier wha happens in a

regime when he size of winning increases with it the ratio . Firs, heminimum price hat current rulers must pay for poiica support willrise. of constrain , they now have fewer toexpen on their personal consumption an pe projects . A secon con-

sequence of an expaning winning coaliion is tha he paymens forsuppor increasingly consist of public goos rather than private goosbecause of cos consierations. Thir as he winningcoaliion/seecorae raio increases, the cos of (he probability ofbeonging to the next winning coaition increases) . Specic offers fromopposiion leaer now attractive, oher things being




equa, causing efection rates to increase an leaer turnover tobecome easier.

In nonemocratic countries smal selectorates are common in trai-tioal or classbase societieor example were ony members o

the nobility can enter te political omainbut larger selectorates areoen foun in autocracies where socia stratication is not prononce. Some rightwing ictatorsips encourage mock elections anhave a broabase selectorate an the former Soviet Union was aregime caracterize by a letal combination of a smal winning coali-tion an a large selectorate. Here tree conitions coin-cie: A relatively arge selectorate stabilies regime because efec-tion is risky; the small winning coalition is reware with

growtbocking private goos; an high of efecting an lowprice for loyaty permit the ruers to use a large share of te surpus forpersona projects.

The Race to Be First and Destructive Winning Coaliions

The selectorate moe offers a convincing explanation of an unerlying propensity of emocratic governments to promote longte eco-noic growth. Yet various emocracies at east in te sort anmeium term seem to folow economic poicies that borer on te irrational. Rorik ( 1 996) iscusses some of these tenencies. Years goby before emocratic governments reverse policies that generate nega-tive growt an overall economic losses. Democratic govern-ments even economic policies tat in an earier perio

economic isaster. precisely is unerying logic?Rationacoice poitica economists of a new generation have

expore with the help of relatively sophisticate formal moels whymany emocratic countries for example in Latin America pickestructive economic policies (Sturzenegger an Tommasi 1 998) . Thenew theories tat the unerly-ing economic structures but lac knowlege of te istribution ofimportant As an ilustration, let everyoneknows with certainty that propose institutional refos wou bring

large net economic benets in te if implemente. Withsome probability there woul also be costs ranomy istributeaong the various categories of actors. Finay it is kown tat loserswill not be A teorist now a moelsowing that rational pivotal actors , teir share in the




costs will not support the reforms until the economic crisis has reachesome critical eve.

The new moels phenomena that the olon inerest groups le unexplore or explaine informaly incluing

he ynamics of the rentseeking process. Why for example o fac-ions rentseeking coaliions frequeny create political crises bycaling for economic reforms wel before their rents are epete anbefore a state of fulscale economic crisis is reache? If these calls forreforms are heee the reform measures appear to make the instiga-tors worse off by hastening the removal their privileges .

Toell (1998) illusrates the new style by offering a raionalchoiceexplaaion of vigorous rent seeking an subsequen early calls

for reform. He observes uncertain property righs cause excessesan even esructive behavior by hoers of various governmen prvi-eges. The possession of quoas monopoly an special favors isoen linke to the life of the current government these rights fre-

are not transferable an they are togroups' attemps to capture hese rights. the exreme the situaton

open access where actors race to be to eplete aresource with uncertain ownership.

Accoring o Tornel (1 998) the beneciaries of uncertain economicprivieges may cal for reforms before their esructive race bottombecause they seek to control the of governmentreforms when it becomes apparent that reforms cannot be avoie . Bytaking the reform initiative a group hopes to minimize its cost of

reforms an pass isproporionate ono other groups.The Toell moel shows competition to avoi burens ofeconomic reforms inuences timing which is set at a relaivey earlyate because the facions are unable to solve heir coleciveactonproblem an present a unite front.

Constraining the Government: Social Structures and

Socia Models

So far our examinaion of wasefu economic policies has been

resrice to rationachoice explanaions. The explanations share hefolowing characeristics (1) poor economic outcomes resut fromstrategic ecisions by rational actors who have ful knowege of heunerlying social (2)economic policies an outcomes are roote in high transaction costs




which prevent sie payments an creible commitments necessary formaximizing joint wealth; an (3) socia structures that constrain rulersare

Teories o this nature are not well suite or explaining why certai

countries get stuck in poverty traps while other countries evolve polit-ical structures supportive of longterm economic growth or why somecountries have politica structures capable of weatherig severe exogenos shocks that evastate other countries . To anle these ifcultissues, we nee a theory that has the growthfrienliness of politicalan social as the epenent variable. Fragmentary evi-ence inicates tat historical orces insocia institutions, organizations, an social moels shape the oppor-

tunity set of poities an oen restrict opportunities for reform.Because the evolution of political institutions has a historical imen-

sion several American scholars have mie Eglish history in searchor the roots of limite government. In a wellknown stuy, North anWeingast analyze the evoltion o governing

in seventeenthcentury an Weingast ( 1 997) has revis-ite case. North an Weingast emphasize iniviual choice but oso against the backgroun of organizations an institutions an in thecontext of specic social moes .

Weingast ( 1 997) attempts to capture the essential features of politica evelopments in seventeenthcentury Engan by using a simplegametheoretic moel that analyzes the relationship between a ruleran two social groups. The moels the ruler's ability to set the

each other. Weingast tat the two canrepe tragressions by te ruler only wen tey cooriate teirresponse an act jointy; acting alone, neither group is capabe ofresisting the ruler. Consequenty, the ruler has an incentive makeneutrality attractive to the group that is not uner attack by saring with it some of the resources conscate from the targete group.

In the Weingast the ruler acts rst an to transgressagainst (for group X I a oneshot game, Y's best responseis to acq an not challenge he ruler. I Y comes te ai o XY will bear costs of war, even whe X efens itsef an together X an

Y overpower the ruler. Y gains nothing by heping to efeat the ruler(except perhaps feeling goo about it) because Weingast makes thestrong assumption that X an Y cannot appropriate the ruler's wealth.If Y oes not come to the of X X oses a part of its resources,bu Y suers no osses. There i no urgent nee for the ruler to share




with Y some of the assets taken from X to keep Y neutral . By the sametoken, a rational X stays neutral when the ruler transgresses against Y.

the divideandrule strategy dominates nonrepeatedgames when we introduce repeated play te situation becomes more

complex. In repeated games, as the folk theorem tells us, a whole rangeof equilibrium outcomes is possibe. Now al choosestrategies with future games in mind, recognizing that repeated playenables the players both to signal an punish each other. Te divideandrue outcome, where one group is attacked and the other acqui-esces, is still a potentia Nash which the ruler canreinforce by saring te wealt of a targeted group with neutralgroup. But nonaggression is also a potentia Nash if the

ruler expects the groups to support each other against her trans-gressions. In terms of the moel, nonaggression enables economicgrowth in the long run, it is the best oint for X and Y. Moreover, in repeated play, a group that acquiesces in one round (stays neu-tra whie the other group is may itself become the target ofstate aggression in a future round, creating an incentive for ero toler-ance of serious state transgressions .

Various scholars, not always using game theory, claim inEnglan and the Netherlans a transition from divideandrule equi-ibrium to limite monarchy and nonaggression equilibrium was a nec

condition for early emergence of economic growth.These studies, however, rey on exogenous events or new socialmodels to explain breakdowns of divideandrule equilibria and thetransition to limited government. A recent paper, for example,

the role of Atantic trade in releasing moderngrowth in Europe (Acemogu, Johnson, and Robinson 2002).Athough Atlantic to the Americas, an Asiaan include colonia extraction and slave trade, the empirica evience that, to the gross prouct of theEuropean income and prots by thewere not large enough to explain the upsurge in economic growth. YetAcemoglu, Jonson, and Robinson tat te Atlantic trade wascentra to the rise of Western Europe because of the indirect impact on

economicThe argument is as folows. From aroun 1 500 Atlantic trade create prot opportunities for new commercial groups in Europe but didso only in that met two access to Atlantic portsand freedom for new merchants to enter and prosper from the trade.




The latter conition excue countries governe by ivieanrulemonarchs who monopolize the trae, usually sharing the spois withtheir close Britain an the Netherlands, however, me bothcoitions Substatial irect prots from Atlantic trae empowere a

new mercantile class in Englan an the Netherlans to eman capi-tastic istitutions for facilitating eterprise a market transactions. In both countries relatively weak moarchs were unable tosuppress these emands. Inuce by its selfinterest, a powerful newmerchant class emanded new institutions that promote economicgrowth, not only in the traing centers also in other regios ansectors were not irectly involve in Atlantic trae . The iffusion

initiate moern economic growth in Europe. In this view, mod-

ern growth is roote in a historical accient the interaction betweenAtantic trae an initia political an economic conitions in Englanan the Netherlans . The rise of te Western worl epens o diversehistorica forces in the two countries that prior to 1 500 ha create ane balance of power an new ieologies .

The case of Spain an further illustrates the exogenous orchance element in economic eveopment, which is implicit in the workof scholars such as North, Weingast, an Acemoglu. Bothwere eeply involve in Atlantic traeinee, Portuguese avancesin ship esig hepe lauch the Age of Discovery. Spain an Portugalreceive irect gains from Atlantic but not inirectgains in the same measure as Englan an the Netherlans because theiniial conitions were 1 500, for hstori-cal reasons, the balance of power ha not yet turne the mon-archs of Spain an Portugal . Powerful were willig a ableto block the emergence of a new merchant cass. Instea, the crownan its key monopolize the trade. Those in power ha nonee for moer capitaistic isttutions which i not emerge, anhigh taxes private enterprise. the trae increasethe weath of their economic might rela-tive to the leaing powers of Europe.

The essons

Recent stuies provie severa iteresting insights into the politicallogic of imperfect ecoomic institutions. First when rulers have uncertai control over their bects or when their time horizons arelimite, they have an incentive to the wealth of their nationsinstea of creating institutios supportive of growth. Secon,



he Pol it ica l og c of Bad Econo mi cs 7 1

aran governmens are prone o ivng an ruling, usualy creatng smal wnning coaltons; therefore, auhortarans end o rewar therimmeiate wih private goosan ally under spply growthpromoting publc goos (secre

propery righs an essenial infrastrucure. Alhough growhori-ene autocras are well known n history, rapi economc growthuner auocrac governmens s usually a temporary phenomenon.Moreover, when autocrats ry to create a strong economy, they are notypicaly concerned with the nees of an average househol but wthher personal projecs, mliary ones. Lmte government,especally creaes opportunies for sustaine longtermgrowth, emocracy y itself is not a sufcent condition for

growh, as he publicchoice ieraue has expore.Since imie government is an imporant sep owar sustaine

growh, a theory of reform ealy should nsruct reformers about how o constrain autocrac ruers. Modern gametheoreticapproaches, as Weingast's assume that limite govern-

is a selfenforcing instiuonal arrangement, create by readi-ness of pivota groups sponaneousy to punish poitica leaers whovioae communa stanars for " legitimate behavor an infrnge onbasc righs. These stuies, however are of ie use for policymakersbecause they treat soca contons hat enabe cooperave equlbrum as exogenous variables. The contons appear n an unexplanemanner at some point in the historical evoluion of social sysems, cre-ating for a cooperave in the politicaloman an property rights in the economic one.

In poltical scence, lterature, both raonal choice an otherroughy follows hree separate paths in explaining he ori

gins of lime governmen (Wengas 1997). A venerable line ofresearch clams ha emocrac values come rs an lmed government folows Lme government becomes selfsupporng only whenpertinen actors somehow have Thepreconion is that the actors share soca moels of legtimate gover-nance and evelop srong preferences for opposing llegtimae politi-cal acts, rrespective of whose righs are breached. Common policy

moels an share poliica values remove he oherwise subbornproblem of coornaing he responses of ifferen groups andnividual members in the face of ividean rulestrateges by a ruler.

theories, however, no of o reformers.The theories are stae in general terms an offer lttle practi-cal guiance abou how to sprea emocratic values.




he second css of expntions identies historicl circmstnceswhere n overl bnce is strck between the power of the rler ndthe power of signicnt soci In this view, limited governmentcoes rst nd democrtic les follow he eoltion of mltpolr

centers of power limits the rler. Vlues initily ply no role in thisbncing ct, bt s time psses, experience with imited governmentmkes peope dopt democrtic vles. Vles do not led the processthey come ter.

Weingst lso suggests third scenrio imited government nddemocrtic les rise Socil fcing rp-cios leder mnge to gree on terms of nd coordite response he reslting involves instittions

of imited governent nd demortic vues.In few words, the ogic behind the third lterntive is roghly s

foows. Leders of mor soci groups sometimes coordinte theirresponses to recurring ggression by tocrtic leders . In gmethe-oretic terms the leders set common trigger strtegies (or mke

for their defenses. To estblish poiticl the grops mst gree ex ante on wht condct(trnsgressions) by the rer will tomticlly trigger their jointresponse. If the vrios grops honor the trigger strtegy newgrowthfriendy poitic eqilibrim hs emerged becuse rtionrler wil not the trigger rles n risk defet. he new b-nce invoves both limited government nd democrtic vlesthetrigger rles. Weingst emphsizes tht the vrios grops need notshre excty the sme socil models of legitimte stte behvior. Aseenforcing pct cn emerge even if the rios grops do notshre excty the sme ves bot constitution ffirs . Joint trigger rules imply however, similr policy models for responding toggression by the rer which impies their constitution models mst sbstntily o this we tht Weingst oes not

explicitly with the problem of responses withinech socil grop .

How does Weingst's compre with the two other expn-tions of imited government? His coordintion eqilibrim is n ml-

gm of the two previos models, thereby ctully rising the br. As prior condition, Weingst s limitedgovernment soution requires both new blnce of powerthe emergence of two or more powerfl

tht cpbe of restrining themselvesresming bsote powernd miniml overlpping of soci modelsreired for enbling joint trigger strtegy. the other two




pproches, the Weingst theory little ssistnce to policymk-ers . he tsk of creting convergence of pproprite socil moels necentrlize hbs of politicl power is beyon the relm of pol-icymking Inee, s eingst emphsizes trigger strtegies n lim-

ite government hve often grown ot of pcts between powerflgrops ttempting to restore orer in the ermth of ctclysmicevents sch s civil wrs. Similry orth Smmerhil n Weingst

in their iscssion of empiric cses, emphsize the roe of trbent historic evelopments in creting conitions for limite gov-ernment.

We rw mixe lesson from o excrsion into the politicl logicof economics. he rst esson is there re few immeite

opportnities for bsic reform in contries rmly re by tocrticeers n sml winning colitions. In these contries, socil npoitic phev pprently is necessry (bt not sfcient conition for reform. Yet one shol be crefl in generiing. Specil cir-

cn give rise to growthoriente tocrts who tke thelong view n on their terms crete stble conitions forctivity. Moreover, in mny emocrcies, spport for growth-oriente policies is frgile n is pone to collpsing when externlimpses olt the economy. he secon, min conclsion concerns therole of soci moels in refos. for theories tht vislize chin beginning with decentrliztion of power ndeing to emocrtic poitic instittions n nly emocrtic vl-es, socil moels seem to ply criticl csl roe in the trnsition tolimite government.

Weingst compres his soltion to coorintion gme witheements of prisoners bt he cnnot escpe the socimoes issue. In pure coorintion gmes, people vlue coorintion initsef. hey re inifferent ex ante to the form coorintionhe vrios pproches in constittionl gmes t deriving lim-

government oen hve very weth conseqences for keyplyes, who re likely to hve strong preferences for prticlr sets ofrles. gmes lso involve concerning ofegitimte power n goo mese of ncertinty bot cse n

effect he plyers oen honestly isgree bot the likelyness of lterntive constittion rles . Or excrsion into the politiclogic of imperfect economic instittions les us to the concsion ththistory soci moes py role in limits nopportnities for reform.



C H A T E R 6

necent Soca Norms

ntroduction: Norms Matter

A reserch progrm tht identies instittions s crci determinnt

of economic performnce mst del with socil norms which reinclded in nery ll denitions of socil instittions . Indeed the iter-ture hs pid incresing ttention this complex phenomenon.North (1990) expores the links mong ides instittions nd eco-nomic performnce; Greif ( 994 forthcoming) nyes how informlsoci strctres of individlist nd collectivist societies ffect eco-nomic perfonce; Weingst ( 1 997) clims tht shred vlesnd focl points oen incorported in hve heped estblishlimitedgovernment eqilibrim nd stble mrkets (see chpter 5);Btes Figeiredo nd Weingst ( 998) nlyze how rlers thretenedby economic reforms exploit beliefs to reirect the ntion' s pol-icy focs towrd soci strife nd wy from reforms; PtnmLeonrdi nd Nnetti (1993) vrition in the historicl soci cpi-t of Itin regions expli their neven development; Brro(997) dds cltr vribes to his growthcconting regressions;nd Eric Posner stdies the reltionships mong normsnd economic behvior.

he ssmption tht informtion is scrce nd trnsctions recostly hs broght soci nos nd other cltrl to the sr-fce. it costly for to verify (me-

the qity of compex commodities discover their prtners'motives nd stndrds of nd enforce (Eggertsson1990; Brzel 997). osty mesrement nd monitoring discourges

exchnge nd fers of opportnistic behvior by the other side cnmke trders forgo crtive options (Wilimson 1985). Explicitrecognition of trnsction costs brings to or ttention not only problems of mesrement enforcement contro egl mech-nisms lso the roe of trst nd norms in both politiclnd economic exchnge.



n efic i ent Socia orms 75

Minstrem economists hve long voie soci norms, thoghtheir opposition hs recenty soened. hese economists re concernedtht d hoc ppels to socil norms for explining theoreticl nom-lies wol lower scientic stnrds in economics A yong eld, the

economics of religion, hs shown tht these fers re not lwys wr-rnte. in this re oen introce religios norms s preferences in individl demnd fnctions nd test hypotheses bot conventionl price nd income effects in religios behvior.

In cdemic economics, opposition to norms is n instnce of "norm ginst norms, nd the folowing section of this chpter irrev-erently ses cse to explin the enforcement of norms nd theirimpct on nd socil Althogh mny scholrs rec-

ognie both ecient nd inecient norms, others len towrd fnc-tionism nd ssme tht norms tend to be ecient. For their prt,fnctionists try to discover the mny wys n whch normsto efciency. he third section of the chpter discsses this tendency.he section tht socl norms need not be ny more

lws nd regltions he section introdces nempiricl cse, climing n ncient norm of shring in historiclIceld contribted to highrisk strtegy in frming. Icelndic frm-ers consistently fied to se stores of fodder effectively s insrnceginst rndom cold spells nd other cts of ntre. My intention withthis cse is to spport the clim norms re oen i wider socil system nd cnnot be considered in sotion . I clim tht dynmic nlysis of beliefs nd is to theIcelndic pzzle. The section policy strte-gies for n ersing nesire norms reference to theIcelndic cse. The strtegies l im to give the soclled coopertionefecton differentil negtve ve (E. A. Posner 996b. he cocding section discsses to deveop dynmic nlyses of

norms in ynmic of beliefs n vles .

The Norm against Norms in Economics

Mny grdte stdents of economics hve erned tht their peers

nd speriors wil pnish them for sing soci norms to explinbehvior tht is not esily explinble s stndrd mximiztion by selsh gent. he stdents lso ssimilte the received reserch

whch them the hrm-l of trivilizing economic methodology. In short, theneoclssicl cltre of cemic hs lest ntil recently




enforced norm ginst norms. In "Wht Hppened to EconomicDevelopment Rttn (99, 276, qoting Hntington 987, 22)sttes,

It wold be hrd to nd ledng scholr in the eld of develop-mentl economics who wold commit herself or himself into the proposition tht "in terms of explining different ptternsof poitic nd economic deveopment . . . centrl vrible iscltre . . . "

At the otset of the centry, Rttns mysond dted or pessimistic. The resrgence of gme theory, which

derives norms s otcomes in noncoopertive nd evoltionrynd recent interest in new instittion economics nd trnsition eco-nomics hs mde mny economists reconsider their opposition tonorms s n importnt explntory vrible (Cose 937, 960; R. R.Nelson nd Winter 982 ; Axelrod 984; Willimson 985 ; Eggertsson990; 994; nd 997;nd Richter 997 . Yet there is tendency in economics to n-lyze norms in mnner tht is consistent with prize theory, silstrted by mny stdies in the economics of religion (Hrdin 997;Innccone 998).

he economics of religion tckes religios beliefs with mrketmetphors, models chrches s rms or clbs , nd ses vrition in the

cost of time to explin spects of behvior schs differences in religios observce by ge nd sex; the timing of reli-gios nd the freqency of Reli-gios norms re treted in the sme mnner s preferences for te ndcoffee n the stdies exmine how religios behvior is ffected bychnges in income or in retive price of religios observnce.

he xedpreferences pproch religios behvior hs trned pinteresting showing religios behvior responds s pre-dicted to income nd retive prices. Yet the methodology hs obvioslimits. A leding scholr in the eld redily dmits tht pproch (xed beliefs nd preferences is not wel sited for expin-

ing the origins of reigios beliefs or srges in reigios ctivity.According to Innccone (998, 467, nrrow economic nlysis hsprobems cconting for "the resrgence of evngelic Christinity inthe Sttes, the rise of in the Middlest, the explosive growth of Protestntism in Ltin Americ, the reli



nef ic ient Socia orms 77

gios ferment in Estern Eope n the former Soviet Union, [nthe role of religion in politicl conict worl wide.

We cn tht recent theoreticl developments, prticlrly thessmptions of imperfect informto nd trsction costs crete

iclties of their own. Consier Azzi nd Ehrenberg's (975 pio-neerig ttempt to moel religios behvior s demd for erlifeconsmption. Trsctioncosts economics sggests tht contrcting for erlife consmption is likely to involve severe mesrement ndenforcement costs. Rtionl consmers mst verify or form rtionlexpecttions bot the of highprice service before they pr-chse it. Aerlife consmption is not serch good qlitiesconsmers cn verify prior to prchse. It is n experience good with

innite ex ante mesrement costs (P. Nelson 1970. With experiencegoods, the proof is in the ping . Unless informtion bot the ql-ity of erlife consmption psses from crrent consmers to potentilbyers on Erth, rtionl ctors will not trst the prodct. In fct, bythe logic of trnsctioncosts economics, the mrket for erlife con-smption dispper or not even emerge.

Modern nlysis enes norms s decentrlized socilmechnisms tht reglte behvior nd ffect socil otcomes Thetritionl norm ginst norms in cemic economics well illstrtesthe penomeo. The no is propgted n diffsed in informlinterctions mong professors n grte in economicseprtments in the United Sttes n other contries; there re no for-ml lws or regltions tht restrict scholrly work on socil norms.As is he cse with ll ctive norms, ctors stn redy to snc-tion those who violte the ginst to mke enforcemeteffective. The enforcers re redy to pnish even personlly nknownscholrs n to do so t the enforcers' expense. The vries.Violtors my receive gentle rebkes los e their repttios s seriosscientists, hve their ppers reecte by minstrem or be

tenre.he thret of snctions inences how scholrs choose their

reserch strtegies, preventing some of them fromthe reserch environment by pplyng "chep soltions to iclt

problems. socil norms improve the lloction of resorcesfor exmple by correcting spillover effects rising i imperfect orincomplete mrkets . The eciency of norms depeds on the propertiesof the (sometimes forgotten) socil tht them. The eco-nomics profession derives its no ginst norms from shred socil




modes of how best to design soci inqiry, nd the efciency of thenorm ginst norms depends on the relevnce of these models.Inefcient norms for vrios resons s inerti ndincomplete knowedge or lockins reslting from preferece or knowl-

edge flsiction (Krn 1 995 .

An Efficiency Bias?

In clssic pper, Demsetz ( 1 967) hs mde the most inentil con-of ny economist to the of norms. Demsetz sggests

soci norms other institions or property emerge in commnity (in some nspecied mnner) if they re expected to

increse its ggregte net welth. hose who fvor the Demsetz expl-ntion oen spport their cse by referring to corrective forces sch sntre or mrket competitio tht lter ot inefcient soci rrngements (Demsetz 1 980 .

Demsetz the of new norms in terms of inter-nliztion of externl effects. theory tlks bot exterl orspillover effects when ctors mke decisions the loction ofresorces in socil setting withot considering ll the costs ndbenets of their ctions. When mking their prodction plns, prot-mximizing entrepreners who re free to ir nd wter in theircommnity wil ignore poltion costs (extern effects) theyimpose on others. he sme is tre of sloppy schors who contmintereserch in economics. o eiminte externl effects nd mke ctorsdst their pnned ctivities ccordingly, the ctors mst becomeresponsible for ll costs of decisions d receive l Atlest in theory, lws, regtions, nd norms cn be sed to eliminteextern effects.

he fndment messge of the fnctio pproch is tht sociprobems crete their own soltionsfor exmple, throgh the intro-

of new norms. o the we revisitthe economics of religion nd ook t n interesting stdy by Hll ndBold (1994. he thors expin why some rely o reli-gios beliefs nd nms to keep the soci order nd how these beiefs

nd nms redily dst to t hnd. Hl nd Bold rge thtlestcost methods for mitining soci order vry with the deveopmet stge of commnity. Hevy relice on reigios nms forsoci control is costeffective for commnities tht hve e primi-tive stge, where order is best estbished person interc




tions in sml isolted grops (cns), bt hve not reched higherstge, where complex brecrcies re the estcost sotion.

he then ponders why some bse their enforce-ment of socilly sefl behior on promises of erlife i heven s

wel s threts of tortre in hel, whie other commnities emphsizeony rewrds in heven nd mke no reference to hel. he nswerinvoves simpe microeconomics. In reltively stble comnitiesvge promises of heven provide necessry incentives for keeping order In more restess societies, both the crrot nd the stick becomenecessry becse relince on only one of the instrments sooninto diminishing retrns. effectiveness reqires gilding thepromises of heven nd mgnifying the tortres of hel

is strck where the lst block of investment in ech gives thesme rte of retrn. he sotion ssmes tht dditionlthrets nd promises hve positive bt eventlly decresing onbehvior. It is frther ssmed tht people ssign nite (rther thn

to prospects of eternl erlife of pin ornd stdy contins severl fetres re typic of

fnctiolism. he stdy does ot explin norms we resimply tod tht society nds or selects pproprite norms for echsocietl stge. Moreover, it is implicitly ssmed tht (most) peope reredy to dopt whtever beliefs bot heven nd hel re needed formintining order in their commnity. Hl nd Bold (1994, 451) donot propose theory of lerning, bt they cite n thor who clims,"o prely religios rge cn rn conter to economics nd ecologyfor long time. Yet whtever shortcomings, nctionl

cn generte testle o test theory, Hllnd Bold se dt set with informtion bot religios beiefs ndother socil instittions in rge nmber of trditionl commnitiest vrios developmentl stges. he sttisticl tests nd spport fortheir min propositions the retionship stges of socil development the beliefs.

nlike nctionl pproches, gmetheoretic stdies of norms donot efciency. In repeted gmes, where ctors re ble sig-nl their types nd pnish defectors, selsh plyers with sesh moties

cn rech efcient or otcomes (sh eqiibri) . heproblem with repeted gmes is indetermincy. Gme theorists some-times embed their gmes in historicl environments tht provide pr

fetre of the or bck-of the pyerstht give the gme focl point, leding it to




prticr eqilibrim either efcient or inefcient. he term analytcnarratves hs been se to escribe this mrrige of gme theory nhistory (Btes et l. 1 998) . Gme heorists sometimes refer to reglri-ties in behior ssocite with eqilibri s socil nors (Bin-

more 1 994 Greif 1 994). Finly the evoltionry brnch of gme the-ory is so sitble for stying norms n how norm efciencyepens on wht ssmptions the moels mke bot ltering or selection mechnisms.

Aer we leve behin both gme theory n strightforwr exten-sis of neoclssicl methos n resoning we rn into n embr-rssment of bewilering riety of moels n theories tht ono necessrily see norms s fnctionl or efcient. I o not

ttempt to evte these ifferent contribtions bt simply istingishbetween sttic n ynic nysis. I refer to theories s being stticwhen they ssme stbe preferences n sttionry soci moes.Dynmic instittionl nysis hs on its gen nlyzing nexplining origins n chnges in knowege beiefs perception pref-erences n ientities we wol like to see of norms(n instittions in generl is of explining the eo-ltion of common knowlege n prmetric or strtegic ecisions byctors bt we re not qite there yet (Ktzenstein Keohne nKrsner 1 998 67879) .

A ikey ftre evelopment in instittionl nysis is its divisioninto sttic n ynmic theory. Inee Aoki (200) ttempts schiision. Dynmic nlysis seek "to how prefer-ences re forme n knowlege s generte prior to exercises ofinstrment rtionity which is the proper omin of sttic nlysis(Ktzenstein Keohne n Krsner 1 998 , 68 1 ) . he n section ofthe retrns to these isses n iscsses ttempts to bilbriges sttic n ynmc nlysis. he next two sections iscss in sttic terms the concept of inefcient norms.

nefficient Norms

Smpling the new litertre on nms or informl instittions reers

my come wy with impression ctors lest in competitiveenironments n hoogeneos grops in stble sly n wys to eveop norms for eciently orgnizing their ffirs(E. Ostrom 1990 Cooter 1996). If efciency is the correct pol-icy response by the stte is to proie locl n region communitieswith secre generl frmework of property bt to llow rele




vnt soci grops to deveop their own rles . he centrl governmentperhps cn ter sely soidify informl locl instittions by cting them into lw.

everyone grees tht norms tend to be efciet, ee i compct

oc grops. Stiglitz (1994 nd vios cothors hve rged thtinformtion problems (morl hzrd, dverse seection cn ndermine privte grops bility to ecienty orgnize their ffirs. Informtion problems cn even psh ctivities sch s forml insrnce services o the mrket (or never llow them to enter). When prticlrservices re not vilble on the mrket of high trnsctoncosts, socil grops sch s extended fmilies or tribes sometimes pro-vide services informly nd in imited versions, reying on

norms nd socil snctions to del with opportnistic behvior.Stigitz (1994 (somewht implsibly rges tht s gener rle.the shold either directy mnge these trobed ctivities or regte them throgh indstryspecic rles. Yet nothing cn be sid priori the stte 's wilingness nd bility to improve the provisonof sch goods nd services or its cpcity to del with informtonproblems, inclding its gency problems.

Eric Posner ( 1 996 lso hs dobts bot the generl efciency ofnorms. He igorosy rges tht socil norms oen prodce essefcient otcomes thn stttes nd cstomry w becse in mny

norms re inferior tools for solving theof coopertion nd coordintion. sing gmetheory nlogies, Pos-ner shows tht socil rely on norms rther thn lwsdeped on pproprite hphzrd foc points to nd nsocil eqilibrim. he socil reslting from decetrlizedstrtegies chosen by individl ctors depend on vrios ctrl fctors . hese points of coordintion re historic wheres lwneed not depend on the ccidentl vibility of pproprite focpoints, he rges. Posner lso mintins tht dispersed soci grops ,lthogh well loc re oen poorly pre-pred to evlte nd properly respond to chnges in extern circm-stnces s technologicl developments. Locl grops my fi todjs their socil norms when new conditions rise, bt jdges nd

ntionl legisltors hve ccess to specilists nd tosorces of informtion . For complex cses tht cll for investigtion byspecilists socil snctions re ess ecient method of enforcement

is on the police the corts . Finlly, closeknit socilis likely to ignore costs nd benets (externl or spillover

effects tht its ctiities crete for grops, wheres corts nd




legisltes sly tke more iclsive view. As conterweight,we shod dd tht in mny contries, the legisltre, the dmiistr-tio, the nd the police re corrpt, which diminishes theireffectiveess reltive to socil orms

o mtter which side we tke i this debte, it is cler tht ecoomicotcomes depend o the previlig mix of orms, stttes , regltios,nd dgemde lws, nd it is ot obvios tht socil forces willwys clibrte the mix of instittios to ensre mximm welfre.ven when socil sbgrop cretes orms tht ectively sove itsinternl problems, these orms re efcient only within theinstittio enviroment. A decentrlized dstment oforms to n inefciet overl evironmet is ikey to

led to globly ieciet otcome.Ktz ( 1 996, 1 754 remids s tht Cose (1 937, 1 960 csts istit-

tiol poicy s serch for secondbest soltions in world withtrsction costs where policymkers mst choose whether to rey omrkets, rms, or governmet gencies. Ktz (1996,1 77475 gments Cose 's list of possible soltios by sggestig thtrece on privte grops d their orms is the forth wy for llo-ctig resorces

Sch grops re strctrlly differet from mrkets, bsinessrms, n governmet gecies; they fce ifferentnd se dirent procedres for mkig rles. hs they willve differet costs nd will be better to solv-ng certi of lloction problems d worse solv-g others .

Evtios of the effectiveness of soci technologies shold otfocs on individl rles or orms d their eforcemet bt on bles tht conti combitios of forml iforml

orms in themselves cn combine to form com-plex system. According to llickson (1994), norms oen mimic entire legl system where specic orms gover etitle-mets d others reglte remedies nd procedres. he there re

cotrolerseecting orms tht specify for ech type of thepproprite methods for chieving socil order. In some circmstnces, cotrollerselecting norms even forbid grievt from sing the legl system (lickso 1994, 98.

he trsition from inefcient to growthpromoting norms is otwell derstood in the litertre. nlysis oen relies




on prticlr historicl circmstnces to explin pst events vlidting Eric Posners complint bot hphzrd focl points. Scholrs rehrdpressed not only to predict the likely direction ofchngefor exmple when ttempts re mde to trnsplt moder

w to trget contrybt lso to evte the properties of previling norms. he cse stdy follows explores these isses.

A Bad Good Samartan Norm?

As mentioned mny scholrs re optimistic the bil-ity of smll grops to crete norms d oterrles to govern their ffirs. In these circmstnces ow trnscton

costs often fcilitte the evotion of ecient property rights (Cose1960 Eggertsson 1990 chpter When bsic property rights resecre Willimsons governce strctres (1985 Brzels (1997orgniztion of mrkets the informl instittions of Elickson s ( 1 99 1 )rnchers nd frmers nd Einor Ostroms (1990) commonpoolregimes ted to be enhcing nless distnt centrl govern-ment for its own resons distorts the locl instittion environment.

Premodern Icelnds smll frm commnity of roghly 50000 indi-vidls ws potentilly n ide setting in which ecient norms coldemerge. Premoder Icend ws lmost etirely rrl commnity offrmers nd their servnts who rised ivestock mostly sheep. Some1 60 locl commnes ech consisting of between 1 00 nd 500 individ-ls provided socil in decentrlized mnner relying on

of socil norms nd forml rles. o high degreeorder nd eforcement of rles depended o decetrlized eforce-ment of norms (see chpter 4). In the st centries of the premodernperiod celnd ws Dnish dependency or colony. Denmrk didmintin presece in Icend bt relied on hndfl of (sly Icelndic dministrors Icelnd hd neither nrmy nor poice force.

Cimtic conditions mde Icelndic frming mrginl nd hostilentre mde the cost of inefcient very high. According tothe contry s decentrlized welfre system of mt hep individls

or fmilies who hd sffered some misfortne cold ppel tocommnl leders for help (Eggertsson 1998b. he members of thecommne wod shre food nd hosig with the needy nd the levelof ws by the weth of echhod. he welfre system which ws primitive frm societys sbsti-tte for insrnce or welfre stte generlly ppers to




hve fnctioned well in cshioning individl misfortnes (specicrisks), bt the system cold not cope with generl risks tht ctedwhole regions (see chpter he historicl evidence shows tht thefrmers fered opportnism by the welfre recipients d were preoc-

cpied with the thret of morl hzrd nd dverse selection heythoght tht grtees of were likely to crete icetives notto work or even motivte people to ndertke risky ventres d coton help from their commne if their proects filed.

Chpter 4 introdced brnch of the trnsctioncosts litertretht exmines how trditionl cope with their climtic condi-tios. system of grssroots socil secrity in wys

the methods of risk mngement in gricltrl

nd frm commnities of presentdy developing contries he iter-tre ses fnctionl rgments to explin the strctre of these infor-ml insrce instittions reltig the rrngements types of risksinvolved nd mesrement nd enforcement efforts reqired for con-trolling cheting, complex interctions with the wider socil system

it to evlte the of prticlr socil norm orrrngement. there re resons to tht Good

Smritn norm of shring tht reqired frmers to shre srpls fod-der with their neighbors hd hrmfl effects

he Icelndic system hd ll long creted disincentives for storing hy. he rst of txtion in the contry, the titheintrodced in 096 treted hy reserves s txble welth if the sp-plies were more thn one yer old. A lw from 1 28 1 gve frmers nochoice: On req from neighbors, frmer ws to hnd oversrpls hy t price tht ws indepedet of ecoomic condi-tions . hose who resisted shring their hy spplies virtlly lost llrights. he evidence does no tell s wheher 81 lw simplycodied previling norm of shring or whether the lw creted sch orm, bt there is no to believe tht the ot oftoch with prctices. from the cen-tries following the lws ectmet shows clerly tht the frm com-

enforced hyshring norm.In historicl Icelnd, tempertre cttions were mor sorce

of generl risk Spordic cooling of the climte sometimes merged win-ter d smmer csed meger fll hy crops, nd shortened the vilble period for otdoor grzig. Pooling risks ws ot prcticl soltion in this the selfinsre by storing hydsting their livestock prepring for exceptionl wether condi-tios. for longterm storge of fodder, however, conicted




with the gener norm of shring tht ndermined frmers propertyrights over their stocks of hy. According to ocl cstom, frmers whowere well with fodder cold be forced to shre their hy in ltewinter nd ery spring even before it ws cler whether they hd

enogh fodder if the smmer rrived exceptionly lte. Uncertinrights took wy the incentive from ctios frmers to crete bffersto prevent fodder crises nd mss strvtion of frm nims when twoor more len yers coincided. he evidence clerly shows tht thefrmers did not tke sch prections . Dring cod spels, even s ltes the erly twentieth rge portion of the livestockstrved to deth.

Alredy in the seventeenth centry, reformers rged strenosly in

writing tht filre to store fodder ws mor cse of crises in thefrm commnity. I hve fond no records of leg dgments bsedon the hyshring lw of 128, bt there is mch evidence theGood Smritn norm of shring hy ws strictly enforced. In 1 806,when royl decree formlly bolished the hyshring lw, the frm-ers did not their behvior nd tke p storge nd ongtermivestock mngement. In the nineteenth centry, s in previos cen-tries, frmers who needed fodder to their neighbors Inexchnges with hy, contemporry cconts show tht lte or no py-ment ws considered retivey mid offense nd ws not cse forserios loss of bt brech of or the involving sheep nd horses ws mor onse (Eggertsson 998b , 22) .

he ttempt to erode the hyshring norm ndstorge of fodder ws ed by Icelndic nd whohd received edction rod especily in Denmrk nd y gentsof the governmentin 77071, for exmpe, by higheve roycommission . Copenhgen hd ppointed the commission to nd soltions to the contrys economic is foowing ner colpse of theeconomy. Some of the commission s mny recommendtions imed timproving livestock mngement by ofivestock size on every frm, pnishment of frmers whose ocksexceeded prescribed nd centr stores of hys mngedcommnity eders. In 1 874, when Denmrk gve Icelnd the right to

govern its intern ffirs, severl bils deling with the provision offodder nd prdent mngement of livestock lmost immeditely wereintrodced in the Aing nd pssed into lw (Eggertsson 1998b, 19).hese no effect t he shows tht the blicnot obey these ws nd tht locl did not enforce them.

(1913, 2014) reports tt dring nineteenth centry,




cople of commnes ttempted coordinted ivestock plnning rely-ing on vonteer inspectors. He hs informtion tht one of these com-

the winter of 1 88 183 with ll its livestockintct, wheres i the contry s whole lrge portio of the imls

strved to deth. he two commnes soon bndoned their experi-ment becse skiled inspectors no longer were vibe for free, ndlivestock plnning did not ctch o in neighboring districts . he frmcnity's ck of interest in livestock plnning is pzzling ndrises qestions bot the drbity of the hyshring norm s well sthe bility of the to it. We now to thesesses.

I cn think of for explntions for why the Icendic frm comm-

nity did not dopt ongterm strtegy to trim its livestock nd storehy in preprtion for hrd times

1 . he frmers were rtionl gents except tht their sbectivepolicy models were incomplete. he models

rge pyoff from livestock nd ongtermstorge of hy. hey selected wrong decision rle of

to their knowedge of pproprite instittions for org-nizing frming in Icelnd .

2. heir poicy models recognized the of livestock nd the frmers were fly btthey were trpped in n inefcient eqiibrim. he otcomeis stndrd cse of filed collective ction nd is comprbleto the prisoner s dilemm.

3. I spite of recrrent mssve osses the frmers' livestockstrtegy ws ctlly eciet. hey were rtionl gents following welthmximizing In Icelnd's nstbleenvironment, the best policy ws to live for the momet ndnot in longterm plnning. he frmers mximizedtheir by rising lrge ocks of sheep in yers ndtking their chnces in len yers. his highrisk strtegyinvolved losing most or ll of their nimls in hrd yers,the frmers wold simply strt over gin or, t the worst , give

p frming nd become frm lborers. he risk ws worthtking.4. he stndrd rtiolchoice mode does not ccrtely

describe the behvior. Icends instittionsfor ginst specic risks were embodied in clster of

incded the norm of niml fodder. he




norms forme n integrl cognitive system from which thenorm of shring foer cou not be remove; its remov

cognitive issonnce. Most frm-ers oie seriously contempting the benets o longter

storge. Seen in isolion, wek exclusive property rights inhy were costly, but srong righs n longterm storgewoul hve unermine the counrys sysem of socil security.

I m incline to reect the rst hypothesis. I n it hr to belieeht rionl frmers for some 1 ,000 yers misperceive he bsicnture of heir environment, misinterpree he they

receive, n in heir livestock srtegies rew on funmently futypoicy moels. he evience mittely shows tht the frmers i notust cretively to heir or opt new technologies . Onlytowr the en of the premoern er i the frmers lern to ig uppet n it s el, n very elementry highlyimprovements in scythes wite unti the nineeenh centry(orsteinsson n Jnsson 1 99 1 , 2 4, 290. Yet i is hr orion (s usully porrye in soci science were unwre ofhe costs n benes of highrisk n owrisk mngement strtegies .Lck of knowege cnno expin their behvior.

I n the secon hypothesis wholly nconvincing. A switch to newmngement strtegy in frming woul hve invove substntilcoorintion n commitment problems i the frmers h ct ini-

In fct, stood rey to coorinte rnsfer to lowrisk strtegy, but refuse to cooper-te (s he folowing secion iscusses in some ei .

he third hypohesis is ikey to ppe to mny economists n scholrs towr he frmers, being rtion, correcty conce tht perioic mssive oss of livestockws n costly effect of the best hehighrisk strtegy me goo economic sense becuse the gins in gooyers he losses in yers. nfortuntely, I mwre of historicl t th wou llow me to empiriclly tes this

hypothesis. Agin, I res my cse on circumstntil evience. In recent suy of these issues (Eggertsson 1998b, I n cler evienceht eing experts n higher uthorities in Iceln n Denmrksw ongterm livestock mngement s to thehighrisk rrngement. For exmpe, in the lte nineteenth n erlytwentieh cenuries, he visible n pssionte proponent of the




storge strtegy ws or Brnson n gronomist edcted in Scot-lnd frmer nd in 880 the fonder of Icelnd's rst gricltrlschool. here is little tht in technicl sense the frmnity hd the cpcity to stbilize its livestock by storig nd djsting

the ocks to ongterm fodder sppies (Eggertsson 998b 21.Hving reected rst three hypotheses I come to the forth nd

n thesis postlting lmpiess in the Good Smrit norms ofshring tht were centrl to Icelnd' s system of socil insrnce. Of thefor explntions I nd the nl one more psibe thn the otherthree I offer ony n inform psychologic explntion void-nce of cognitive dissonnce. he qestio of lmpy norms belogs to dynmic theory of instittions tht expins the formtion of socil

modes beiefs nd preferences. he litertre contins mny modelsof behvior bt it is fir to sy tht no consenss hsemerged on y prticlr pproch. he chpter's lst two sectionssrvey some of the isses concerning the stbiity nd chnge in socilbeliefs nd socil norms.

Policies for Eroding Undesirable Norms: The Coopeation

Defecton Differential

he governmet of contry cn employ vrios mens to nderminenorms tht conict with the of pbic policy bt sccess is oenncertin. ric Posner ( 996b 1 374) ses theoretic frmeworkwhich he refers to s the coopertiondefection differentil ofnom violtors to clssi the most importnt of these ntiorm me-sres. Poser's stdy is represetive of recet scholrly work thtlinks rtionl individ choice with mcro otcomes withot prodcing (in my opinon flledged dynmic theory of beliefs nd vles.Posner 's differentil compres gins of observing norm to thenet gins of violting it. When the net gins of the normbecome thn the net gins from observing it rtionl ctorstops observing the norm. In rtionl clcls the net gins to n

from observing orm depend on two fctors: hesm of benets tht the ctor ttribtes to the norm mins his or her

tot costs of enforcing it. Net gins from or violtion of norm inclde the vle of the best vilble ltertive er llowing for the pnishmet costs tht violtor shold expect. Whe positive

differentil begins to shrink ctors initilyttempt to restore the differentil by withdrwing their prticiption incostly eforcemet while still observing sbstntive norm. When




the direntil becomes negtive, rtionl ctors no onger observe thenorm, nd the socil rotines tht the norm spports re no longer ss-tinble.

The elemets o the coopertiondeection dierentil sggest wt

mesres governments cn se to proot inecient or ndesirblenorms (E. A. Posner 1996, 172836. In Posner's terms, the im ontinorm policy is to trn positive dierentil ito negtive dierenti, which cn be done by ( tryig to ower peope 's perceptions ofthe direct benets from spporting the norm; (b) rising the costs tonorm ollowers o enorcing the norm in their owering the

or those who violte the norm; or providing ttrctivenew socil rrngements tht compete with rrngements sp-

ported by the norm.In their ttempts to ndermine the hyshring norm, the thori-

ties in premoder Icelnd expored virtly l venes sggested bythe Posner frmework. To lower pnishment costs for norm violtorswho resed to shre their stocks o hy with the neighbors, the thor-ities ormly mde individl leglly responsible or stisc-toriy eeding their nimls. I er's lck o hy in midwinte isegly seen s proo o negligence or even criminl behvior (nessthe shortge is csed by re, ooding, or other sch ccidents, thesocil stigm o rmers who rese to help neighbors my beiminished. Similry, i the rmers directy spervised com-peled to mintin sfcient emergency stores of fodder, the norm ofshring hy become obsolete. Attempts t complsion inclded 1 746 royl decree issed in Copenhgen tht instrcted locl thor-ities to monitor hy reserves of l ers i their districts d toensre tht spplies were deqte . Comprble ocil recommendtions res, nd lws tht reqire ofcil monitoring of reserves ndorbid ers to strve their nimls re common drig periodstretching from t est 1702 ntil the end o the nineteenth centry.he most o these ws the Act of 1884,which imposed nes on rmers i they were fond to hve strved theirnimls nd hve ignored recommendtionsties concerning pproprite hy reseves . An 889 revision o the Str-

vtio provided in extreme cses or the imprisonment o oed-ers. Historins gree tht rmers d oc lw enorcement ocilslike entirely ignored l these ttempts or two or more centrieswhich is the centr o this story (Eggertsson 1 998b, 1 920) .

The nd reformers lso tried to ffect the coopertion-deectio dierentil by sing cognitive pprochescmpigns o




perssionto le frmers to pgrde their socil models nd recog-nize the costs of their highrisk strtegy s well s the benets of thehystorge lterntive. hese ttempts lso did not frmerswere ot willing to give p their gme ginst ntre

Introdcing new socil rrngements tht the plyers nd moreprotble thn old normspported rrngemet is perhps thesrest method tht goverment cn se to erode positive coopertiondefection differentil of norm. he new rrgements, whichsometimes rely on government sbsidies, cn mke the old norms irrel-evnt. In Icelnd, the to the livestockmngementproblem, which in the rst prt of the centry both stbilizedthe contrys livestock nd ndermined the hyshring norm, flls in

this ctegory. he new system ws one of centrl (rther thn indi-vidl or locl) storge, nd the iititive cme from the ntionl leg-isltre, the centrl government d new ntiol ssocitio offrmers . he progrm received sbstntil nncil spport from thecentrl government nd relied on new technologies nd neworgniztion. he contrys system of commnictionson ld, tse, nd in the irhd improved, modern shing indstry providedsh mel s fodder, nd imported spplies were now vilble on shortnotice. Finlly, in the emerging rbn environment of the twentiethcetry, forml governmet socil services nd commercil insrcereplced the trditionl commne system of sring s method forcopig with risks (. Jhnnesson 1948, 10714; Brnsson 979,27778).

Bulding a Dynamic Theory of Norms

In this section I discss recent ttempts to model dynmic spects ofsocil norms the origis of the rles themselves nd ssocited socilmodels or beliefs; the evoltion of enforcement strtegies; nd the dis-semintion of rles ptterns. A theoryidelly wold integrte ll three spects, bt, s we shll see, the rsttopic is less well developed thn the other two, nd empiriclstdies nd rml tests of hypotheses re reltively rre.

Gme theorists oen dene norms s reglr (Nsh eqilibrim)ptterns of behvior tht emerge in interctive reltionships. Itertedncoopertive gmes re chrcterized by mltiple eqilibri, leving the theory wheres theory comes tothe nd provides tools for formlly nlyzing the selection ofstrtegies. nd Swistk (2001 ) , drwing on their own work nd




tht of others, provide cid ccont of how evotionry gme the-ory i usel for studying the dynmics of socil norms. Consider socil group with members tht interct in pirs, with the pirs rn-domly chosen for ech round of the gme The idiidus who seek to

mximize their expected pyoffs, puse periodicly to reevte ndpossiby chnge current er observing the gme spyed by ll the plyers. Bedor nd Swistk se iterted prisoner'sdilemm gmes to illstrte the pproch, thogh their nlysis ispplicbe to other types of gmes. he pyers, in their regulrlyrecrring revisions, the pyoffs yielded by strtegies slwys defect, titfortt or which impies cooperting inperiods nd 2 nd then defectig if nd only if your

defected in the previos two periods. The reevtions mke the py-ers discrd lowyield strtegies or, in the lnguge of evolutionrygme "the more t strtegy is in the current genertion, thefster it increses (1506). A strtegy plyed by l the members of

is stble if it cn resist the invsion of"muttsnew behviors tht invde the group. The ntive strtegyis weky prevents the spred of mutnts nd is strongy st-be if the invders decrese in frequency. Bendor nd Swistk concldetht soci norms re necessry for stbiliing behvior in rge clssof evolutionry gmes. he uthors so nd tht forcesdo not necessrily ense Preto optiml otcomes, thogh ntivestrtegies tend to be more robust (hve greter survivl chnces) themore efcient re.

Stdies pplying gme theory to soci norms tend tobe bstrct nd wek on Recent empiricl studies ofsocil norms tht use noncoopertive gme theory often rey on exogenous culturl nd historicl eements to explin on csebycsebsis, why prticr soci eqiibrim cme to be Schstdies hve provided interesting insights, bt the nlysis isof nture et . 1 998).

The dision of socil norms through society cn be swi ndsometimes nexpected. The sudden dision of ethnic in theformer Ygosvi strtled mny insiders nd otsiders. Kurn ( 1 995,

998 whose pproch is (formy gmetheoretic, employs model with turning points d repttion cscdes to explin bothpersistent ow leves of ethnic ctiviy nd exposive increses in sch

The offers gener insights into the ofnorms.

obtins his results by ddig two ew ctegories of




variabes to the stanar inividual utility nction reputational til-which emanates from social (ethnicity reated) responses both in

one's own ethnic and in and expressive utilitywhich is a iscontinos ariabe hat registers how mch people ale

their current lifestyles. The model assmes that peope vary in theirwillingness to change their lifestyles and allocate resorces to ethnicactivities solely for reptational reasons .

wo factors can upset the prevailing social equilibrim of ethnicactivities and ethnic norms new expectations and new inherent tasteor ethnicity. Both actors are external to the model. Anpsrge in expectations about rising (or alling) ethnic activity overallin the community makes individas allocate more (less of their per-

sonal resources to ethnic activity to avoid socia sanctions bt inivid-a responses vary because of different nees for socia acceptance andseexpression . Moreover the conguration of these factors procesa istribution of thresholds . In the mode expressive tility has twoimportant implications ex ante, the thresholds are not directy observ-able (they are a featre of inividal tility functions) an inividalthreshol ifferences can create mltiple of stableand nstable varieties.

Finaly the model contains a diffusion function that charts the rela-tionship between expecte and realized societa levels of ethnic activity.It is assme that ownwar when overshooting realized levels an pward when nderestimating the evels. Buiding on these (998) shows how a small change inexpectations the overal leel o ethnic activities may lead viareptation eects to huge changes in realize levels. Large effectsare likely when the prevailing eqiibrium is unstable or when changesin expectations excee the sphere of gravity of a prevailing stable eqilibrim. In either case the sie of the change depends on istanceto the nearest equilibrim point.

he factor can ater the level of ethnic activity in societyis a change in the inherent tiity that people derive rom ethnic activi-ties as distinct rom social to engage in activities. Mosttheories of ethnication emphasie ony the direct tiity eect eaving

ot possible role of reptatioal cascaes . In the Kuran model adirect utility effect shis p the diffusion crve leading to a new eqilibrim. he move to a new eqilibrium will aways involve an intrinsic effect in some wil involve aeect.

sm relying on concepts o unobservale tipping points and




reptatonal cacae Kan erve relt that are nteretng anntitvey enibe bt alo apponting rom the vewpont o ocalcience. In thi view ethnication i an phenomenon ai the taility o low (or high) ocietal level o ethnic activity Ao

the reptational eect an the intrinic eect o an ethnicatonproce are probably empirically almot he coreproblem blockng progre appear to be or lack o emprcally abletheory o how people retrctre ther oca moel .

Moel o the phyical an oca worl are riven by hman mag-inaton an creatvty which appear to be inherenty

Stent o no ier in their view o how well wenertan the mental moel part o norm ynamic. Eric Poner

( 996a 1 7091 0) believe that we lack a atiactory pychological the-ory to expain why people ometime eel emotiona an pychologcalcomplon to olow norm. Other cholar cam that pychologitan cogntive cientit have evelope rich an e theore o men-tal moel an internaliation o norm an North 1995;Cooter 996 6662; Clark a recent volme on vae anorganization in economic that contain nineteen eay leang cholar the etor peimitically concle "he o novae an preerence ormation i increaingy attracting the atten-ton o economt . . . . Yet th el o nqry now n t ntal tage tl ack a ne ramework an . . . a common et o con-cion. In partclar there itte emprica evence to pport orrete theoretcal claim mae in th volme (Bener an

998 xxiixxiv) .To illtrate the role o ocial et retrn riey to Icela

thi tme in the early moern perio which aw a graal eroion othe norm o haring in arming an o norm pecializaton ote agrcltre. Nonethee tratonal vae moel anno lngere elaye the contry' moernzaton. When Ice-

rom Denmark in the nne-teenth an early twentieth centrie Icelan' poitica partie aoptean over three contrating ocial moel: captalitentre-prenera moel the ocait (nclng Marxt) moel an the tra-

itionalit moe. he moel aw the Intra Revol-tion a a pervere hitorical epioe that might bring a temporaryncreae n wealth. Yet in the long intrialzaton wth actorywork rban iving in thi view the abrican lea to mora an economic ecine. he traitionalit cale oran agricltral rather intrial revoltion rral rather tan




ban living reglate international trae an trict control of foreigninvetment. hey only accepte mallcale manufacturing ocate inrural area and integrate with faming.

Recent tuie o the political itory o Icelan i the lat qarter

of the nineeenh century an the rt half of he twentieh centryhow that inuenced poiica partie acro he eright pectrm. geiron ( 1 988) gget that the fnamental ividein Icelanic politic wa not the al capitalitocialit pit bt capitatocialit veru traitioalit. he political partie wereivided along traitionaitnontraditionalit line an traitionalitin vario partie joine han by reaching acro paryline to cooperae in governmen ghting to deay

tion an inutrialiation. he raitionait retared economiceveopmen an modernization in Icelan for everal ecade paric-larly by blocking invetmen n hyroelecric power pan aluminummelter an raiway and by eaying urbanization.

I we ree to beieve that ocial arrangement uch a laiefaireArican ocialim and Soviet central

ony the maerial and relative power of key player an noth-ing more an importan quetion arie : How o nationa elite acquireor elec particuar ocial model of economic development along withthe relate vaue an norm? Chai (1998 282) ake a tep owardanwering thi ict qetion when he attempt to eplain the"triking relationhip between an eperience with Wetern colonalimand a tendency toward tate economic intervention in thatrecently have broen away rom colonial rule . like the Icelaerleaer o other newly inepenet countrie ace a range o foreignmode of ocial an economic evelopment. et of contening ocia moel are eom and ambiguiy permit ifferent inerpreation. Fnamental choice of policy epen not only on

procee an the power of interet bt alo on theof alternative ocial Chai that in the former

Wetern colonie wellnertoo pychological procee which hele to internaliation of "oppoiion ieologie an moti-

vate the rler initia choice of ocial moel . The oppoiion ieolo-

gie were attemp at homegrow policie iffere from ofthe former mater. Accoring o Chai' empirica eveoping countrie hat ha not eperience coonial rule id not go thougha imilar phae of oppoition policie in the potwarperio. Icelan which became a overeign nation in 944 t well withChai ning coutry i no inclue in hi uy . Aer




the Secon Worl War Icelan agge een years or more behinother West uropean countries in ismantling state control of theeconomy an maret arrangements

The Kuran moel analyes how norm entrepreneurs can ini-

tiate eputationa cascaes by stirring up expectations of increasing ethnic activity Another way to moe interactions is assumethat iniviuas use Bayes's rule to upate their prior beliefs Poitical leaers are in a special position to manipuate events an newsabout events an to create particular responses both in their own

an in Social share symbols moels ancollective of historical evets as ethnic strie that peo-pe use for ltering ata an interpreting current events These cogni-

tive structures provie opportunities for manipulative eaers to rein-e atent suspicions Bates Figueireo an Weingast (1998) examinetwo cases in these the overthrow of the InepenenceParty in ambia in 991 an the outbrea of ethnic tension an vio-lence in the ormer In the latter case Batesan how sought tosave his political sin raising expectations activities inthe former Yugoslavia an shiing preferences away from ongoing postcommunist refoms which threatene his authority to ethni-cation an civil strife

Bates an Weingast's sty interesting insights but as the authors recognie their moe lacs a ynamic ele-ment In the Ygoslav case the players observe only eventsan corresponing pieces o inormation relevant forbeliefs and expectationsthat are associate with equilibrimpath Yet equilibrium behavior also epens on expecte values of outcomes that never happen Behavior along the equiibrium path can beanayze using Bayes' s rule behavior off the equiibrium pathBates Figeireo an Weingast 1998 627) In other wors Bayes's

has actors their beliefs only aer observing whatthey consider to actua events or actions but "perceptions ebates

an rhetoric: these processes rather than ratio-nal ecision maing an experience govern the caculations that

inform the choice of strategies off the equilibrium path (628) .



P A R I I

Empircal Ierude:Povey Trap- A Case Sudy



C H A T R

Why Iceland Staved

Of sland to s yte nede

ibll of Englys

Introducton: The Mystery of a Missing Industry

his chapter reects on the dismal eiibrim that held the Icelandiceconomy at low or even declining levels o income and technologyom the late Ages ntil the nineteenth centry. With theanic case I hope to life some o the main themes o theboos theoretical section concerning imperect instittions andpovety traps. I have chosen this paticlar case becase of its simplic-ity and edcational vae. In my thining historica celan has rolesimiar to that of formal mathematical moels which when they aresccessl bring tanspaency to complex isses and highlight impo-tant relationships that more images

he goden age o the Icelandes when they taveled widey discov-ered oth America and created original liteate (the sagas) that isstil in print in major worl angages petere ot in the thirteenthcenty which saw civi war increasing isoation rom Erope anoss o indepenence. From the sixteenth centry on living conitionseteriorate in a series of eighteenthcenty amines tat

to moving the to Den-ma In the twentieth centy the wold has seen disastos social

that ow rom the popensity to mae great experi-ments which oen generate monmental aires becase o the per-

petrators nrealistic assmptions abot nowedge anincentives (V. Ostrom 1993 As Haye ( 1 945 1 960) never tieof emphasizing in these social expeiments the central athority re

overestimates its ability to monitor enorce.In the Icelandic case o economic ailre eected the inabil-ity or nwilingness to experiment at ala social paalysis in which




both omestc an externa nstttions thwarte economc progressan trappe the commnity n poverty.

The economic history of Icelan is a story of a stationarytio o ome 0000 niia wo eterre by the cotry's mar-

gna contions gave priority to farming an attene only part timeto one of the wor's most valabe sheries which srrons thecontry. It s a story of the stant monarchs of the DanshNorwegiankgom who lacke ncentves an capacty to expan ther tax basepartly becase of limte control of resorces an agents on the stantNorth Atlantic isan. When the nineteenth awne

an instral organiation in ha not avancesince the Vikng age an rise of an nepenent

shing instry ha to wait for the last ecaes of the centry (Mag-nsson 198

In my anayss of the case I focs on economc potca an socainstittions that shape nivial behavior an channe collectiveaction. For example I examine for choice in thelabor oca governance systems sch as the com-

an the amnistrative strctre the Crown e tore Icelan. My argment with the theme of this book isthat soca nstittions were the fnamenta factor holing back eco-nomc n Icelan n a spportve envronment the contry wol have an benete from speror(known proction technooges. Incomplete socal moes ging the contry's elite the lanowning class paye an mportant role inmaintainng poverty trap. The elite i not empoy mo-er economics an se a general eqlbrm moel to analyze howremoval of restrictions wol affect their weath. Instea they sewhat we wol now characterize as an "informal parta eqilibrimmoe to preict that permttig inepenent sheries wol rnfarmng. arge however that efectors lre by promise ofprots n the sheres the coaiton of anown-ers ha the Danish Crown not participate in enforcng the status qoor its own reasons whch I n some etail.

I begin by sconting two ieas that are nappropriate for expain-

ing why Icean i not eveop an effective shing instry (a iso-late Icelaners were naware of both stateoftheart sheries technoogy an potential export markets abroa an the cltre n

was averse to commercial activities. First the otonthat the Iceaners' lack of knowege sheries technology anexportaton was ltimate case of centrie of stagnation. it pos



Why Icel an d Starved 0 1

sibe that the Iceandes did not evelop an ective shing industybecause they knew only small owoats and shing ines with singlehooks and had no conception o expots and expot makets? The evi-dence does not support this view Inshoe shing was a pattime aciv-

ity o amers fom the time o the county's settlement aound 900substantial expots o sh began in the thiteenth centuy gadu

aly eplacing wooen poducts as the county' s majo expot; and omaound 400 when English shemen st appeaed Icelandes weeexposed to stateoftheat shing technoogy though thei contactswith oreign shing eets.

Second conside the the ailed to deveopan independent shing industy thei values wee in a unda-

menta conict with commecial exchangethat the chie objective othe actos in the county's pimitive household economy was to satisybasc needs athe than to accumulate wealth though exchange. Histoy again ails to suppot this altenative B . Lusson 1 967; J . Jhan-nesson 974; Byock 1 988 ; W. Miller 990) . In point oact the desieto accumulate was unbrdled in as is evident in thesagas deal with the Viking peiod and om the extemey unequaldistibution o pivate wealth. The Icelandes wee neve shycomecial exchange land was piced and exchanged; agicultualand maine poducts wee expoted and luxuy and commodities wee impote; an in the commonwealth peiod not only weeseats in the national assembly the Aing taded but the law allowedactors in cases to sell to third parties the right both tocases and to enorce vedicts . Even i the Icelanders aspired toony survival institutiona was required ecause the preod-en economy oen could not meet basic needs which led to equentMalthusian cycles o epidemics and amine (Gunnasson 1983Gunnlaugsson 1988). Fnaly the argument that pevaiing value systems hostie to change by themselves bocke economic developmentcannot account o the economic takeo in the ate nineteenthwhen labor and capital overcame oma institutional bares andowed into areas into the shing and even o thecounty Duing the tansition in the nineteenth and ealy twentieth

centuies poweful elements o the taditional community waged ideo-ogca and poltical was against uanization the new wageeanng cass the shng industy and industial deveopment; howeve thesefoces not evese the see chapte 6) .

Whie mindl o the deological oppostion I emphasize the ure odeection the landowne coaliion and identiy strategies o




the Dansh own as the citcal acto pepetatng the stats o nthe pemoden economy of Iceland he next secton analyzes the mancomponents o the trap, which pevented largescale tans-er o resorces om the arm sector into the sherie he sectio

introdces the key playes n the economc and poitcal game andidentes the inteests and constants he thid sectohas a dynamc pespectve and aalyzes the demse o the tadtonalsystem and the tanston to a new stcte o ndstal ogazatonhe nal section smmazes and concldes

The Poverty Trap

Backgound

Icelad was setted the late nnth and ealy tenth centes mostlyby Nosemen, and ae enoying a lengthy peod o consideableprosperty, the entered a path o economc stagnatio andlater experienced serios economic decline he evidence o stagna-tion and decline which corelates with cooling is ove-wheming. Agricltal technology was vtaly nchanged om theViking age ntil the nineteenth archeological stdes revealshkng and wastng nastctes the annas epot amnes wthnceasng (see 4), the height o the pop-latio shank, eecting deteioating nttion

From the age o the settlement down to theremaied more o less constat or abot cm. n the ce-try it ell to 67 cm, and abot the midde o the 20th centry itrose agan to 1768 cm In othe words n a peiod lastng 400yeas at otsde o n the cose of 1 6 geneatons the mean

o the popaton st alls abot 5 cm then ses 0cm of cm a geneaton on the (Ste-ensen

The centra paadox in Iceland's economc histoy is Icelanders' ail-

re to develop a speciaized shing indstry and exploit on a large scalethe contys amos shees Fom the Mddle Ages ntl the end othe pemoden ea n the ineteenth centy vaos instittonalaangements the development o an shing

A crcial component o these hmanimposed constraintswere law and egations prohbited o town



Why Icel an d Starved 03

ships with specialize shers he law restricte abor mobiity byreiring al adlts, with few exceptions, to live on farmsteas as farm-ers or servants and banned cooperation in the coasta sheries betweenIcelaners an oreigners Dring the perio o Daish monopoly

trae 1 602 787 even Danish merchants were not alowe to winterin Iceland Finally, Icelandic prices were reglate, an the price forsh relative to the price of agricltral exports was kept lower in Icean han n foreign markets hese reglations reected the narroweconomic interests of farmers, lanowners, and the Crown heCrown' s ncertain control of its tax base in Icean was a major part othe story, as were arm fears of in the

market

Before examining the property rights of leaing economic an polit-ica actors in premoern Icelan, it is necessary to provide a shortaccont of the instria organzation (Eggertsson 1992998b). ntil the late nineteenth centry, Icelan was essentially arral society of armsteas scattere in coasta an fjor lowlandsaro islan he raise livestock, grae at-tene in montain pastres in the smmer an on home els in thewinter The main crop was hay by law an in practice, shing was a seconary activity of (some) farmers an their servants, mainlyoccpying them rng sack winter season In valablemigratory co was foun in shalow in the country'ssothwestern region As most shermen sed primitive open rowboats,they travel only a few miles an to land thesame day 1980) .

Followig the Protestant reformatio in midsixteenth centry,the size an ality of vessels apparenty eteriorated In the civil warof the centry the Icelaners foght ony naval battle(Fabaragi 1 244) with some 680 men on thirtyve ships he eccle

sees at ar owne several vessels, incluing oceangoing ships that were either omesticaly or fromoreigners For example, n 413 ar boght a ship from Engishmerchants to sail Icelan an England, an in 1 567 arboght another large ship, this time from the merchants of ambrg

(horosen 1 924 5 152 7276) . Relatively abnant riwoo wasthe Icelaners' only omestic material for bilding boats bt timerwas mporte for boats welngs an even catherals Inability to

stable vessels reasonabe prices) i s not a convncing expa-nation of the backwar of the sheries

shermen se open boats that they cold pll ashore




for protection t the en of trip, ccess to bech in the sothwest-ern region ws preconition for entering bot in the winter sheries(orsteinsson 980, 214) inicte tht lw n pro-ie irl liberl ccess to the shing beches Kristjnsson

1 98086, 3 93 Uner the lw, lnlords on the cost retine prop-erty rights to the bech n nrrow strip of costl wters, bt ccessto the shing grons themseles ws otherwise open to ll celnersOf corse, mny frmers, een in the sothwest, were inln n inot he ccess to beches pproprite for shing, n ll sch botowners were chrge for the of beches n bot shes Also loclthorities pt tx on ten ot o istrictson 198086, 39397 Althogh frmers in the northestern region

n inln frmers col rent bech rights for their bots from thelnlors in the shing sttions of the sothwest, they generlly pre-ferre by the sh, either irectly or inirectly, by lening bot owners servnts for the seson in retrn for shre in the ctch Fgresrom the nineteenth when internl pssports h been intro-ce, show most of servnts who le the frms to prticptein the sheries cme from istricts in the sothwest, n prticiptionrtes from the northestern region were fr lower thn in the sothwest(A Kristjnsson n Gnnlgsson 990, 227 Costl propertiesin the shing regions freqently were operte by tennts bt owneby the chch, the Dnish Crown, or welthy inthese regions oen pi their rent in prt by serving s shermen ontheir lnlors' bots

The U ncerai n Propery Rig hs of he Crown

he min economic n politicl ctors tht inenced the corse ofevents in the premoern celnic economy were the Crown, its gents,the chrch, lnowners, tennt frm servnts, foreign mer-chnts, n foreign governments Yet in mny wys, the Crown con-trolle the fte of the contr s sheries Figre 1 presents smmriew o the highest politicl in Iceln from 930 1904,here we re primril concerne with the perio from the nion with

Norwy in 1 262 ntil the en of the premoern ge, lte in nine-teenth centryDring the commonwelth the contry's foreign tre ws

by thirtynne regionl (gar who sets in thentionl ssembl (J Jhnnesson Following the with

the ing cqire propert right to ll tre with



Chieains o he commonwealth

The kng of Nrway

The king Denmark

Why Iceland Starved 05

Limits to

The Englis age. Englandhas strog inence onIcelandic aais

Stong Geman inenceMercants omHambug

he celandes gainpower ome rle,

Fig. Political authority in Iceland, (based on orsteinsson and Jns-son )

Icelad icludig the right to determie (at east formally what for-eig merchats could eter the trade (Guarsson 1 98 7 74. Aer theuno of Denmark ad Norway i l 8 cotro of trade with Iceland

for while with the merchat of Berge bt passe evet-ally to the Dansh Crown.

The size of the Crow's tax base i Icelad depeded primarly othe added in farmig ad shg ad of the two the

provided both more tax reeue ad greater potential forogterm growth. To grow the sheries required extesive foreigcontactsaccess to markets and to imports such as timber shig gear vessels and techology. The small scale of ecoomicactivity i that amrketing servces either be from or be obtaiedthrough joit ventures. The Scandavia connecto potentaly pro-vided a contact the Crow's to develop a strog spe-ciaized shig idustry i Icelad is puzzig. I beliee that the expa-

atio for why the Crow wet aog with the ocal whichopposed expandig the shig ivoves two reated elemets:Icelad' s perphera status in the kingdom ad perceived threats to theCrow from betwee nd other

the kigdom.Crowns unwilgness to vest substatial resources to eforce




its property rights in istant Icean suggests that the colony as ofmarginal interest to the kingom and that the costs of developing astrong presence there ere to the benetsthe ceturies Scaniaia shig eets unlike those of many other

countries i not ply Icelandic ters because the Scaninavias hadaccess to relatively shing grounds coser to home TheCron s unilingness to invest in Icean as reecte in Denmark slo prole in the country an the reative autonomy given the Icelaners Figure 2 presents a schema of the pre DanishIcelanicsystem of aministration The Cron id not maintain a permanent

post or a regular police force in the country an the royalaministration in Icelad numered only thirty iivuals

(excuing a fe inspectors of Cron property an the servants of thechurch ho became servants of the Cron aer the Protestant Refor-mation Until O even the Danish governor of Icelan sat inCopenhagen Finaly the center communicate ith the ependencymostly the months; for the remainer of the year Ice-lan as out of contact

The strategy of limite inoement gave tothe loca elite As late as the sixteenth century Icelandic leaders mai-taine that the Cron could not set ne las for the country ithoutconsent from its general assemby the Aing Simiarly until about00 ere to set ne by having their coutsrue on questions of general nature Lrusson 958 208) In sumlimite involvement implie royal to confront the oca eliteexcept oer ndamental as sovereignty

The element of expanation is that the Cron becase oflimite engagement an no organize efense as vulnerable to ncursions by onto its remote possess ion an Danish leaers particuarly feared foreigners attracte by Iceland s rich marine resourcesFor the Cron even cooperation of Iceaners ith foreign-ers oer shing an marketing potential threatvents of the eenth an sixteenth centry hen Copenhagen tem-poarily lost control in Icelan convince the rulers of the nee to iso-late the islan The English ho aroun 400 entered the Icelanic

sheries ere foreign poer to intrude in a serious y TheBritish ere motivated by strong uropean eman for ried sh andaie by a technological revoution in shipping During this era thengish coastal statons n In 528 an ngish reporton the Icean shing eet liste 49 ships (oggers al from the eastcoast of hile in 528 entire numbered



RentekaerEconos


KanelJuie and reigousaffais

Ars cad nDenark

uhrs cad nIed

Bshops (2)Pass 18)

Ocas ohaona ssmby

Fig. The administration of celand (based on orsteinsson and

Jnsson )

440 vessels (ostensson 976 , 49). he Iceland shees wee o con-sideae impotance o the nglish economy in the eenth and ealy

centies and nglish Cown levied eavy taxes on theeet 976, 2 22) . Fo the Icelandes, who at the timehad een compelled to tade solely with Begen the nglsh connec-ton opened a new and vaae maket. In conseqence the shng secto expanded and the Icelandic economy lossomed. Yet the peiods also nown o and volence. !

It took Copenhagen 50 yeas lly to dspose o the nglishntdes in Iceland. e Cown met the challenge in vaios way: it




attempte unuccefuly to ell lcene to the Englh hermen(ortenon 976 12122) playe a game of hotage by cong theDanih trait to the Englih an thereby elimnatng their acce tovaluable trade in the Baltc Sea and probably even trie to get rid o

Iceland by offering it to Henry VIII a collatera for a loan (ortein-on an non 991 14977). More effectively Copenhagenexploted the nteret of German traer partcuarly thoe from thecty of Hamburg n the Icelandc here an playe the German offthe Englh in a compettion for Icelan' reource. In the ixteenthcentury the Danih Crown aigne German governor to Iceanand and traer irmihe in coatal tatonwth the Icelaner now iding with who offered

more lucrative trade than the Englih d. Aroun 1 40 the Englihlot ther lat pot on the Icelanic mainan an n 9 with omehelp from the Scot the Danh rove Engh from a tronghol nthe Icelanc Wetman Ian. With the Englh out of the picture theDanih Crown turned on the an n 4 concated

property in nclung fortyve boat thatGerman ha jointly with the Icelaner. Thethe core of the Crown' new hng eet. The Danih navy ha becomea powerful an in 1 74 the Crown concate thirty ocean ve-e belongng to the Hamburger. Towar en of the xteenth centuy the Danh ha regane control over Icelan(ortenon 976; orteinon an non

The Crown now conronte a dilemma: how both nd coteffec-tive way to protect it property right in peripheral Icelan an pro-ve contion for a trong economy that woul maximze tax rev-enue. the two goal conicte. The economy wa beterve by a poicy of free trae that allowe the Icelaner to cooperate whatever foregn party ha the mot to offer but event ofeenth an xteenth centue ha taught Copenhagen that in Ice-

free trae wthout trong efene the en of Danihhe compromie oution which put Icean on a path of eclne untilthe en of the eighteenth ha four element: (a) theand a protectve belt of ocean aroun it were put offimit to al non-

Icelandc vee; (b) the rown monopolize Icean andleaed the right to trader n pecc cite in the kngom; (c) meaure were taken to prevent the development of coatal townhip thatmght raw from the ingom; only farmerwere permtte to enter the coatal herie. In the mixteenth cen-tury the authorite (in cooperaton the began




a rve to eracate foregn hng nteret from the Icelanc coat.From aroun 600, the Dane trove to enforce a ban on trade betweenIcelan an peron the kingom, an in 63 the DanihCrown claimed an excluie here one around the country At tat

pont the North Atlantic wa an open ocean, mare liberum, except foran excuve one around Icelan. However, the enforcement cotwere hgh, an Danh abty to enforce thee rght vared wth thetrength of the outde preure an wth the fortune of the kngdom(ortenon 976, 930).

Danih monopoly trade prevailed rom 602 to 787 . The arange-varied, but to trade with uualy were leaed,

oen for perod of ix year, to in Danih motly

Copenhagen. Fo two pero during the monopoly ea, 75964 an 77487, the royal houehol iectly manage the trade. The value ofa monopoly lcene wa related cloely to the volume of h productn the tradethat i, licene to trae in tation of the northeaternegon, which pimariy exporte arm were lethan lcene to trade in the valable tation o the outh-wet Trade n farm prouct wa for the Danebecaue agricultural prce were kept articially high, whch, in effect,mae the hing regon of Icean ubidie thoe regon primarilyepenent on fang (Gunnaron 987,

The Crown alo entere the here recty a a lanor byacquiing valuable poperty in the coatal region of the outhwet

the Protetant Reoaton o the midxteenth TheDane a mltary orce to Iceland or the occaion, concatelan owne by monatic orer, and the ee in Sklholtto trade much of t bet coatal propety in the outhwet fo land inpimaiy agricultural ditrict . When the moke ha ceaed ae theReformaton, the Crown owned nearly 20 percent of the faland and

t own mall hng eet.

The Crown to be wth t compromeAthough moerniation, pecialiation, an greater cope coul havencreae the yield rom the herie, the Crown dipre for tructural change but occaionaly tete the reolve of the

oca elite . Thee occaional attempt intructe the faer improvether boat an gear and pay more attenton to the here. Throghthe centurie the offhore preence of Scottih Dutch, German, French hing eet, aong wth ther occaionalncurion an lict trae wth the Iceaner , contantly remined theCrown o need to iolate rom outider an mantain goo



1 0 Imperfect Institutions

reations with the local eite. Power interests back home i noteman access to the Iceanic sheries various circumstances in theDanish kingom as access o the Norwegian co sheries keptthe Scaninavia shermen mostly in their own regio an ept them

from chasing the co to Icean an later to North America.

Land lo ds an d he Labo Make Consa i n

he Danish policy of limite engagement require cooperation fromthe Icelanic powerl. In Icelan power was cosey associate withlanownership was concentrate in relativey few asshown in tables 1 an 2 In 1 695 52 percent of al farman was pri-

vatey owne the church possesse 32 percent an 16 percentbeonge to the Crown. The private sector was ominate by a smalnumber of powerfu iniviuasfor eampe at the beginning of theeighteenth century eightyone iniviuals owne half of the country sprivate lan.

the premoern perio neary al farmers were tenants an ino own the an they Tenants were an free to rentfarms anywhere in the country. In a total of 8 1 9 1 heas ofhousehos in 1 703 96 percent were tenants (B. russon 1 967) . Farm-an in Icean was scarce an the number of farmers remaine relatively stable at 6000 throgh most of the premoern henumber of hire laborers was reativey large with 1 824 percent of the

TABLE Distribution of andownership

by Type of Owner (in %

Year

Pivate53

52

: B 96 6

Chch

own

TABLE 2 Distribution of Ownership ofPrivate Land around 1700

Total (";) Idivduas

iches next remng

N Around pivate owned percen of alnd.

;(U orsnsson n nsson




total popuation liste as farm servants in the eighteenth an earlynineteenth centuries. Labor was cheap, an even poor tenants fre-

hire one or more worers 987 35). It was cs-tomary to employ servants on oeyear renewable contracts, an ur-

ing the contract period, employers were responsible for their servants 'welfare. As we saw i 4 Iea's informal social insurancesystem was base o about 160 communes (hreppar which ha cosierabe autonomy and were the smalest units of the countrysaministrative system. Inigent iniviuas ha a claim on their local

for when neither their househos nor theirextene families were able to care for 1998b).

Two themes unite the farmers of the premoern era. One was an

obsessive concern that averse selection an moral hazar mightunermine the insurance system of the hreppar an rain the taxpay-ers' wealth. Each faer was responsible for his or her servantsinepenent worers and shermen might attempt to free ride on theirhreppar an become strategic welfare recipientsThe other issue was a constant worry about labor (orupwar pressure on costs, which i not even in the sec-on haf of the nineteenth century, when the servantfarmer ratio wasrelatively high (Magnsson 1985 240) . Both issues were relate to thetension between the economy's two sectors the fas an the sheries.

he prouctivity of in farming was low becase of the harshenvironment an primitive techniques, whereas marginal prouctivityin the sheries was higher than in farming an the potential forgrowth far greater. Landlords an enants realize that the evelop-

of a specialize inustry woul raw worers away,substantialy increasing labor costs. Inee, farmers ha experiencesuch evelopments in the eenth an sixteenth centuries at the timeof the English an erman involvement in the sheries . Farming provided the typical household with ony a smal margi beyon mere subsistence, the yiel to have over time with cooling temperatures (the Litte Ice soil erosion an other factors.Female servants typically receive only food clothing an shelter,whie each male servant receive a small aitiona payment

(horosen 92 ) . For the farmers, therefore, eman pressures fromthe sheries appeare ominous. A substantial upwar shi in laborcosts woul banrupt tenants o marginal land they thought ansignicantly lanowners' wealth

Yet in a poor country where famine was enemic, the high opportu-nity cost of ignoring the sheries was obvious. To solve thethe Icelaners ha evelope institutions allowe farmers to




exploit part time the inshore sheries bt aso sheltere the agricltralsector and tie down the abor market. Centra to the system were

that blocke the rise of an inepenent labor force as wellas shing ad traing tows To accomplish this goal all worer were

reqired to live on farms an inepenent wage labor and nonfarmhosehos were not allowe.

Instittions that compele all Iceaners to belong to farm hosehods ate back to the beginnings of the contry' s history bt the rlesreceived new meaning and enforcement was intensied in the eenthcentry when farm servants oce to the coast to participate in the

an wor for an later traders winteredin Icelan. Varios resoltions concerning the exclsion of foregners

were mae bt initially ha little effect. For exampe in 1 480 celanicleaers wrote to their king complaining abot foreigners who oper-ated in coasta areas draining servants away from thefarms. The critical regation of that period which inence atereveopments was a 490 rling by Governor Pining. The

which the Aling conrmed forbae oreigners to winter inlan in emergencies; otlawe cottagers ness they met a strin-gent minimmwealth reqirement; an reqire others to be eitherfarmers or farm servants (Thorosen 1 92 1 29930 ) . Restrictions ofthis natre remained in force ring the rest of the premoern era (andinto the with the Pining jgment freqentlyreconrme by the corts; however enforcement varied considerablyamong perios and

The were concerne with itiner-ant workers Legitimate itinerant workers id exist bt werereqired to meet a high minimmwealth reqirement which n theeighteenth centry was three tmes hgher than what was emane ofthose who wanted to become farmers. The reins were tightene (unsccessflly) the en of the era 78 3 86 3 when itinerant work-ers were altogether 1 987 3233) .

Reaers may woner why most Icelaners tolerate restrictions thaton slavery espite relatively wea organize or formal

enforcement by the athorities. Two main reasons exist for the lack

of pblic resistance: ocal and internationa isolation. Ordinary peoplehad few opportnities to come together and organize opposition.Except for a few traing posts Icelan ha no towns or vilages eventhe farms were there were no roas were ong.The possessed no mobile as money andall trae was strictly controlled. Second dring the monopoly




peio the conty was isolate an olimits to foeignes ecept fomonopoly mechants uing the summe hose who desie to leavethe isand for did not have many options hey eithe had tosee permission to ail with the Danish traers or somehow illegally

and out at sea contact shing vessels fom other contries . As a esltsubstantial outmigation to uope was pacticaly impossibe

vidence fom cot ecods eveals that the vaios estictions dinot eliminate constant tgsofwa between the two activities faing and shing he fa community was conscious of latent upwa pes-ses on abo costs and those When the of the

was relatively strong couts the reglations in themaet an authorities tightene enfocement New

schemes fo the shemen wee seen as a theat to the system an fo-bidden Fo eample in the siteenth and seventeenth centies cotsin the westen istict epeatey outlawed a sensible incentive systemfo shes Accoding to this pactice the shes mostly fa sevantseceive possession of sh on specic hoos on thei setlineswhich have many hoos 198086 hefarm also saw impovements in shing gea an the esult-ing incease in prouctivity as upsetting the baance. In fact aneinterests oppose setines which hd pobably been intoced intoIceland by Engish shemen In 578 and again in 58 6 nationalassemby le that shing ines with many hoos wee not peitteuing the main shing season A 1 5 8 1 lette has suvived inwhich pominent fames complained to the ing's deputy about thecommon se of in a particlar district The complainants gaveas one reason for their grieances the fact that ervants prefere towor in shing stations that sed which incited them to gothe own ways an ceated fam labo (L. Kstnsson 98086 3 4293 1) .

Finaly the aticially ow pice of sh mst have discoage investment in the sheies monopoy thepice of epots an impots was ed accoding to a oyal price listthat was revised only and coresponded to historical priceists for internal trade in Iceland The Cown appeas to have taen

advantage of the pice stuctue in intenal tade anassigned a low puchase pice to the county's most vauable epothe lage gap between the wol pice fo sh and the puchase picein incease the of the licenses by the Cown

the longun effects local investments in the sheiesAvailable evidence egistes a decline in of product in




tota exports in the monopoly era, althogh a nmber of factors mayhae contribted to this decline (Gnnarsson 1983, 5254; orsteins-son and Jnsson 1991, n the las t of the eighteenthcetry when the Crown made serios eorts to reie the celandic

economy, arge increases in the relatie price of sh were a ey elementof the reforms

The Case Revsied

main thesis is that the colonial element was essential foreqiibrim trap hed the economy at a ery low leel

of deeopment the colonia oca wold

hae raised the cost of entry into the shing indstry bt cod nothae preented the emergence of an independent shing indstry

o thrie the shing indstry had to reach beyond restrictedIcelandic maret and nd lcratie otlets elsewhere in ropeforexampe, in England, the German regions, or For alandlord who soght to specialize in prodcts for export,

certainly presented a serios hrdle The aw reqred aboat owner to operate a farm and tied all labor to a farm. These rlesapparenty were not enforced rigorosy al the time in the shing com-munities of the sothwest where some hosehods were only nominaly inole in farming he shing were not sef-sfcient in labor and drew seasonal worers from other districts,where migration was related nersely to the o armingThe law made employers personaly responsible or the weare o theirpermanent worers een whe they ied i separate hosehods

he barriers in the abor maret shod not be nderestimated In177687 the trade monopoly now directly managed by thensccessfly attempted to operate a "modern shing eet in Ice

he of the company the on theshortage on resistance toson 1983, 8498, Bt there were other actors that made lie

or director, the Famine o the Mist( 1 78386, when some 20 percent of the Icelanders perished, and a fall

in the price of sh when American sppies reached the ropean mar-e aer the American Reotion Althogh the barriers in thelabor maret were not triia the historical eidence shows that the

of a thriing sheries sector in the eenth sixteenthcentries and again in the late nineteenth cold oercomerestrictie labor maret intittions




Access to money an creit was another obstacle that cou restrainprospective entrepreneurs he oca economy essentialy was notmonetie money was not nknown an the dinot hae orma credit organiations Foreign trade wou have

gradualy brought exporters into contact with more sophisticatecreit and exchange mechanisms but a oca entrepreneur initialycoud have trae sh and other exports for better equipment In thiscontext it is interesting to note the price o arge oceangoing vesselsrelative to the value o sh in foreign markets orsteinsson (1976,6769) examined o English doggers that operated o Icelanin the hal of the sixteenth century an oun that the value o oneshipoa o stocksh was equal to 4080 percent of price o a dog-

ger plus abor an other operating costs In other wors a luckyinvestor in Englan coud almost recover the price of a ship in oneshing expeition to Iceandic watersat east in this time periowhen sh prices were high

or setting a moern shing operation variegreatly among landowners with the relative avantage going to actors who alreay had international contacts an experience in thepartime sheries. reasoning suggests that in an openeconomy deecting rom the coalition o andords would be the dom-inant strategy or payers with reative avantage in the sheries Asthe sole eector a anlor into moern sheries coulignore the feared downward pressures on the price of land and rising abor costs one person's actions have no noticeableeect in these markets) I a large o actors were likely toefect the lanor woul hae an incentie to be the In this

indiviua eectors are motivate by private gains in thesheries while anords taking an encompassing view preictargescae entry into sheries woul evastate the arm sector

Iceland's two powerful and weathy sees at Sklhot and Hlarwith their internationa connections were prime for efec-tion an there is evidence to sggest that they may have tried to deectBoth sees oceangoing vesses an relatively large eet oshing boats In 1 576 the bishop at Hlar bought a large ship from the

Hamburgers an ater obtained permission or the ship to trae innorthern Icean an go overseas he lanowners respone in thehighest court of the nationa assembly which sent a note of protest tothe Crown In the letter the bishop is of ofpacing seinterest above the general welare an o amaging theinterests o ruling class




Defecting fom the coalition of anlos an ovecoming con-staints in the labo maket epeented ony a st step towad setting

an advanced sheies opeation Developing a viable expottry require foreign contacts both to acquie inputs and to nd outlet

fo the poduct a situation that aises two fundamental questions (a)Di the Icelandes enoy elative advantage in shing? And (b) couldthey have found foeign makets fo thei podcts?

With egad to the st qestion poximity ceates valuable oppotunities fo pocessing the sh ashoe and fo oganizing the sheiesfom a neaby land base In histoical times foeign shermen

value on access to the policy of isolationdenied them Ae discoveing the ewfounan sheies the En-

gish set much stoe by the availabiity of a land base The impotanceof a base nea the shing gounds also is evident fom an 85556Fench attempt to obtain peission fo a lage settlement on the Icelandic west coast Finaly duing the twentieth centuy locationpoved extemely fo the Icelandic economy Economicgowth led by the expot products created living standards com-

to of Scaninavia The countefactual question of developments in the absence of the

oya tade monopoly and eate coonial especialy concen-ing Icelan's access to intenational is a complex Inthe eenth centy the wol maket came to in the shape ofngish shemen and taders and various foms of coopeation (andconict) The Hambrger who emphasie trade and sold the

Icelandic skre in cental Erope followe the En-glish Aer losing foothold in orth America Dutch ecamemoe inteeste than befoe in the Iceland sheies an in tade withthe Iceanes lling the vacm when was in Eope kept the Danesat home The Danish mechants of the monopoly sold about half of thesh fom Icelan in Denmak bt contacte with Hambug an Ams-

to sel sh in thei makets again mostly in centaluope Finally late in the eighteenth centuy the Danes began to ven-

directly into the markets of which in nine-teenth centuy became vey impotant outlets fo Iceanic expots

In shot the Icelanes faced a lage numbe of colaboa-tos but the Danish policy of isolation and monopsony pevented anycoopeation except fo tempoay ilegal exchanges Une ideal con

the mechants of Copenhagen wee eativelypatnes in the sh recognized by a of Denmak's




eag cvl servats a 1 78 7 report whch they rle agast open-g trae a relatos wth Icela to actors otse the kgom

Seera oreig ations co not oly sel seera procts to

the Iceaers] at a lower prce tha His Dash Majestys sb-jects are able to o bt protable Iceac sheries wiaways be so temptg for them that exclg them (. e . the foregers) from the trae a the cotry wol be mpossble f tshabtats were to be alowe to come into contact wth them(cite i Garsso 1983

The Dash merchats also operate er less tha ieal coi-

tios i the log the istittoa ramework create perverseicetives or Daes a Iceaers aike. he low price or sh oeeby the monopoy gave the Icelaers tte to vest bettereqpmet a crease their sppy. he merchats ha eve esscetive to vest becase (a) the be appropriate bythe Crown extracte most o ret by sellig licenses a bytaxatio; reewal of the (sixyear) liceses was certai; a (c)regatos orbae Daish particpato the sheries. It s ot sr-prisig that ti the last years of the moopoy perio the merchatsrete bt not own ther shps a typcay se them both as vg qarters a for storage g ther smmer vsts to Icelacports. or the merchats ivest sbstatialy in iteratoa mar-ketg. Istea they relie o itermeiato primariy by merchats a Amsteram. Oly the e whe the Crowrectly maage moopoly o we see sstata ivessels hosig storage acilities a marketig (Garsso 1 987 .

Why eightee members of the Icelac elte ot obby theCrow to chage ts pocy towar cotry? he aswer ssome of them As I scss te ext secto a mber of Ice-

for a ope economy theywere a small mority. A string o statements an resotios exteg to the ineteeth emostrates that or the most part Ice-ac leaers spporte the varos restrictos that hel back the

sheries. I cote that the eite relie o a partial moel o sociachage an i ot recogie the potetia geera eqbrm coseqences. I retr to these isses te chapters coclig sectio.

he of the system the of aepeet shg ha to wait for the Crow to chage its




stategy and alow fee tade an impuse that in itself was sufcient tounsette Iceland's taditiona social equilibium he institutionalchange leading to the mode ea is a lage topic that I biey sketch inthe ext sectio

The Game Unravels

The Col la pse o he Tadi i ona l Sysem

In the last quate of the nineteenth centuy incipientand a industy pu the pemoden in to

the seeds of its destucton had sown a hunded yeas

ealie In the st pat of the eighteenth centuy openhagen madesevea haeated attempts to lowe enty baies and expand theIcead sheies which wee of consideabe economic impotaceboh to the own and to the Danish community Yet the peiphealstatus ofIceland and the policy o imited engagement made the Cown

to impose its wil on the eliteIn 1 70 1 the Cown decided to pemit Danish mechants of the tade

monopoy to in Iceland but Icelandic leades potested andthe own yieded in 706 he tade chate of that yea states "hemechants ae ot aowed to have any shing boats in the county nohie any aboes fo woking in the sheies no have any shing linesclose to the coast (Gunnasson 1 98 3 24) In 1 759 the Cown aloweda single mechant to spend the inte in the and in a tadechate o 1763 the wee allowed to people in Ice-lad the yea but wee stil oidden to empoy Icelandesin shing 98 3 24 By a decee issued in 1 762 Copenhagen appointed a special fo sheies in Iceland odeedthat catch statistics be colected o the couty and fobade inladfames fom buying sh fom the shing stations as a of com-pelling the fames to thei own shing he magistates inand othes opposed the measues beginning in 1762 and in 1763 theCown withdew the (Gustasson 1 98 1 ) In this instance thepoposa was impactica because sh wee a key component of the Ice-

landic diet and many fames did not have easy access to the sea(Rafnsson 1 98 3 In spite of mino confontations evidence showsthat in mattes of institutional change the administation in Copehagen was sensitive to the wishes of the eite especially themagistates who wee wealthy Icelandic landownesson




Beginning aron 770 the Crown change it trategy an took amch rmer poition on economic reform. he virta colape of Ice-anic ociety to which the policy of iolation an monopoly trade hacontrbte i a key factor in explaiig the ew approach It ha

become clear in Copenhagen that Iceland weakened by the poicy ofioation and limited engagement acke the reerve an reilience tocope with col pell natral diater (particlary volcanic erptionand epidemic) that avagely plage the contry in the eighteenthcentry which aw three major poplation crie. In Copenhagenthere were moving al or ome of Icelan' popa-tion ff the iland A.

In 770 and again in 78 5 the Crwn appointed a royal commion

of high ocial to tdy the economic itation in Iceland and to rec-ommen economic reform. Both commiion pai pecial attentonto the herie an many reform of the ate eighteenth centry were baed on thee recommenation (. Jhanneon 950) . In770 the fce of the governor wa moved to Icelan from Copen-hage in 77 72 the Crown bidzed the monopoy trade companyto bring orwegian bider and for eighty veel Ice-an in 776 the Crown over and directy managed trade withIceland an began operating a eet of ecke hing veel in aneffort to introdce new to Icelandic her (. Jhanneon 950 26567). Other evelopment in 776 ince a new royal priceit that doble the export price of h (. Jhanneon 950 275). In 787 he Crown aboihed trade monopoy and opene trade withIceland to all of the kingom and the merchant were alloweto Icelaner in bt ree trae with all nation wa otpermitted nti 85 5 (orteinon an Jnon 99 25660) . Whenthe trae retriction were the price of h increaed even frtherbecae of a hortage of food in Erope (. Jhanneon 950 230).Finay on the of the 785 commiion theCrown to etablih a of townhip in toprovide biie and tax exemption for trader and artian whomight chooe to ive re (. Jhaneon 950 223) .

The diater of the eighteenth centry joted not ony the Crown

bt ao the Iceaner themelve. A nmber of modernit incling many member of a growing colony of Icelandic intellectal in Copenhage pported effort to liberalize the Icelandic economy and lobbie he Crown to effect. Yet even among theernit were in a minority. A early a 757 for example and agai in

an intellectal entreprener and the Crown' general




secretry for economic irs in cend Skli Mgnsson mde pro-posls for endng the trde monopoly bt did not receive gener sp-pot from Icelndic leders ( Jhnnesson 1 950 2091 ) Rtherthn providig spport fo thee ttempts to liberlize the ecoomy

the nded interests pshed in 178 for the introdction of internlpssports for peope crossig conty bondries (L Kristj{sso198086 2:393) wo yers lter the smll nd restricted bt potentily thretening ctegory of ndependent workers ws otlwed together giving the workers six months to nd employment s frm ser-vnts The bn remied n efect 863 (Thoroddsen 92134244) retrospect the opposition by of the contry's ledersto n open economy nd other reforms my sond nd

my rise the qestion of whether the opposition ws genine orwhether Denmrk pressred the Icelnders to spport the stts qohe evidence dictes however tht the eders genery spoke theirmids

Populat ion Pressures an d the Dyna cs of

I nst itut iona l Chan ge

he dynmics of instittionl chnge in cend from the erlyreforms in the te eghteenth centry ntl emergence of modershing instry 100 lter is complex story in whichgrphics plyed n importnt roe t is cler tht poption pres-

intercting with strict on new frmlnd to thesoening of bor ong before the rles were

removed Figre 3 shows tht Icelnd begn thecentry with poption of bot 50 000 bt by 1 78 5 the poptionhd flen to less thn 41000 Sstined popltion growth sbseqenty begn nd the poption reched 47000 in 80 59000 1859 nd 72000 in 880 mprove living stnrds pop-

growth were in to reforms in thesheries n fct celd lmost qdrped its exports of sh prodctin the rst forty yers of the nieteenth (orsteinsson ndJnsson 1 99 1 268) n its response to the debce of the eighteenth cen-

try the Crown did not t the sheries bt so vri-os pieceme reforms in grictre icldig fencing nd therestrctring of property rights whch icded seling chrches dCrown to owners ( 1950; G Jnsson199) he reforms heped the contry lrgerpopltion bt reforms took pce within old instittiol frme



3

5

Why Iceland Starved 2 1

- 5 Pltin n Dmb

5

M 0 � � M 0 � � o 0 0 N M � � � � �

Y

Fig celand, (Census Bureau o celand,wwwhagstoais)

work athogh they ndermned t. Formally the sheres didreceve free access to manpower.

Weakened by a dsastros involvement in the Napoleonc wars,Copenhagen stll did not directly challenge Iceland' s landedresstance to reforms. For example, in 1 808 the Royal FinancialBrea in openhagen stated n the ftre no one will bealowed to settle by the nless he proves that, in addtion to thehose he rents or prchases he has access to enogh land to spporteast one cow or sx ewe (cited n Hlfdanarson 1 99 67)

Untl the ecades of the nneteenth centy n therral down not prevent theof rban commnities in coastal areas . In 1 8 0 abot 0 6 percent of the

lived in Reyjav, the main center 850 he proportion had grown only to abot 2 percent and to 3 5 per-

cent n 880 By 1930 however, resstance to rbanization had beenovercome and more than a qarter of the popaton lved n Reykavk (Statistical Abstracts 984 7) he rapd nneteenthcentryncrease in the farm great pressre on thefarm which responded by exstng farms, set-tng up new farms on marginal land, and increasng the ratio of er




vants to farm households As the informa institutions of the abormarket prevented farm servants from marrying each other, the pro-potion of (disgruntled) men and women grew rapidly(unnlaugsson 988, 08 8)

In the last quarer of the nineteenth century, he dam burst Periodiccold spels devastated many subdivided and marginal farms, and nowthe celanders had a new option they could voe with their fee In thelast quarter of the nineteenth century, some 1 5 ,000 individuas, about20 percent of the popuation, le the country, mostly for North Amer-ica Others dried into areas, ignoring restrictions on abor

taditional system had received its coup de grce, utremnans of the formal instiuiona ingered Historians fre-

quently dae he adven in Iceand of a speciaized shing industryaround 1870, but the Icelandic Parliament naly removed aborbondage in 894 and resricions on coagers only in 1 907 (orsteinsson and Jnsson 99 )

chapter has addressed a puzzle why a nation that lived for nearly1 ,000 years on an isand next some of the shing in theworld did not develop an independen shing industry unil oward theend of he nineteenth century but gave priority o lowproductiviysubarcic farming, suffering extreme and famine Whie anmber of Euopean nations, beginning in the 400s, maintaine largeshing eets o Iceland, the Icelanders organized their sheries asparttime activity, mostly inferior technology and small openrowboas of Iceland's relative backwardness , smalltion, and isolation local entrepreneu would have required coopea-tion from foreign enrepreneurs and nanciers to develop an ecientexportoriented indusry In Icelaners needed assistance ininernaiona marketing and in he of highquaiy inputsand capita assets The contry ependency of the or-wegian kingdom, which could have in efforts

The chapters main argument is that Iceand was stuck in a perni-trap tha had oth domestic and foeign compo-

nents I is further argued that the domesic component aone would

not have sufced o maintain staus quo The interna componentwas related to the economic selfinterest of landlords and farmers whofeared hat the development of highproductivity sheries would raisethe cost of abor in the farm sector and the

of and A compromise evoved, therefore, where labor was tiedto land ut tenant and farm servants could be used as parttime




shermen, especialy in the winter. Uner ths arrangement, which pro-vie moest insrance against periodic setbacks in farming, the pos-sibility still remained that enterprising Icelanders might efect from thecoaltion o laned interests an join foreign iterests in developng a

specialie shing nstry. The external element of the eqilibrimtrap however, effectively constraine potential efectors.

he Danish Crown folowe a policy of soatng Icelan from foreign inence an taxing the Iceaners by seling monopoly rghts totrae with Icelan to cities in the kingom, particlary Copenhagen.The Danish merchants of the monopoly trade were forbien to par-ticipate in contry's instry or even to spen winter inIcelan. Denmark di not invest in permanent military presence in the

contry and relie on a smal nmber of aministrative agents sallyIcelanic lanors. he contry i not have a poice force or anay.

he Danish poicy of imite engagement an isolation was moti-vate partly by the experience of the eenth an sixteenth centries ,when an later German iterlopers rawn by valablesheries eclipsed Danish rle in Icelan Simlary many local mea-sres for tying abor to the lan originate in the EngishGerman eraan were intene to stop and reverse the growth of coastal shing commnties ring that perio. Under the monopoytrae system,the Icelanic eite erive most of its wealth from the theCrown prote more from the parttime sheries (Gnnarsson 987,4749). The price of sh was set articially low relative toprices in foreign markets , received fair prices .

Crown prsed two goal: maximizing its reveefrom the sheries (an from the coony in general) an ensring thespport of local anowning cass whch opposegrowth an expansion in the sheries. he otcome was a social eqiibrim involving primitive, lowproctivity, an nonspecialiesheries. he their opposition to anecient sheries sector on an incomplete partial eqilibrim moel.They focse solely on adverse effects by the anticipateincrease n the opportnity cost of labor inpts. They di not allow for

positive eman for farm procts that wol emerge from agrowing sheries sector and risng national income ! Modern economists wol evalate these isses with the hep of a general eqilibrim

hey consier a sh in the economys proction possi-bilities frontier, reecting proctivity gains in the sheries; shiing spply and eman crves in the farming sector (with a negative sb




stittion ect an a positive income ect) the scarcity of new farm-lan in Icean an the natral protection against many farmimports empirical sties moern analysis not havecoclsiely reassre the lanors that strctral chage wol

leae intact their wealth Yet aing positive eman effects to thenegative sppy effects at east reces the epecte oss an introcesthe possibility of net gains Genera eqiibrim moels however werenot part of the menta apparats of Icelanic lanlors

conomic actors in Icelan evae the premoern system's con-straints on varios margins with negligibe Smalscaleillegal trae foreign was nown to eist especialyevents on the continent of Erope kept the Danes at home Some

farmers in the chief shing istricts in the sothwest set p on theirhomesteas cottagers whose primary activity was to sh rather thanfarm assming responsibility for the welfare of these families Yet hightransaction costs an isolation hel bac the shing instry

The trap nally came apart when the Crown respon-ing to eteriorating conitions in revisethe policy of isolation an monopoly trae The sow transition to anew economic system that wol be base on an inepenent moernshing instry with a specialize abor force laste amost a centryconomic forces graaly overcame the restrictive reglations in the

maret which sally were formaly only aer theyha become obsolete The economic actors that estroye the stats

were not empowere by social moels ofchange Rather they themselves in an environment where thepsit of personal gain initiate growth



P A R I I I

Institutonal Pocy



C H A T R 8

Applyng Socal TechnologiesLessons from the Ol d Theory ofEconomic Policy

In the 1980 aer decade of neglect, academic economist redisco-

ered tha ocial intitution maer and hat ueful way of analyzing hem could be found. In part I of thi book, I introduced ome of thetheoretical itas that the new nttutional economc ha opened up . Iam particularly intereted in what we hae earned about imperfectntttion and economic decline. The cholarly initiallyfocued on origins and function of intitution, but cholars haealo recenty turned their to iue in intitutional policy, per-hap partly becaue of prodding by reformer and poicymaker andunexpected problem wih tranitions in ariou par of the world.Roand Transition and Economics: Politics Markets, and Firms

proide an of rigoros anayi of instit-ona tranformation tha chalenge the ocaled Wahington con-

and the belief that market will inariably emerge ina nonmarket economy when price are and tandard mea-ure of tabilization are introduced

The purpoe of a normatie theory of intitutiona poicy i todeign tratege for reparng intitutona enironment. Alhough diinc intitutonal poicy hare acommon iion wth macroeconomic polcy an panning. Both elare with the genera enronment of economic actitywhich in the cae of inttutional polcy i not only the natonal/inter-national enronment alo the local enironment of ariou indu-trie and een organizaton. Both macroeconomic and inttutional

economic hae a trong interet in explaining unwanted economicoucome whether unemployment and ination or indurial declineand economic tagnation. Unlike the new intiutionalism howeermacroeconomic deeloped an explci poicy perspectie.The rse of modern macroeconomc i aocated wth theof General Theory of and




(936), which is essentialy his attempt to make sense of the GreatDepression. he Keynesians put poicy issues on the front burner fromthe beginning.

In chapter set te stage or te theory ect ion with a discussion

of modern growth theory and its evolution through three phasesthen, in chapter 2, I dened a role for institutiona growth andlocated its sphere of competence. Here I similarly begin the book'spoicy section by discussing macroeconomic planning and how threebroad waves of theorizingKeynesian macroeconomics, rational-choice macroeconomics, and macroeconomicscreated new perpectives for policy. aim oray inoworld of macroeconomic poicy is to draw lessons for institutional

poicy and to contrast the two forms of policy. he pioneers of macro-economic policy deveoped and sought guidance from what theycaled the theory of economic poicy. The of economic poicywas originally an attempt to use the logic of mathematica decisiontheory to design strategies for macroeconomic policy based on Key-nesian economics. section that follows introduces basic ee-ments and concerns of the old theory of economic policy. Thequent two sections briey describe how the evolution ofmacroeconomics created new perspectives on policy, both by suggest-ing new strategies and by shrinking panners' set of avaiabechoices . he chapter conces with general discssion oftitioners of institutional policy can learn from more than half a cen-tury of macroeconomic planning.

The Old Theory of Economic Policy: Basc Eements

he old theory of economic polcy emerged mainy from the work ofRagnar Frisch and Jan inbergen a Norwegian and a Dutchman whowere inence by contribte to) Keynesian

the rst Nobel Prize in economics. inbergens (956)classic study, Economic Policy: Theory and Design deeply acted andreinforced the way economists about the policy implicationsof heir work. he volume and related studies did not propose new eco-

nomic theories or explicitly evaluate the state of economics science butcontributed at a different level. inbergen's decision models have theavor of systems analysis in engineering and his aim was to show howeconomic be to reguate eco-nomic systems. he theory of economic policy general



Applyng Soca l Technologes 29

tions abot the strcte of economic systems to erive varios rlesfor the optimal esign of policy an specic economic theories arecite only or

The theory o economic poicy emerge i a era o great expecta-

tions about the promise of socia engineering reecting the hopes ofwelfare economics (Bergson 938 Samelson 947 chapter 8 theKeynesian revoltion the new e of eveopment economics(Kineberger 1958 an the central planning iteratre Johansen

Although inbergen Frisch an other early contributors to thetheory were well aware that policy goals are shape by political orcesan policy is oen ominate by uncertainty they i notsize such complications an economics profession initially

absorbe a mechanical version of the inbergen framework. In the 950s an 960s mainstream poicy stuies usaly mae the folowing assmptions either or implicity

1 . The goals or targets of economic policy in whatwas alternatively reerre to as target preference function,ojectie unction or social eare unction) are given or cor-respon stanar concepts of efciency in economic theoryan to recognie notions ofjustice in ethics an relate els

2. he basic structural relationships of the economic system areknown . Strcte may limit the scope of policy an pttargets out of reach bt limite knowege an inaccuratepolicy moels generally o not case policy

n last quarter o the twentieth century nexpecteemerge in manipulating Western economic systems both at the microan macro eves (Lucas 1976 R. A. Posner 1986 part II. Furthermore mainstream economic thoght ha begn to obt the viabiityof socialist central management an evelopment policies in the hir

lone critics appeare earlier. hese set-backs unermine the optimism of the early postwar era an helpecreate new an more skeptical perspectives on economic policies as Iiscuss sbseqently but I wil begin by outining the traitiona view

of economic policy an planning.The brain of ol theory of economic policy metaphoricaly wasa poicy moel that lai own the strctre of the economic system interms of two critical of the of poicy anthe targets o policy. Johansen 977 provies an excellent




compact summary of the traitional view using a formulation thataccors with Arrow's (1956, 440) four components of any ecisionproblem.

1 . A polcy model that species empirical relations x a z where a vector of oucomes x epens on policy measures aand exogenous factors Z (such as climae an export marketconitions).

2. A set ofpolcy nstruments 3. An W Wx . Computaional o values or policy instru-

ments maximize he function

Given the strucure of the policy he prevailing exogenous fac-tors z specify the set of outcomes xz hat are within he reach of thepoicymakers who compute and apply optimal policy measures a*that maximize their objective nctionthe social welfare nctionreaching W* this worl o planning the role o economissor "analytical is one of helping to specify the policymodel an computing he optimal solution in accordance with thepreferences of he policy W Wx which in turn is consis-tent with the popular will or the public goo .

In their quiet moments the pioneers contemplate how politics aninformation problems might complicate the planning process(Johansen 1 977, 1 049) . risch was concerne or example that ana-lytcal experts might nd it dicult o establish Wx in a ormor ecision problem ohansen 1987, 54244) reports thatin working on his problem Frisch ienied ve ifferen approachesto acquiring information abou the policy preference function ()experts irectly ask political ecision makers to specify the ecisionfunctions; (2) experts interview ecision (3) experts conuct

interviews with political (4) experts inferencesabout preerences from policy statements (5) experts rely on revealedpreerences o policymaers erve rom theirrisch also recognie hat politicians might hesiate to reveal their

preferences either for sraegic (political) reasons or because they areuncerain abou elements in he panning process.The ivie between economics and poliics shows up in risch's is

tinction between selecton analysis an in Tinber-gen's notion o the optimal economic system. risch enesselection analsis as the tas o optimal outcomes W* in a



Applyng Soca l Technologes 3 1

wor free from politica constrains in practice however politicalconstraints oen pace * ot of bons If represents the highes

of that social realities permit then * measres thecost o poliical constraints in terms o he social welare ncion Sim-

ilary Tinbergen ( 952 959 recognzes that socia an political forcesoen spport sboptima economic systems Tinbergen refers to measres aime at reforming the economic system as "qalitative policyan istingishes them from "qantitative policy that leaves basicstrctres intac Johansen ( 977 4748) makes a isinction betweenminor an basic policy: Basic policy implies ra-ica change in power strctres will generaly not be contem-pate any central athority ner the prevaiing power

(Johansen 1 977 48 . Minor qalitative poicy measres in Johansen' ssense have some corresponence with Lcas's (1990 welknownnoto of regime change in contrast with policy action aregime an Bchanans (1975 987 poicymaking within a constit-tion verss constittion making Tinbergen believe that in the long rn wol select comparabe socia welare fnctionsan optimize over all known instittions (socia technologies) whichmae him preict that all economic systems wol converge towar acommon basic strctre Tinbergen's convergence hypothesis rewworwie attention an the neocassical growth moe iscsse inchapter 2 emboies a similar notion of convergence

B et s p these speclations asie an retrn to he traitionalprescriptions or stanar macroeconomic poicy Theinstrments of poicy variabes as exchange rates taxrates base money price ceilings import restrictions pan inicatorsan agrictra proction qotas The strctre of the policy moeenes vaes are attainable an what nsrments of policy are most effective in reaching the esire goas Poicy targets canbe (policy sccess entirely on a specic vale for eachtarget variable) or the policymaker can weigh target togetherin a target preference nction X' x he aim of economicpoicy is either to reach or to maximize a target preer-ence fnction

When targets are xe (absote) or when target preference fnc-tios are maximize withot limitations basic ogic sggests two welknown rles of thmb: First in general "the nmber of instrments

be (at o the nmber of (Hansen 963 7).hink for example of a market where in terms of a spply an

iagram qantity an price are etermine by the




intersection of the spply an eman cves . he athorities now seta new target P" QJ A single instrment that moves ony one of thetwo or shis both of them along some xed path only bychance reach the new target P A genera soltion to ths policy

probem requres at least two instruments one each for shing thesuppy and emand crves .

he secon re of thmb advises against decentralized poicymaking where each polcymaker controls an instrment that s ass igne toa specic target variabe. al available instrments shold becoorinate an irecte jointly toward the set of target variables

7) . o exten the previos example imagine that poicyactor A controls one instrment and has P2 for a target an that actorB contros a ifferent instrment and has Q2 as a target. It can beshown that without coorinaton the efforts of the two actors toreach ther separate goals can generate osclatons aroun the overalltarget P Q ' that do not necessarily converge on the target. It fol-lows from this ine of reasoning that as a rle centralized poicymak-g necessary.

Finaly the of the policy model has important impica-tions for policy. he strctre describes interreationships among the vectors of variables in x = z and determines whether themode can be vided into autonomous epartments which has critical

for policy. Folowing Simon ( 1 953) all enogenosabes an instrments in a policy model can be arrange accoring to

ordering from the rst orer to the highest Nth order. Instr-ments of Nth order of the Nth oreraffecting ower orers of the system. se ofhowever has repercussons not only for rstorer target variables btaso for endogenous variables at igher levels potentially throughoutthe system (Hansen 963 822) Unlike polcy action within a regimestrctal poicy or regime change mst rely explicitly on a theory of

orering in the socialsystem determines how complex theory and complex measres are

for changes in the of an economic sys-tem. For example esigning the transition to markets in Rssia and

Eastern Europe becomes a relatively simple task if desire marketinstitutions wol emerge autonomosly once "the prices are set free which was (roughly the position initially entertaine by many mainstream economists who these contries on their transitionstrategies he notion of strctraly orered variablessggests that policymakers who have ncertain knowledge of social



Apply ng Soc a l Tech no log es 33

stuctues may get nexpecte eslts at othe eves of the system thanthei instuments wee planned to act.

Private Policy Models and Rational

Expectations Macroeconomics

It is only a sight exaggeation to say that the ol theoy of economic policy is an engineeing manua fo impementing the social technoogiessuggeste by Keynesian macoeconomics, which aggegates individualbehavior into stabe mechanical eationships fo the whole economy,

appearing to provie a favoabe environment for central control.Yet the mechanical image is not truy epresentative of the master hm-

sef Unike many of his disciples Keynes was preoccupie thoughouthis life with changing expectations and quirky esponses by individuas tothei uncetain envionments (Skidelsky 994. The initia mathematicafomalization of Keynes genea theoy which was pimaily the wokof his set al zziness aside by presenting snapshots of

economic system, freezing and stabilizing structural reationships.The image of aggregate eationships implies that new policy mea-sues will not cal foth esponses fom the pubic that change the ela-tionship between instruments and targets in the policy model, x G =an in some cicumstances totay undeine measues. The socae

expectations evotion of the 1970s ceate a bannew pe-spective by ecognizing that economic actos oen have the incentive anability ease of new policy measures an that these responsescan change the of poicy moe 1976, 1990.

n it initial fom rationalexpectations paaigm made raterextreme assumptions about the information an knowege avaiabeto repesentative economic actos. The theory assumes that economicagents base thei ecisions on coect modes of the macoeconomyan pivate economic know how the policy authoity isgoing to when fo vaiables iffe fomtheir actual values . The intouction of educate countepolicy by the

on pivate policy moes, can signicantly hrinkof oucomes, X available to policymakes

Policy Models as Dependent Variables and Bounded

ationality Macroeconomics

When theoists moels of social systems, they ecide howvarious types of actos know, what o not know,




and how they earn (Sargent 993 , 65) Rationaexpectations macro-economics, in its pre form, makes a very strong assmption abothow the actors know The theory is essentially static, insese becase it assmes that al actors hae done their homework and

aready know the strctre of the game Reevant actors share a reli-abe (socia) mode of environment and have adsted theirbehavior to coherent rles and expectations As Sargent (993, 2)remarks, these modes endow representative economic actors withmore knowledge than their creator, the mode bilder, possesses Themode economist or statisticallyestimate and infer abot poicy modes, these pro-cedres assme that the agents already know

A wellknown early reslt of rationachoice macroeconomics isthat smart conterpoicies by ecoomic agents netraize and rle otgovernment policy aimed at the socaed Philips crve,which involves trading nemployment for ination or vice versa Con-

poicy cannot be to lower the rate ofbelow its eqilibrim (or atral) rate ad keep it there b step-

ping p demand pressres and raising the rate of ination ispzling here is why in the 960s and early 970s goernments andtheir experts in many parts of the word did prse sch poicies Onemight be to iterpret their actios as cyica maneversintended to fool the pblic, bt to fool whomagents with fl knowl-edge of the system? One branch of the literatre ors a soltion to theple b claiming that episode, privateagents were endowed correct models, whereas the polic modelsof goernmets ad their expert were ased on erroneos economictheory (Sargent 993 , 60)

Strict macroeconomics is closely related togenera eqilibrim theory in microeconomics In their prest versios,both theories assme complete kowedge, when knowedge is notcompete, we the of how actors learnWhen economists attempt to nderstand a social system, they con-strct a theor, colect data, and the data to test the theory In ananalogos manner, Sargent (993, 23) sees reglar economic actors

constrcting and models, which they coordinate and share,and rationalexpectations eqiibrim prevails only whe the actorshave soved their "scietic problem A regime change invoves a shiof policy models, bt economics generally theory ofthe dynamic path between the old and new regimes The researchageda of bondedrationality macroeconomics is to analyze




earning invoved uing the adustment to a new policy regime Anobvious way to proceed is to model soca agents as behaving like econ-omists and scientists when they new knowledge but Sargent(993) recognizes that little i known about how scientists actually

earn about the world although of course their statistical estimatontechniques (such as cassica or Bayesan econometrics) are known

Lessons for Institutional Policy

The experience of half a o theorizing the process ofintervention offers lessons for institutiona pol-

icy each stage n the deveopment of macroeconomcs sends a dif-

ferent message Cassic macroeconomic panning teaches two essons:( the importance of being clear about the preference function of therung pocy authorty and 2 the need to specify poicy mode x= f. and to identify the available policy instruments A In chap-ter 5 I discussed various attempts mostly by politica scientists toexplan why target preference functions of many ratio-nal ) poltical leaders do not give priority to economic growth Econo-mists recently have developed an nterest dimenson ofeconomic reforms as evidenced by the eld of political macroeconom-cs (Aesina 1988 1995) To allow for pure poitica preferences foreconomic outcomes we a politicaly vaue outcomes to thetarget preference function which now becomes W Gg, x implying that economic alternatives sometimes play little or no role in policy-making independent of political preferences many studiesin the new institutional economics are senitive to poitica factors theed needs to pay more attention to the impications of poitcs fornsttutional reforms

The man lesson of ratonachoice macroeconomcs for institutiona policy is the insight outcomes from pubic policy ependnot ony on government policy also on the private poicymodels of individual social actors Al socia equilibria reect individ-

actors' perceptions of their envronment and the actors' poicymodels embody these perceptions Accordingly the partcular models

that individuals entertain prevailing social technoogies and gov-ernment decson rues imit available choices in public policy An earlyrecogntion of the signcance of ncompete and variabe poicy modes is in Steven Cheung' s ( 95, 96) investigation of rent con-trol in Hong Kong Cheung provides a strking image of aprocess that involves revision and updating of both private and pub




Non-controed exogenousfacos

Strcture and fnctonngo he economy

x a z

a

Policy

Preerence scae

w

W = G(g. x:

Fig The policy proce baed on ohanen )

lic polic brigs s to boeratioalit macroeco-om.

macroecoomics irects our attetio to theqality of pblic a private policy moels a role of eperience

a in patig these moels . Sbstantial isti-change that types of actors new policy

moels which itroces et aother imesio i policmakig:attempts to learig a iterpretatio b targete actors. Iother wors policy moels ow become itermeiate targets the

poicy process. I its state istitutioal ecoomics usalltreats icomplete knowlege as a problem arising from scarcity of ata(e to measremet costs) or from a hma iabilit rapily toprocess rather tha ivolvg incompleteb metal path epeece) that limit the capacit to select a iter-pret ata.




Fige 4 mmarize the icion in thi chapter by extening aiagram from Johanen (977, 58) to incorporate rational expecta-tion, political otcome, an political contraint. The howhow rational expectation, rece the choice et rom � in the tradi-

tiona (Keyneian) policy moel (where a et of exogeno variable, zimit poible otcome) to X_ in a moel withrepone or conterpoicy. contraint (for example, contittona re or incient pariamentary pport) can frther retricta government choice et by ptting certain otcome, off limit ,which in gre 4 available otcome (the choice et) to X " fp

otcome, can alo hve vale political coneqence,gx If certain economic otcome are preferre in themelve

(rather than for poitica reaon) , the policy preference fnction nowbecome W Gx g which frther limit the abiity of economtan other expert to nence the goal of pblic polcy.

Or orney throgh the intelectal hitory o macroeconomic pol-icy and panning ha broght two key to the ore: the concept opolicy moel a dependent variable and the iea o endogeno poli-cie. When to the imit, the concept of enogeno policyappear gget poicy determinim, leaving no role for reformerwho face a wor where all eciion are mae by maximiing actor.The folowng ice the limit for intittional reform anmake the the iea of policy etermnacy implicity ametabe policy moel. Althogh it i not neceary to give p the con-cept o ocial policy determinim i not whenpolicy moel are incomplete, variable, an



C H A T E R

Degees of Feedom Isitutoal Reform

In this chapter I ook at three basic in policy In thesecond section arge concept o optimal or optimaleconomic (see chapter 8 is elsive to o use In

neocassical economics however it is cstomary to dene ineciencyas deviation rom an optima state sch as perect competition Thethird section sggests two reated denitions o "imperect instittions that are amenable to comparative instittional analysis I reerto one o the denitions as and the other as

topic concers limits to instittional reorm Aer concd-ing that particar social instittions are imperect and advocating reform politicians advisers and others oen discover there areew degrees o freedom Limits or reorm oow directy rom themodern interpretation o socia instittions as eqilibrim otcomes in

involving ecision makers who maximize their tility nctionsand have economic political and social interests When a social sys-tem is in the o the social

leave zero degrees o freedom or reorm Theseissues are discssed i the orth sectio which arges that limts forreform are rea whie compete determinacy is a theoretica constrctthat shold not be taken literally In the h section and in the folowing I dscss two sorces of argescale instittiona reformFirst nexpecte exogenos shocks requently reative prices

other knock the system o balance open windowor reorms (discssed in chapter 0) The other sorce o reorm isadstments in policy modes or the rise o new models inthe th section of this chapter Actors change their social models in

response to persasion in mrket or ideas throgh earning bydong and via interactions in socia systems I reer to a stdy o poicymodes and poicymaking at the Organiation or Economic Cooperation an Development (OECD in the 970s toin the market or ideas and I the dynamics o the wearestate to explain in persoa ad pbic policy



Degrees o Freedom i n In st itut ion al Reorm 39

The Eusive Search for an Optimal Regime

In this section I that policymakers with their incompete socialmodels lack the necessary knowledge to set p an economic regime

that is optima for achieving their particlar economic goals. Theycannot systematically carry ot what Frisch abeled selection analysisand Tinbergen called the choice of an optimal regime (see chapter 8)Conceptally the transition to a n optimal system reqires that policymakers complete two superhman tasks which I describe. o simpifythe I that the policy preference nction involvesonly growth.

To discover the optimal economc regime reformers need to esti-

mate the ltimate growth potential of different economic systems bycomparing how well each wod fnction nder optimal management.The task cals for working ot optimal poicy x/ /(a* z for all(known) economic systemsfor a s in For eample the policy-makers estabish whether a Soviettype economyform all versions of the market if athorities sed optimalcentra management policies rather than say the methods of the for-mer Soviet Union. The discovery process also invoves nding theegal social and political fondations for each type of economicregime necessary for realizing its fll growth In other wordsthe reformers mst ientify the most effective social technologies formaintaining cooperation coordinaton and commnication for eachsystemj in J

The second task transitions. When preparations areto transform the crrent policy a, into chosen

optimal policy regime a, z it is necessary to establish whetherthe transition is feasibe in view of prevailing poitical and cutural conditions. If a feasibe transition path does not eist reformers arecompeled to settle for a seconbest soltion. When isfeasible the planners the optimal or leastcostpath allowing for the reevant social political and economic factors.This second task corresponds partly to Frischs implementation phaseof the planning process (see chapter 8). When argescale strctral

change is planned it is oen impossibe make all the changes at oncewhich necessitates piecemeal reforms. Piecemea economic reformshowever are risky becase some transition paths can create interim

of severey "incompete economic systems.Reformers therefore discover the optimal seqencefor eam-ple y eamining whether the introdction of international




cpit ow) prior to X (mte ometic mrket for ecitie) willetbiize the ytem (McKinnon 99; Ron 2000). he egn ofn optml trnition pth likewie recognze poitic con-trint In the trnitio to mrket in Etern Erope vier hve

igree bot whether it i pproprite to repon to "winow ofopportnity with ( "big bng mere, (2 grl introctionof reform, or (3) hybri trtegy mixing the two (Dewtripont nRoln 995; Ron 2000). An optim eqence cn lo involveociologicl fctor . he ctre of lowincome contry my reilyccept only elect eement of Wetern legl coe. Smilrly,lr reform fi in "collectivit ocietie, in the enee Greif ( 994, fnction properly in "inivilit ocietie .

Finly, there i the iclt e of ongterm ociwhich preoccpie Mrx, Schpeter, n everl other pioneer ofoci cence. Iey, the erch for n optiml economic ytem cnno ignore longterm oc ynmic, nclng ytemc propenitieto crete n e new knowlege or tenencie to for ytem to regen-erte or egenerte. thoritrin oftype Y contin the ee of it own etrction; wil rent eeking neconomic cleroi eventlly trngle mrket ytem of type ?

Obvioly, flce election nlyi ccefl erch for theopim poicy regimei beyon the pe of ny grop of poicymker. he mking of comprehenive intittionl policy i ly a wlkn the rk or t let n poor vbility; moern ocl cience frfrom hving relible theory of ocil chnge. The wlkintherkmetphor i n pproprite chrcteriztion of the initi vice tht

offered in the ery on trnition to mr-ket in Etern Erope . Preictby, the vier electe pect of thetrntion problem for whch their tool ppere tbe . heirhowever, were eigne primrily for nlyzing the opertion properte of pottrnition mrket ytem.

Benhm, Merithew (995 hveclie tie eling with trnition to mrket in Eri thtppere in economic 989 n 994. hereport tht mcroeconomic topic (tbiliztion poicy) ominte thi

bet of the itertre. hee tie ly pply mcro-economic lyi irectly to the tbiiztion problem of the trnition economie. When the litertre of 98994 i irecty concernewth chnge, for elling (or trnferring)cpit et to prvte owner i the mot topic, perhpbece of recent concern in privtiztion of pblic



Degrees o Freedom in In st i tut ion a l Reorm 4

entepses Fnally, the ealy tanstion teate contans stong opnions, wth lttle scentc backng, concening the tmng ofeforms, especaly the elative meits of shock teatments (bg and grada approaches in the transtion

In the ealy yeas, the liteate pad little attenton to theoetcaland empiical isses egadng the nstttiona fondations of a moden maket systemstopcs sch as egal efoms, economc oganzaton, and pblc admnstaton (Mrel 1 995) . hs has now changedIn ecent yeas, inteestng new theoetca wok dealng explcity witheconomic tansitions has appeaed, and the pays moe atten-ton before to interactions between economy and the widersocial system (Roland 2000) . It is no longe srpising to come acoss

state stdies by economists examining sch sses as the sbstit-tion of pivate les and pivate enfocement fo fomal egal arange-ments and how pvate les wod affect the opeatons of ms(McMlan and Woodff 2000). A new mltidscplnay, hybidappoach to o instittional change is emegng, eminiscentof other hybrid dscplnes sch as sness admnistration or pblicadmnistration Yet it wold an exaggeation say a niedtheoy of change is on the hoizon

Defining "Imperfect Institutions

Neocassical welfae economcs does not povide poicymakes withtools are helpl for thinkng policy We haveseen that the noton of an economc system is not helpl, andthe concept of nstttion no sene in the absence ofoppotnites fo Pareto impovements (o, indeed, stctalchanges By assmpton al actos incldng poicymakers maxmizetlty and have aleady made wha they consde the best avalablechoces An economst who ns oom fo mpovement n sch a

has smply some constants, costs, o benets(ggetsson 990 chapte 1 4 Yet a theoy of instittona policy can-not avoid dealing wth inefcient or impefect topic ofths book Hence, we mst look for a deniton beyond the Pareto ci-

teion of neoclassical economics I popose a deniton of mpefect instittions that is n the spiit ofcompaatve nstttiona analyss Accodng to ths denition instittons be impefect eithe in o sense Aset of is mpefect in the eyes ofan oseve if he or believes that an alternative bndle of intit




tion wou provie a uperior oucome, a ene by the performancecrierion ue by the oberver (hi or her target preference function).For example, in the eye o an who ue the weath crierion(a o in thi boo) the intitution in country X are imperect i he

conclue that hey generate e weath per capia han another et ofnown to her in theory or pracice (uch a the initution

of ome oher counry) .Intitution are ai o be enogenouly imperfect when actor

owngrae intitution that they previouly juge a ective anhat an alternative et o initution reorme

intiuion) wou generate uperior Abtracting romnowege faication, owngraing of intituion occur when

acor ajut their poicy moe. Variou factor give rie o uchajument, incuing invetmen in new informaion,graual emergence of unexpece intiuiona ynamic an ranomhoc to ocial ytem.

Thee enition bypa both complication poe by the iea ounivera optimizaion an quetion o avaiable egree of free-o in reforming imperfect inittion. The rightlyor wrongy, that alternaive intituion wou give beer reult, aene by the oberver, when the new initution have beenbu may or may not concue hat ocia force wi boc reform.

The Determnacy Paradox

When actor o all ype maximize their objective nction, ormallyintiuiona policy i enogenou o he ocia yem, leave noroom for outie exper o inuence poicy. In hi worl, evenetructive policy reec he choice of raiona actorfora Bae ( 1 98 1 expain. The o theory of economic poicy (ee chapter 8 mae room for reform an expert avice by rigorouopimization of peronal from the political an ocialphere , retricting ch behavior to he economic omain.

Governmen leaer who ollow heir political noe are more lielyto oppoe qualitative initutional policie han quanitative policie

within an exiting policy regime; of the wo, quantiative intiuionalpoicy, which amount o ructura change i more iey to upet thepoitica baance Quantitative policy uually invove marginal

o one policy or another, holing the o power an wealth. In a tabe policyregime, uncion o hoe who conrol an coorinate the ey



Degrees o Freedom in Inst itut ional Reorm 43

instrments of quantitative policy are sually well ene an clearlyestablishe here is little uncertainty about the policy space of nc-tionaries at the central bank the nance ministry the environmentalprotection agency or the central planing bureau A set o permissible

an politically sustainable policies has been institutionalize the lti-tue of each functionary has been establishe an the igression ofeach agent is part of the social equilibrium

Funamental structural change iffers from quantitative policy inthat the former usually occurs in times of political instability or maorinstittional of the status be eitheroverrule or in the throws of a eep crisis before they allow raicalreforms Avocates of major institutional reform must

for the social equilibrium to issolve before they can act an then mustcarefully ajust the measures to the social an political environment

he literature has long recognie the limits to reforms Bhagwati 98 ) refers to the implications of enogenos policy as the "etermi-nacy paraox an a passage by Johansen in a review essayvivily the problem is reviewing the report of anofcial committee in the nite Kingom that ha appointe toexamne application of optimal control techniques to macro-economic planning might improve the overall performance of theBritish economy Feeling the Committee on Policy Optimiationis "almost apologetic performance of British policymak-ers Johansen makes the following observation [ 99 98, 569).

One so speak ask what egrees of freeom the Commit-tee asume for comparison o possile alternatives I alsorts of constraints referring not only to strictly economicaspects but to problems of information political pressures etcare then one might en up with the sort of overalsocial theory in which the government is enogenosan there will not be pointin iscssing hypothetically what woul have been the outcome ifthe government ha behave ifferently On the han onemay consier the government as a rather free ecisionmaker

with a wie scope for choice between alternatives

he new literature on institutions obviously lies closer to the eterministic of Johansens scale tan the freechoice as Dxit996 2) conrms in his of "transactioncosts politics Dxitrejects the common that a uty to




"son economic gments an leave poitica consierations to oth-ers. "his argment appears to assme that economic an politicalaspects are aitively separable in their effectsthat one can analyzeeach separaby an then n the total effect by aing together te two

caclations , says Dixit ( 1 50 . Not al scholars agree with Dixit s ic-tm, an many economists still arge for partia analysis of the socialsystem, with the economy treate in isolation from other sectors.Lcas ( 1 986 405 one of the greatest economists of or times, states,for example, "that the problem of controlling ination has been sc-cesslly solve' in a scientic sense. then as a footnote forskeptics: few societies have solve ofin a political sense. I o not see fact as qalifying my caim in the

text, any more than I wol view the crrent poplarity of creation-ism' as qalifying the scientic stats of the theory of evotion.

he varios approaches in the new literatre on instittions, whichwere examine in the rst part of this book, al spport the noton oflimits for reform, whether the theories on interest thestate, or cltre . s otline the implications for instit-tional reforms that are embee in these approaches .

an rentseeking theories emonstrate how incom-plete information, rationa ignorance, free riing, an costly collectiveaction make it possible for wellorganize smal grops evenin emocracies, to pressre the government to create instittions thattransfer wealth to these grops. hese measres typicaly rece aggre-gate wealth. Yet theories o not explicitly tell how

can escape from of special interests an avoi theirnegatiesm No grop of actors seems to hae aility andthe incentie to netralize these forces (or they wol have one soareay. Oson ( 1 98 sggests relief is most ikey to come in thewake of powerfl exogenos impses, sch as wars, that pset thesocia eqilibrim an issolve these

Another set of theories makes the state rather than interestthe force behin imperfect institions. he stae is moele as anenterprising actor with an agena of own (Almon 1 98 8 . Politicalleaers, both in emocracies an atocracies, form coalitions of sp-

porters an esign to create new client grops (Bates1 990 . All other things being eqal governmental eaers wo preferto bi growthspporting potica coalitions, bt as chapter 5

the crcmstances freqenty make imperfectan ba economics goo politics (in terms of for he leaers)

9 8 1 ; an 99 1994. he point




hee i that theoies of coalition poliics usualy o not ientify a pac-tica escape fom a etucive political game he playes ae lockein a geneal social

heories that expain the origins of impefect instiuions in terms of

cutural facto also offe little help to efomes One way that avesecutual hine economic gowth is by aising the cost ofenfocing ules of "goo conduct in vaious aenas of socialexchange Gametheoetic explanations of how counie bui "commecia moaity an ohe instiutions hat unepin specializaion,exchange, an economic gowth typicaly appeal to social stuctuesthat serve as focal points in epeate focalpoints vay geatly an inclue ideas o haed (Weingast 1995,

cuture (Keps 990 ethnic networks (Lana 994 Geif 1995 oieology (Hinich an Munge 1 992; Bawn they usually shae thefeatue of being a poicy instument of the We maythen ask whethe cuual esisance to gowthfienly instiuions

disappea if govenment ways to shape vaiablesaccoring to their policy nees he answer is no governments coulceate culture, an ideology by proclamation these informalinstitutions would become equivalent laws an egulations angovenment woul pomote specic norms to please interest goupsan coalition of suppotes Only when thee inteests seek economicaly efcient popey ights woul gowth esult

Degrees of Freedom: Dsequilibria and Divergent

Policy Models

Many economists an statesmen have discovere the politica ansocial limits to refo the had way Yet limits ae not asabsoute as appea in the liteatue As chapte 10 iscussesshocks estabiize the social sysem sometimes ceate oppotuni-ties fo efom his section examines how he incom-peteness of policy models povides anothe exit fom the eteminacyparaox

Uncetainty about policy moels, a manifeste in the notion of

enogenously impefect institutions, unemines the etemincypaaox as some scholas have ecognize Dixit (1996 30 unescoes the oe of both shocks an incompete moels when he states

"one ami hat thee ae some of feeom fo pol-icy making at amost al times, more at ome times than othes Inparticular the oppotunity to regime changes generally




aises at times of beaks ' in the system, when mao aws n the pevi-os aangements ae appaent 1 53) . In addition, noting that pblicpoicy spans a spectm fom specic opeationa totioal qestions, Diit ages that politicians can be moe ope to

epet advce on constttional les than on les lowe in the hiea-chy. les typicay nvolve geate ncetainty, whichpovides eief fom poicy deteminism.

I wl discss ve aspects of polcy modes (and the socia modelsfom which they ae deived) that ae elevant fo instittional policy.The ve points ae:

. Policy models ae typicaly incomplete.

2. Fims, and othe actos ely on thei pivate pol-icy modes when esponding to pbic policy meases .

3 . adst thei poicy models fo vaos easons.These adstments can change the popeties and effectivenessof social

4. of pivate policy is an instment ofpolicy.

5. Competiton among contending policy models is afeate of the policy pocess.

pets inence instittona poicy an pomote efoms eithe bypesading those in powe to alte the govenment's taget pefeencection, W = G(g, ), o by tyig to obtain thei fo a newmoe policy mode, = fa, z). In the latte case, the epetsact as salespesons fo paticla social technologiesfo eamplewhen economists advocate competng modes fo macoeconomicmanagement as eaing economists id n 2003 when they pblclydebated sometimes acimonosy whethe a poposed edction infedea taes wold stengthen o paayze the U S economy.

The winning side in the was sometimes takes ovetempoaiy dominates policymaking oganizations and even pofes-siona In a daing and Pattison (976, 78 seekto ncove the policy model " that is sed by the Paisbased] OCD in

the fomation of hypotheses fo as wel as fo poicy making. To discove the OCD policy mode pio to 976 , the athos seachboh pbished and npblshed oganizational docments. Fatanni

Pattison, of the BnneMeltze con-that a BitishKeynesian appoach to macoeconomic stabiia-

tion poicy dominates the commenting on thei



Degrees o Freedom i n In st itut ion al Reorm 47

sty, Hansen 976 , 42), who party falts the athors' methos annings, agrees that the OCD Department of conomics an Statis-tics was ominate in its thinking by British Keynesianism an "wasalways rmly anchore in British instittions an tended to think that

poicy that is good in Britain mst be goo for any other contry.Reecting on the OCD on Fisca Poicy, with which he

had been associate Hansen 976, 52) stated "It wold hary bewrong in this instance to characterize the OCD as an overseas missionary post for British Keynesianism trying to reform continental

poicies. To this he adde in a ootnote, "I recal once having seen an internal ocment where an werecale overseas contries ' The strggle between proponents of con-

trasting poicy moels, of course, is not limited to macroeconomics.Rork 996 reports on conicting policy moes for reforming theeconomic systems of lowincome contries .

Moern economic history provides many examples o contriessenly changing their policy regimes or either the whole economyor indivia sectors. Sometimes sch changes in irection are corre-ate across regions of the wor. Siegmn (996 provies empiricalevience showing alternative waves of andtion in the 900995 period in rope an select Asian an LatinAmerican contries. These and other examples suggest that perhapstimes the its min, I iscss in chapter 3 whichienties three sorces of new policy new policy moes, reistrib-tion involving a shi in power), an system repairsor example, ollowing shocks).

To we shol a that introction o new policy model orcontine spport for ol ones sometimes involves knowledgefalsication (Kuran 995. In their study of the OCD Fratianni anPattison 976) are of two mins abot why OCD experts peddleBritish Keynesianism rather than for example the athors' favore

monetarism. On the one to theathors, the OCD experts were geninely committe to the Keyne-sian view. On the other hand, there wa evience o knowledgefalsication. The latter conclsion is based on the assmption that the

personal fnctions of the OCD experts, with their basic goalsof selfpreservation, nerie the breacratic prefer-ence fnction. In particlar the authors claim that the OCD is

eclecticism hypotheses, whichthey interpret as a strategy of selfpreservation Fratianni an Pattison

2224). Fratianni and sggest that a switch by the




OCD from an o to a new regme of polcy recommenatons mightsmply reect a ecson by the breacrats to pate ther strategy for

n response to changes n the political and eological environ-ment Aong the same lnes the evidence incate that especally

towar the end knowege fascaton was common among poicy-makers an avsers n rope 's former Soviettype economes (Kran1 995 chapter 1 6 Hollander 1 999 .

Prvae Pocy Modes

We have iscse diparate pbic policy and how changes inpolicy sometimes emerge from competition among

iverse moels . I now trn to the role of private poicy models whichge the behavior of inividal actors. I rst iscss the generalhman propensty to moel comple phenomena n smpe terms andthen eamine the propensity of actors iving ner a new instittonalregime to initiate wth a ag an interactve

in their polcy Over time in private modelsand corresponding changes sometimes nermne social

that previosly ha fnctione wel; the nstttionsbecome enogenosly imperfect As issatisfaction grows epertspshng alternatve modes get a wer aence ncng pocy

I se the moern state of northwestern rope toilstrate the internal (endogenos) ynamcs of instittional regmes.

All face navoiable scarcity of information knowl-ege brainpower an tme forcing them to economize on theseresorces Research in several elds n people respondby empoying a series of schematic simplifying modes when theyinterpret their social an physical envronments. Consierableemprca evdence spports the theory both eperts and ornarypeople rely on moels . Dearo 's ( 1 995) mportant sty ofhow Amercans n the nclear age isof recent work in ths area . Dearo eamines whether there are qal-itaive ifferences in models an of everyay people (novices)and eperts (corporate managers n the aerospace an efense ins-

tries professiona efense analysts senior government ofcias andacaemc specialists). Althogh etecting fferences between novicesand epertsthe latter grop for eample thinks more abstracty andknows more weapons' "pertsrey on the same rles of that novices and theycombne in the same ntitve nerstandardze npro-gramme way (240) .




he introction n the twentieth centy of the moern welfarestate is a massive socia experiment, reecting new social models an

social technologies Lindbeck ( 995a, 9) describes the welfarestate as "as a trimph of western civlizatio bt in a series of papers

he has analyzed ynamic ajstments to welfarestate instittions thatare sometimes bengn bt in other nstances are haaros (Libeck994 1995a 995b 1997 Lindbeck Nyberg and Weibl 2003). Ifocs here on hazardos dynamics

Lindbeck makes roghy the following argment A sstainable,welfare state a economy with a large

share of the poplation at work he system mst also effectvely con-trol strong economic ncentives for cheating taxpayers an

benecaries who face high taxes and generos benets Effectiveenforcement reqires not only strict admnistrative control bt aso ahigh egree of sefenforcement throgh soca norms to overcomehazardos economic incentives In the workplace prior to the emer-gence of the welfare state, there was a relatively close match betweeneconomic incentives an social norms the past, a ecision not towork normaly invited severe economic harship, and cheating ontaxes was not very becase marginal tax rates were low

Varios social mechanisms can be evoked to explain why hazardosadstments come with a ag and o ot occr he gra

weakening of social norms when hey conict with strong economicincenives plays a fnamental role in this process Weakening ofenforcement is another factor As the of recipients of socialbenets increases and taxes are raised, control isalways expane With enforcement falling ehidcheatng becomes easier and more common especially in soca gropsover whch trational social norms have reatively weak inence Astime passes an new generations enter workng life the newwith no irect memories of the ol system may be ess responsive to

norms than were A major macroeco-nomic shock that suenly increases the nmber of those receiving social can also as a the ytem As thenmber of volators increases, potential vioators of social norms feel

ess threatened by social sanctions According to Linbeck ( 1 995a, 1 1 ) ,aer he process takes off a abrp "ketchp effect in chiseling ancheatng becomes possibe

he that Linbeck reectof private an policy models, to terms When

private actors adjt their ad aggregate otcomeseventaly will change In a welfare state, these astments may lea




to a ecline in pivate saving an a subsequent euction in the stock ofnationa wealth an the eslting economic ifclties can move the

to thei moes an instittional efom.Political competition i another possibe reason wh the welare state

eaches a cisis . Instea of aiming fo benets an taxes that ae sus-tainabe in the long n, in each eection oun poiticians compete boffeing thei votes geate benets (an implicitl highe taxes untilthe sstem cashes .

If hazaos namics n ot of conto an sbstantiall shinkthe economo exampe, b the o saving anlaborthe government ma lower its social levels.gops of citizens , sch as the elel, now face political isks The wel-

fae state was oiginal seen as an ecient wa to inse the pbicagainst economic isks that pivate insuance schemes hanle pooo at al . If the welfae state is hit with homegown economic stagnation an a sbstantia ection in the tax base, the govenment will

social benets, an the public will experiencein levels. For oinar an nexpecte cu-

taiment of sevices is a new tpe of isk, political isk, that ispaticual costl becase most peope have not mae plans foealing with contingencies (Linbeck 1 995a, 1 3 4.

Linbeck's wok on hazaous namics in socia sstems is notunque. he contains of seial intepabetween pblic an pivate moes. In pioneeing sties Kege(198, 993 an Bhagwati (198, o example, analzeastments foeign trae regimes. At thelevel, there is Vieto's examinaton of feea govenment reg-laton of the U. S . commecia ailine inust. Aiine egulation initiate a seqence of an eactions between the an theinust giving ise to inefcient opeations an steai inceasing costs . Higgs ( 1 982 pesents a vivi pictue of egulation namics inthe shing of the U.S . Pacic othwesttechnical egess an epletion. An, as a nal example thee isKege's ( 1 990 fascinating of namicsin the U.S . suga pogam.

In this chapte, I emphasize an obvios conclsion When socia sci-ence assumes that (intene ationa an goaoiente behavio

the maket to a social sphees, the of theeconomic an social sstem is impling that expets anreformes little or no scope to initiate instittional eform (other




than change areay My econd major point concern theneglecte role of incompete knowege in ocia change In thi con-text I introce a denition o "imperect tati copatible wit comparative itittioal aalyi Frther arge

that expanation of intittional change that rely oely on tatenance an changing eqiibria are erioly incompete ifthey ignore the role of incomplete knowedge It i nreaonable toae that people idea abot the natre of ocia and economicytem are tationary or nchanging or to ame that changing ocialmoel private and are not an independent orce in intit-tiona

The concept of a general ocial ha a efl role in

rawing attention to the imit of reform I arge that opportnitie forreform are created by rea factor that pet the political byrea ock an exogeno imple that ince actor to reviemodel and generaly by the prea of new ocial idea and modelThee actor oen interact; moreover a hitorica back-gro play a key roe in electing te new ocia eqilibriemerge dring reform



C H A T E R

Eluding Povey Traps, Escapng Hstory

ntroduction: Forces of History and a Handful of Heroes

As we saw in chapter , modern growth theory word knowl-

edge as the primary source of economic growth. According to new orendogenous growth theory, leading countries forge ahead by deveop-ing and applying new production technoogies, and growth aggardsfa behind because they are unable to adopt and apply knowedge thataready exists. The main point of this book, however, is that the tech-nical and even of copying and appying new produc-tion technologies is the fundamental factor progress indeveoping countries . Deong (2000 is close to truth with his haf-serious comment that a poor country needs only a handfu of engi-neering graduates to copy advances in foreign production technologies. My thesis is that poor countries ack social institutions that arenecessary compements of modern production technologies .

The chapter, which dealt with the concept of policy eter-minacy, the idea that internal dynamics, evolving poicy

and externa shocks sometimes dislodge entrenche socialequiibria and create opportunities for institutional reforms. Thischaper examines in more detal various that upset socialequiibria and initiate reform processes. But when such opportunitiesemerge, I argue, reformers cannot build from history limits

choices.The capacity to initiate major institutional changefor example,

to a new system of property lies gov-ernmental leaders and the politically powerfu. A countrys govern-

ment sets laws and reguations, codies social and managesthe poice as wel as other enforcement organizations. In terms of theconcepts introduced in chapter 8 there are four reasons why a government might fail to the necessary forgrowth.



El ud in g Povety Taps, Escap ng Hi story 53

. he leaers target preference nction W G(g givesgrowthpromoting social instittions a low rating becasethey are to threaten the leaers personal wealth orpower

2. The leaders lack political athority to introce certain insti-ttions necessary for growth; political constraints excle theinstittions from the leaders coice set.

3. he leaders poicy mode x = fa z) lacks the poicy instrments a

necessary for creating instittional conitions forgrowth. For example tools for replacing certain social normsmay be lacking.

4. The leaers rely on policy moes x = fa z) that misrepresent

the links between instittions an growth.

We can se historical case of chapter 7 to ilstrate the for reasons why pblic athorities tolerate imperfect instittions . In the casesty I claim that premoern society in Iceland have escapeire poverty an starvation if the contrys leaders ha promote newtechnoogies an organization in the sheries. Instea Iceland relieon meieval farming technoogy an lingere in a owincome socialeqilibrim. A breakthrogh wo have reqire cooperation withEropean shing bt conition precde withforeigners (the Germans the Englis the French or the Dtch) toevelop a stateof theart export instry. he spreme athority theDanish Crown (correctly) saw irect foreign asDenmarks control of the colony an Icelanic lanlors believeda instry wol nermine teir wealth anstats which was base on primitive farming. onition 2 was relevant in the eigteenth centry when the Danish Crown graallybecame willing to reform bt was not yet reay to overrie politicalopposition by the Icelanic eite. Conition 3 was of seconary importance Icelan ancient of secre property rightsan traitional legal norms were not in fnamental conict with amoern legal coe. Developments in the late nineteentemonstrate that traitionalist ieoogy with its opposition to new

instries and socia change was capable of slowing bt noting change. Finally 4 misleaing policy models apparentlypaye a signicant role in sharpening ocal opposition to reforms. he

inicates that Ielanic theevelopment strategy in terms of a partial rather than a gen




eral equilibrim moel that exaggerate the threat to farming anlanlors from inepenent sheries. he fears that a prosperousshing banrupt the lanlors via high wages an laco arm worers igore the eman eects rom rising incomes Ris-

ing incomes an greater eman for farm proucts wou increase inthe value of lan, an higher livig wou create a sustainabe increase in the supply of labor. Moreover, in the abor market, acommon wage rate in farming an shing woul have equale the margina prouct of labor in the farm sector. n other wors, the shing

have attracte labor with rewars comparable to whatworers were receiving in the arm sector.

When haarous enogenous ynamics an external shocs a

winow for institutional reforms, various avocates an experts play aprominent role in propelling the eforms forwar an inuencing the

they Many observers perceive the opportunity forreform as always having been present al that was neee was enthusi-astic reformers wiling to mae themselves hear. one ns noneasiness about limits to reform in wellnownaccount of his of heroes an their arge roe in successfulpoicy reforms. Drawing on his experience as an economic aviser tocountries in Latin America, Harberger escribes how a smal nmberof highpowere experts have profounly affecte economic reform inthe region, procaiming "his its origins in myconviction that successful economic policy in eveloping countries isvery far from being of forces ofthat happens when happens its has come. ar fromin every case about which have close owlege, the policy wol inal lielihoo have faie (or never got starte but for the efforts of aey group of iniviuas an within that one or two outstaning leaers (343 .

By profession, these reformers an experts were bank gover-nors, irectors of economic cabinet ministers (especiallyof panning an oen ecate at foreign niversities anwith extensive foreign contacts. sing their sills, personalmagnetism, an abunant energy, the experts persuae their govern-

ments to introuce better macroeconomic policies, eregulate, an lib-eralie trae an payments sometimes over violent opposition fromthose who expecte to lose from such changes or i not believe intheir effectiveness.

o one isagrees with the caim that only beings, experts




an reformers are capabe of esigning promotng introcing animpementng instittional reform. Withot hman ert no strc-

change will I assert however that perverse socialria dermie al wellmeaning reform efforts nti ew featres in the

poitca lanscape nexpecte economic shocks or erosion of olsocial moels make ofceholers revise their An eve whenthe poltical elte spports reform the cltre of a contry may proveincompatibe with the new instittions. Yet hyperoptimistic reformerswho possess sef knowledge an strong determination to promotetheir deas oen have roes One reason is that the tipping pointwhere new policies become acceptabe to a large nmber of pivotalactors sally is ncertain or nknown the actors' socal mo-

es are sbjective an not irectly observable. Moreover as Kranhas examined actors often falsify their preferences to accom-

moate social pressres. It folows that treless reformers are sometimes in ck. Moreover reformers an the rest of society may be

by when they sccee in opinonto the tipping point ths initiating instittiona

Once again let s retrn to the case of premoern Icelan. Whenthe contry naly saw effective instittiona reforms it was an exter-nal shock that pset the contry' s perverse soca eqilibrim: stepwisentrocton of international free trae in Iceand begnning in 787an clminating in 1 8 55 with free trae with a l contries. Free traeemerge in Icelan becase of the efeat of Denmark in theNapoeonic Wars an the estrction of the Danish navy British dom-ination of the North Atlantic an ieological and political move tofree tae in Erope Althogh "forces of history create condi-tions for hman agents of the Harberger typevarios leaers ranging from bsinessmen polticans an poetsactallyfoght for an introce the new social technologes plng thecontry in a new rection.

Using very large scale this chapter the next map thethat egins when some forces no a contry's perverse socia eqlib-

an if all goes well lea it into the realm of economicgrowth. Ths chapter rst iscsses varios implses an shocks that

pset the socia eqilibrim emphaizing their exogenos natre. Theremainer of the chapter illstrates wth the help of three cases howhistory lmts natioal polcymakers' choces. The folowing chapterooks egal the "transpant effect before examinng

concerning minimal property rights for growth.




Escaping Poverty Traps

In an inteesting Johnson and Robinson po-ie tiing eidence fo the longeity of peese social eqilibia and

ineffective socia technologies . They also expain abot theeqatesof the vaiation in cent pe income in fome coones bysing a theoy that asmes that cent socia instittions eect thenate of initial colonia instittions . In some coonies the opeanpowes set p extactive states; in othe coonies the settes tied toeplicate opean popety ights and accoding to theent instittions typicaly eect te initial path in the colonialcontext These ndings ae on an econometic estimation that

ses as statistica instments histoica data fo the motaity tes ofsodies cegy and saios visiting the coonies and opean sette-ments. he athos "docment empiicay that (potentia sette motaty ates wee a mao detemiant of settlements; that settlementswee a mao deteminant of ealy pacticein that thee i a stong coelation between ealy instittionsan instittions today; and nally that cent instittion hae st-ode effect on cent pefomance (2) .

The athos caim that thei "ndings do not impy that instittionstoday ae pedetemined by coonia poicy and cannot be chaged(Acemoglu Johnson an Robinson 000 9 Institutions can beimpoved and the stdy shows that the gains will be sbstantial btthe evidence also the idea of pathdependenceimplying in many one o moe of theconditions discssed eaie bloc instittional Demsetz(1967 pesents a moe optimistic picte that adances the agmentthat all commnities espond to new economic oppotnities by intodcing o ening excsive popety wheneve they expect schageements to net wealth. My is thatoppotunities ae ost becase social constaints oenwealthmaximiing podces consmes and politicians sending thei into eatie Not al ieDemetz's dictm; his theoy of popety ights is not a geneal theoy

bt a specia case. I sbseqenty discs vaios events and eveop-ments that sometimes soen the constaints that hod bac the evotion of popety ights that Demsetz envisioned. I nd it sef to dis

between the foces nitily tigge exogenousfactos that shape te efom pocess itsel. his section discsses thetigges leaving the deteminants of the efom path fo late.



Eluding Povety Taps, Escapng History 57

Many contribtors to the "how the West grew rich literatre(North an homas ; North Rosenberg an Birzell Mokyr agree with this view o the growth process assigning animportant role to etraneos circmstances an historical orces

Some of these athors, for eampe, emphasize the conseqences ofrivary between states or evoltion of new omestic political forcesthat chalenge absolte rlers an graaly introce separation ofpowers an emocratic constraints raising the opportnity cost ofeploitative policies. he iscssion that ollows ienties si cate-gories o that oen challenge lowincome socialan estabilize

Extena Pol t ics

he removal or aition of foreign political constraints can pset acountrys social eqilibrim an create openings or reorm, which inthe long rn may or may not be realize. Eamples o sch changesincle events pt an en to oreign omination (colonial orSoviettype), foreign in cops topping a omestic icta-tor an his or her coaition, or foreign military occpation an theimposition of a new legal coe an other social instittions. Foreignintervention or withrawal however has an ncertain impact on instittions reorms. he en of colonial omination has not alwayspt countries on a reform path; omestic poitica leaers sometimescontine a new version o the eploitive policies o the ormer oreignmasters. Also, the thesis has been avance oreign spport,as strctral loans rom the Worl Bank or poor Aricancontries, in some cases has sstaine rather than pset perverse politca equilibria an stabiize ictatorial regimes (Nulu an van eWale ).

Domestic Pol it cs

The social science oers convincing insights into orcesthat maintain a owincome socia eqilibrim, where no pivotal actor

has both the incentive an the ability to efect. o epain why actorso not leave poverty traps the theory reies on theoretical mechanismssch as the prisoner's iea free riing or open access an sesthese tools to epain the conseqences of actors schiverse an hostile ethnic weak states that are not lly in con-trol o territories, rlers short horizons an narrow




powe bases (see chapte 5) o welloganize special inteest gops.O nestaning of ndesiable social eilibia howeve s notmatche by compaable of the ynamic path fom annesirale eilirim poit to a more esirale one

Many histoical acconts sggest that tansitions fom pevese tobenign social eilibim ae oen associate with vaiosatonomos omestic (an also extenal) evelopments that ate thebaance of powe. These foces iclde the gadal ise of a new eligion o political ieology iminishe hostility between ethnolingistic

the ise of a new social cass an othe compaable eveop-that sally ae not ner the iect contol of governmet pol-

icy. Sch slowly evolving changes in the envionment of key ecision

makes eventaly make it logical an feasibe fo them to solve pevi-osly intactable poblems an fo example to estabish emocaticconstaints an sepaation of powes to aange ceible commitments by ethnic gops to coopeate with each othe to consoiatestate power ove all its teitoy an to cooinate ieologica beiefsof major social gops concerning legitimate state behavio.

The next fo impses on o of nata esocessen economic cises eclining elative economic stats an newsocia moesae not clealy istinct fom the previos two cate-goies (extenal an omestic I ist these foces sepaatelybecase they oen a life of thei own in the liteate.

Naural Resouces

It i tempting to concle nexpecte scoveries of aat nat-al esoces sch as ich iamon mines o oi eseves wil joltconties into efoming thei stcte of ights. The newesoces might ease nancial constaints that peviosly blockedefoms o activate the Demsetz ostbenet pocess costlyinvestments in impoving popety ights theienfocement. Howeve the eationship between gowth an natalresorces is complex and natralsometimes enable contries to each elativey high levels of pe capita

income while ey o infeio social instittions. In othewors abnant natal resoces economize on socialwhich is the case in many oilpocing conties . Fo exampe a govement may shae the esoce ent with foeign itempoys to extact poces and maket the aw mateias ansiers leave few taces in host contry provie expert knowl




ege Prosperity base on natural resouces but relying on stagnantinefcient socia structures is unikely to lead to sustaine economicgrowth The initial spurt will not last the lack exi-bility to cope with aerse eelopments such as epletion of the

resources fal in emand when substitutes become available in thewor market or omestic struggles regarng istributon of theresource rent If a resourcebase economy lacks the capacity todevelop social nsttutions for supporting moern inustries it willeventualy enter a path of ecine

The scenario that I hae presente oes not necessariy thecurrenty popular concept of the curse if the is takento mean that a iscoery of natural resources necessarily

impee socia progress riving otherwise capabe countries off theirgrowth paths (Sachs an Warner 1995; Gyfason Herbertsson anoega I smpy argue that abunant natura resources maytemporarily boost the economies of countries that generally ack thesocial capacity to import an appy moern prouction technologiesTwo other possibilities also exist: ( 1 the resource curse where the is-coery of natura resources estroys a country' s existing ornascent poitica an social capablties an blocks their future eel-opment an (2 the Demsetz case whereby such iscoveries createncentives to buil effective social nsttutions for growth Hstoricalcases probably support all three hypothesesfor example the eco-nomic history of North America appears to t the Demsetz theory

the origins of effectie rightsIn sum iscoery of abunan natural oen the

preailing social equilibrium but we cannot generalize about theeffects of resource abunance for longrun growth

Sudde n Economc C ises

In that trigger polcy reversas the econ-omy iterature (which typically eals with reforms in macroeconomicpolicy rather than with major change) gies prie of placeto suen economic setbacks or crises such as hyperination massie

colapse of export markets an balanceofpaymentsproblems In a stuy of eight countries Bates and Krueger ( 1 993 nthat reforms were always unertaken when economic contions ha

conomc shocks sometimes nitate policy cycles withalternating phases of reform an crisisgenerating poicy packagesSuch cycles can foster longterm economic stagnation a contrary




manner severe economic setbacks can also create strong isactionwith crrent policies and instittions mobilizing an ective reormmovement Chapter 4 examines dierent responses to economicshocks ad reers to an empirical st b Rodrik (998) that ses

variation among contries in atent social conict and eective instit-tions o conict management to expain ierent responses toshocks Again prior conditions etermine how contries respond toexterna events

Dec i n i ng R e lat ive Econo mic Status

or individas amilies an nations ew social evelopments have

stronger pschological impact than the experience o a ecine in eco-nomic stats reative to one's reerence grops For nations relativeecline brings not onl a sense o hmiiation sometimes aso earso political and militar aggression b other contries In social sci-ence the bestknown o the relative wealth eect is Ger-

that elative backwardness has positiveon latecomer economic evelopment incing reorms Ger-

schenkron bases his theor on the development experiences o RssiaGerman Astria an Blgaria He conces that thegreater the egree o backwardness the greater the state's role in creating conitions or growth Fishlow (989 46) rightl criticizes Ger-schenkron's relativebackwardness thesis or its inadeqate attentionto political constraints claiming that Gerschenkron "pas tooattention to the classes an whose interests the inter-ventionist state mst aeqatel incorporate i it is to pla the centralroe reqire

or or prposes the relativeecline expanation has the amiliarisadvantage o not expicitl teling s conitions eventall

growth aggars respon to their sinking hein Gerschenkron's sampe sooner to relative

ecline than man hird World contries have one he relative-wealth is knowing moreabot the nderling social strctre its impact is not preictable

New Socia l odels

the carriers o new newsocial technologiesthe organization o societso it is notsonable to expect shiing social models pset low



Eluding Povety Taps, Escapng History 6 1

income social euilibria by changing strategies an behavior at varioussocietal levels, from the househol to the national government. Mostmoern scholars ten to iscreit Max Weber's thesis that the "Protes-tant ethic was the riing orce bein the rie o moer growth

The roots of the rise of the West go further back than the Reformation.Yet the iea that earlier religious forces contribute to the rise ofEurope remains alive. Moreover, erosion of antimoernist religiousmovements (for example, the collapse of theocracy in early twentyrstcentury Iran) can create conitions for growth.

In aition to ethical an practical moels aiyhol an wor routines, are gran policy try to cap-ture the essential properties of economic an political systems. Com-

bine with unexpecte shocks, uncertainty about the properties of thesocial systems can lea to wholesale rejection of particular socia mo-es, acceptance of new moels, an funamental revision of government policy, even when basic poicy targets remain the same (see chap-ters 3 an

pervasive uncertainty about the nature of social systemsexplans why nations sometimes seem stumble onto growthpromoting social technologies . Recent work by Weingast an his coauthors, ana-yzing what they cal marketpreserving feeraism, ilustrates mypoint an his coleagues argue that uring the past 300years, has characterize the politicalorganization of the growth leaer in each perio (the Dutch Republic,Englan, an the nite urthermore, scholarsthat ipure initial versions o this constitutional proba-bly are on the erge o turning China, Inia, an Mexico into emerging economic giants .

The theory of marketpreserving feeralism buils on Tiebout'smoe uner which issatise vote with their feet an

eave their local communities. he Weingast ( 995) marketpreserving consttution combines an market for anoutputs, local selfnancing an control of economic organization,effective local nancial (no the gov-ernment, an creible commitments by all units of the feeration not

to unermine but to preserve the system an its arrange-ments. In such an competition among lower governments for inputs an tax revenues compes them to provie growth

environments to experiment with best available socialtechnoo gies .

eeralism is a perect example of reere




to earlier as gran policy moels proviing visions of national evel-opment ner particlar socia technoogies. As far as I can tell how-ever in many or most cases marketpreserving feeralism emergedwihot the key payer eing lly aware o the economic properies o

the systemthey i not prposefly plan a new system with the aidof clearct policy modes. Consider Engan ring the InstrialRevotion. At the time Englan was not a federal state de re defacto however it met the conditions of marketpreserving feeral

he important roe of circmstantial forces is particarly evi-ent in of poitica evelopments in India China and Mexicotowar the end of the twentieth centry may represent initialsteps towar marketpreserving feeralism (Montinola

Qian an Weingast 995; Parikh and Weingast 1997; Careaga andWeingast In these three cases eaers of snational nits whoelieved that they co perform etter than federal governmenttook the initiative to reform their local strctre of property rights.

these id not elong to free ederal mar-kets (one of conditions) they have y trading in world markets.

Parikh and (1997 arge that in Inia a small grop ofstates recently have exploite the sl im majority an the political weak-ness of a new feeral government (which has replaced the perennialCongress claiming power to reform their local economies . In afeeration the demonstrated ects of otstanding economic sccessy a few refoing governments can incite reformersthe system. IS Bt ripples o reorm are only one o many possilecomes Very little is known aot the origin an maintenance of cred-ibe commitments to marketpreserving feeraism. What forces forexampe wil prevent a federal from intervening to protectnsccessf local economies with sbsiies or y alowing them toraise trae Sooner or later coalitions pressing for protective

are likely to emerge threaten feeral systems of theWeingast ( 995) variety.

The foregoing discssion of the six overlapping categories of implses

and their effects oes not imply anything at al may happen.Rather it estalishes that history matters. Both gametheoretic workon comparative instittions (Aoki 200 1 ; Greif forthcoming) and historica analysis (North 1 9 8 1 ) emphasie how the preexist-ing context selects constraining the choice setavailale to a Social systems have evove along different




historical paths so the conseences of comparable shocks or eventsneed not be identical across contries. he heterogeneity of the pastmakes it all the more difclt or socia science to generaie abotsocial chage Of couse i the cotext o paticula stuctues it may

be possible to make sound pedictions.

Politial Hstores and the Reform Path

his section uses three cases to illustrate how the political history of aaects the direction and speed o institutional reorm aer

pesses o change have bilt p. coside thee types o politicalenvironments. irst I ook at in which gov-

ernmental units pressure a reluctant national govenment to reform.Second I conside the reverse sitation in which a wiling nationalgovernment meets opposition to reform from its etrenched lowerunits. Finally I discuss circumstances in which poicies promoting moderniation challenge the interests o neither central nor oca gov-enments. The cases o ome Soviet andwil sed to illustrate each of these historica circmstances.

Rel uctant Center, Wi l l i ng D istrcts (C h i na

Aer sffering two episoes o f monmental economic setbacks eachattributable to perverse economic policies by the center (the GreatLeap owad 95860 and the 96676) in979 a pocess o efom got way in China that ovethe next twenty yeas geneated one o the wold's ates(moe than 9 percent annual rate of gowth in per capita income) andraised the country fom poverty to middleincome levels (Qian 000a000b 00 Roland 000). here are many ways a story of schprofond importance complexity bt here I focs on only oneaspect forces the reform process (Henning andLu 2000) .

The asco of the coming on top of theLeap orward le China's leaders (of the Party and the nation) with

an awkward choice between the stats uo and economic reforms.Withot institutioal reform China seemed to be headed for relativeeconomic and military decine and grassroots pressures for refowere growing. economic experience and lessons from other

that eective reorms greater reliance onincentives and competitive pessues instead o plan indica




tor n bureucrtic control . he ubtitution o price or commnhowever woul crete uncertinty or mny prty unctionrie bouttheir ocil n economic poitio n in the long run poibly reeehrtocotrol cce o reorm eing towr cpitlim with

unoreeen conequence or the ommunit Prty. In the uncertinevironment o the te 970, the reltive utoomy o Cin'region n itrict h cruci impct o the reorm proce.

In the 970, Chin' tructure o centrl mngement reecte iterly (griculturl) tge o eveopment n the huge ize o the coun-try n it wel recent recle epioe o ecentrl-iztion begining in 1958 . hee circumtnce gve ubntionl gov-ernment uonomy, involving r greter ocl

contro thn previle t the time in the Soviet Union (Grnic 990Qin n Xu 993. he reorm tht begn roun 979 grew out oent ct by rmer worker mnger n locl government nprty eer in region where the power o the ntion governmentw reltively we. he locl inititive involve incentivebe

in economic orgiztion tht iitilly trnormeChin' griculture n ter it mnucturing ector. Following ece o uphev, the oil w rey or economic reorm, nlocl experimenttion n reorgniztion rpily n mticllyincree prouctivity in reorming gricuturl re which iturn h emontrble eect in other loction. Subequently tep-wie locl inititive in mnucturing crete imilr ripple eect.he power elite t the center relize tht the cot o oppoing reormw riing rpily n ecie er conierble internl truggle

bet choice w to hpe the ew eveop-ment (Qin 2000b .

Although ultu Revoluion hd upet hin' ocil equilibrium, trengthene locl leer vivi the politic n crete opening or tructurl chnge, vriou orce nonethele coulhve growthpromoting In uring mjo retructuring o property right, potentil oe hve trong incentive to the reorm. When expecte loer repowerul or hol trtegic poition in ociety, trnition re liely to

i unle compromie re eche juting the new tructureo property ight meet the inteet o the lo er but without remov-ing (l it growthpromoting poentil. Economit who evluteuch olution in ioltion rom politicl ctor re

to be impree, other trnition pth imply re notvilble . At one level, the complex reorm in hin cn e viewe




a seies o sccessl compomises that peseved gowth and po-tected potential oses . In a seies o studies, Qian (2000a, 2000b, 2002)describes the details o these compromises. At the ocal and entepriseleels reliace on economic icenties and market orces leaes litle

o no role or unctionaies o the ol system, who thereore hae mchto lose. Yet the nate o eoms in China povided thesepotentia loses with an oppotnity to potect thei inteests. ownshipvilage entepises (VEs) became the cucia vehicle o gowth inChina's economic miacle appeaing initialy in agicultue and latein and other sectors. VEs have a nonconentionalownership om neithe state nor private ms but local governmentms, a structure that provided ewading oppotunities for displaced

unctionaies of the centra management system.Moreover the country's legal ramewok has deed the conven-

tiona wisdom. he move away om state contol o economytowad maket eationships took place in a legal envionment that didnot dene o deend pivate owneship and relations. hestate also been ambigos in its spport o private property, andpivate ms recently have developed sowly. In this environ-ment, the thriving VEs have reied on protection rom local govern-ment and local power brokers bt ecent trends toward priatizatonhave impessed on the Chinese leades the need o a moden legal

In China the socalled dualtack appoach has also poided a tem-poay shield or potential losers rom eorm by allowing organi-zatios designed or central plannig to operate alongsidebased According to dualtrack approach, economic agentsmust st meet basic obligations in the planning sector (where plannersset the prices and ae ree to poduce o the maket at reemaket pices. he potects potential loses in panning secto whie inceasing eciency incomes al he elation-ship o ocal govenments to the goenment a compaa-ble stucture: he collection o taxes and provision o local publicgoods remains with local govenments (owner o the VEs), whichare reqired to pass a xed amount o evenue to the cental goern-

ment but are alowed to keep the residual. he scholaly liteatue has debaed whethe it was wise o Chinato select a gadal dualtack appoach instead o attempting a swie

moe some o the ome Soviet conties ohave tried. Sachs and Woo (1997) asset that China has har-

vested rapid gowth not becase the country ollowed a




gaual appoach but in pite of it he autho claim that etaining inefcient tate entepie and letting them opeate aongide theemeging nontate ecto lowed gowth it economic ogici clea, thi agument oeloo the ocial obtacle to change Hi-

toica an poitica account of China path inicate that it eco-nomic efom ae the outcome of a tugofwa between a eluctantnationa govenment (the paty leaehip) an wiling ubnationalgovenment (Hennng an Lu 2000) he fundamental impule iving the efom i centipetal, notwithtanding Beiing' et tolegitimatize and cooinate loca initiatie, anticipate an channelnew eelopment , an moi national intittional enionmentto the efom If thi o the natue

of he efom i coect, the ebate, whethe the Chinee wee wie ounwie in choong gaua intea of big bang efom i immateialhe Geat Leap Fowa may have been Mao choice in ome ene,bu nobody "choe the cuent gaua appoach he countefactualhypothei that big bang efom hae een betteeconomic eult o China i not o pactical inteet becae we can-no ignoe the hitoical political context

he futue of China' economic efom i a puzze of monumentalimpotance but emain coue b uncetanty Since the ealythe iection of economc change ha been fom econdbet tanition

to intittion (a ene in puely economictem) he dual tac in poction maket ha been gauallyphae while potential loe hae been caelly compenateMoeoe, the 990, the VE hae been piatie, ana contitutional amenment ha gien piatel owne moelegitimacy In pite of thei vey uefu ole in the tanition, VEinvolve high tanaction cot an elatvey weak manageial incentive (Qian 2002, 40) Pivatization of VE ha been eatively uccefl, intittion efo

not lea to a efom tap Attempt to efom tate-owned entepie howeve, hae genealy aile, with manyeom meaue woing pooly o not at all (Qian 2002, 44)he paty contol of appointment of manage i the mao ouce of

faie attempt efom the SO (Qian 2002), which i eminicentof aile efom in the Soviet economie of Euaia (ee the following In China howeve the fat gowth of the nontate ecto

ha o faiue in the tate ecto, which ha hun in el-atie impotance (Qian 2002, 47)

At beginning o the centuy, the ucce o economic



Eluding Povety Taps, Escapng History 67

reforms in China ha aggravate the obvios friction between capital-ism and commnism or more generaly between economic and politicalforces. If China is to maintain growth an catch with theest the contry mt sccesslly netralize potential sorces o

conict. In particlar, the ongoing diffsion of market relations anexclusive ownership will nermine party elite's position of power,and mch epens on the eaers responses. Growthfrienly otcomes are certainly possibe. China may ndertake a smooth transitioneither to emocracy or to noncommnist form of atocracy, in eachcase interference with longterm economic growth. At leastthree navorable are also posible. the leaership mayattempt to protect political qo iscontinuing the transi-

tion to markets . Recent history indicates that political leaers who sc-cee in diverting attention from economic reform must instea offertheir people new highy salient focal points, sch as fears for the contrys secrity. Second, strggles at the top over the irection of eco-nomic affairs bring political chaos and economic breakown.The thir isse o concern is averse social conseqences of rapigrowth. hen extremely rapi growth affects regions an socialgrops neqally, which it amost always oes, spontaneos nrest orconict may spread from disaffecte loca nits an throughot thenation. In other wors, marketpreserving feeralism may backreinstea of generating orerly competition among instittionalments, rapi neven growth can fan the res of civi nrest.

The economic an politica o China in the twenty-rst is of paramont importance, yet we know little thelikely corse of events Inee rapi economic growth in dring the lst quarter of the twentieth centry startle most economists,including experts in the economics of property an our forecasting skills for mor social change have not sbstantiallyimprove. Stil, the most nlikely fte evelopment in tht Ican think of is the combination of transition to own-ership an markets, rapi growth, and a stable role for the commniststate.

Wil ng Cente , Re lu ctant Agents (U SSR

When peope praise or blame China for taking the slow roa to reformthey sometimes forget that prior to their colapse, the former Sovietnion and the Soviet economies of astern attempte graal

reform. went on for decades,




faie miseraby an many people came to believe that the internallogic of centraly manage economies mae the systems irreparable(Nove 986 992; Kornai In this view plan inicators com-mans an party control i not mix with partial lieralization o

prices. Winiecki (990 996] argues however that the reforms inSoviet Eurasia never succeeed in replacing bureaucratic control withmarket forces because mieve state functionaries the potentia lo sersfrom reforms aways found surreptitious ways to retain their controlof the prouction process .

Soviet economic ecine is a classic example of internalynamics a process that mae Soviettype economies increasinglymore inefcient reative to economies (ove 986;

Winiecki 986. The passage of time accentuate several funamentalprobems in the Soviet worl. Positions of leaership were le withpeople who showe outwar signs of oyalty to regime rather thanprofessiona competence an this practice graualy lowere the levelo efcacy in Soviet organizations In another evelopment the central

increasingly ysfunctional in a wor ofrapi technoogica change. When enterprises implemente new tech-noogies their prouction ows were temporarily interrupte creating suspicions of mismanagement an isrupting the planning system.Moreover the system itsef was not a fertie source of new technologies. The task of centraly coorinating the economy became moreifcut with time because prouction relationships in new and tech-noogicaly avanced inustries were oen more complex than those oftraitiona such as coa an These an other time-relate prolems put the Soviet economies on a path of longtermecline which ha averse consequences for the rulers. Faling aneven negative growth rates weakened public support for leaders giving omestic rivals an opportunity to chaenge the eadership an unermine national defense an geopolitica ambitions. The Soviet leaerstherefore eagerly sought reforms that raisetivty an economic growth. Rather than sur economic colapse thetotalitarian Soviet leaers were reay to sacrice own-ership for private ownership an a marketbase economy in an auto-

cratic state. In a marketoriente ictatorship branches of thetop leaershipnamely top politicians an aministrators the policean the militarywou still prosper but there was also an important

of probable losers .The economies of the Soviet Union an its satelites were

centralized and hierarchal in spite of




othe similaities o opeate the economic system, Soviet leaeselie on two chains of agents eaching fom the highest anks of gov-enment to the entepise level: a chan of aministatos an managesan a chain o Commist Paty nctionaies o moitoing the

manages. o iscipline the cental management pocess an fo otheeasos, Soviettype managemet was chaacteize by planneages tat planning), incling shotages of cosme goos In thisenvionment of shotages an ationing, the athoities poviefavoe gops with infomal access to scace goos an sevices,which became the chief of pivilege A tansitio to maketswol gaally the amiisteing an oles oSoviet manages an appaatchiks, epiving them of thei vaios

pivieges Winiecki 1990 While top beacats ha a goochance of sviving in a new system, milevel agents ha few goooppotnities an wol become most signicant gop of losesMilevel manages an appaatchiks wee selecte fom a shallowpoo of actos who caime loyalty to the system ha few ma-ketable skills hei systemspecic hman capital wol epeciateapiy in a maket giving these actos a stong to economic efoms.

In the Soviet Union an Easten Eope, economic efoms ogi-nate with leaeship at top an the wee passe own thechain of comman to be implemente, enfoce bymieve opeatosthe potentia loses fom sccessfl implementa-tion he efoms began on a small scale as ealy as the 1950s, anWiniecki 1990 [1996]) how nctionaies eshape the

to etai i some mane alabe contol oe the poc-tion pocess he nate of the esistance vaie Refoms wee attimes effectively abote at the while the fnctionaies petene othewise Anothe stategy ivolve making the efos,eibeatey bt secetly, intenaly iconsistent, which the mea-ses fail an fo abanoning them When efomsinitialy scceee, the fnctionaies evese them, claiming that themeases ha gone too fa an wee ispting the economy

Govenments ae saly neee to initiate an implement lage-

scae nstittional efoms, bt the two cases of Chinese aneconomies shol emin s that govenments ae not moolithicDivie inteests an conict among levels a baches of govements oen efom When a goven-ment attempts eom, it oes not stat fom scatch It cope witha enowment of political factions an inteests of vaying




We trn now to a nal case a unie African sccess story in whichnationa leaders are supportive of growthoriented reform and owergovernmental are cooperative.

Wl l ing Cene, W l ing D ic (Bowana

Africa' s sbSaharan region had lower per capita income at the end ofthe twentieth centry than in the mid960s. Most contries of theregion lack social capacity to update their production methods andappy new technologies and the problem is uite severe compared toother parts of the world. A alternative explanation blamesAfican economic decline not on inadeuate social institutions but

rather on natural factors and geography (climate diseaseand transportation costs for goos and knowledge (Bloom and Sachs1998 Galp Mellinger and Sachs 1998 Sachs 2001. The naturalenvironment it is said inuences the productivity of agricuture andthe uaity of and thus the level of income. A thirdexplanation trade as the engine of growth and explains poorgrowth performance a country's limited integration into inerna-tional trade networks (Frankel and Romer 1 999. n this study claimthat instittions althogh timately the answer is an empiricalissue. Rodrik Subramanian and Trebbi (2002 have the relativeinence of instittions geography on income levels aronthe word. The athors employ recently developed statistica instru-ments for geography and trade to separate direct and indirect effectson incomes from the explanatory variables. They also allow forreverse caality The authors instittions are con-trolled for geography and trade have at best weak direct impact onincomes whereas the uaity of institutions has a strong impact onincomes. Geography and trade however have sbstantial indirecteffects by inencing the ality of instittions.

f we not the geography an weto show how political social circmstances have prevented poor coun-tries from social technologies. Why have African lead-ers failed to built property rights for growth? Do national governments

fai carry ot effective reforms becase they lack the necessaryincentives or poitical authority? What abot loca and regionaluntswhy do they not compel their national governments toreform? The of economic stagnationin Africa emphasizes political history. National bordersoen articially drawn in the century by the



Eluding Povety Taps, Escapng History 7 1

coonial powes typically englf an abitay colection o f ethnolin-gistic gops that peviosy had not fomed an oganized politicalentity (Eastely and Levine 1 997) Attempts by nationa govenmentsto irodce modern systems of poperty rigts oen chalenge the

weat and stats of leaders in traditional sbnational grops whothen oppose sch meases o compicate efcient nationalgovenance and modeniation in the postcolonial peiod socalledcoonial indiect e which elied on taditional leades sch as paamont chiefs had stengthened taditional athoities that oppose thenew ode When independence arived many Afican weein dire straits: laced infrastrctre and hman capital yet their

mistrst of West and its ways oen made them elc-

tant to borow Western nowledge and se Westen advises According to Bates ( 1 98 ) the most effective political strategy for

capting and maintaining powe in many pats of newlyAfica has been to fom a naow winning coalition of the ban elite

civi sevants the military and captains of the incipientban indstial sector narrow spport base made it both possibleand effective for the rles to reward thei followes not withwith semiprivate and goods eithe throgh direct resorcetansfers o indirectly by ganting them vaios monopoly ights Inthese pimaiy agicltal economies the agictal secto becamethe taget of estctive expoitation by the state theeby ceating powerf disincentives fo podces Inastcte pojects whenthey wee not neglected wee sed as chips to pay off politicalcients and divide and re the In this environment theconstttional strctres evoved pt few restriction on abses ofpower and the lac of democratic constaints aised the staes in thepoitica game

hese acconts of the political economy of decline in Afica doassme that the leaes in the egion ae incompetent o

they seen as the of histoicalcircmstances that did not allow them to form egitimate encompass-ing and growthoiented coalitions Sitting in the middle ofthis growth tragedy Botswana which was in dire staits at the time of

its independence in 1 966 is the great African exception Dring thethid of the twentieth centy Botswana enjoyed the wold's highestate of pe capita growth (ove 7 pecent pe am In a stdy tat

both thei of "how it andalso and histoy of the case Johnson and

arge at independence was favored




by a political history that enabe its leaers to lay the social founda-tions of growth.

no scholar claims that Botswana has beenbecause its leaders discoered and pursued noel and unconenional

economic policies (Acemoglu Johnson and Robinson 2001. On thecontrary Botswana established a modern system of secure properyrights and a welfunctioning market system and displayed disciplineand restraint in macroeconomic management. he puzzle concerning the country' s economic success centers on the socia and poitica foun-daions o the poicy choices made by its leaders . A look at the hstori-cal facts reported in and Robinson how-eer reeals such of factors that

explanations of Botswana's high growth tend become oerde-termined. My purpose here is not to proide new explanations for the"Botswana economic mirace which is already he subect of a largeliterature but to emphasize that the basic causal actors typicallyinole features o the social enironment at the time ofindependence. Consider ollowing background actors

As Botswana was ony of perpheral interest in colonial timesBritain did not fuly actiate its "indirect rule or take othermeasures hat strengthened traditional eaders. herefore traitional leaers were weak when Britain le an thenationa goernment could easily consolidate its hold on thecountry. Botswana's modernization erts did not meetsignicant local resistance Johnson and Robin-son 2001

As Botswana is relatiely homogenous ethnically and linguistically government did not face he chalenge of dealing wihsectional hostiiy and lack of cooperation among heerogeneous groups which is a maor probem in many Africancountries (astery Levine 1997.

he poitica structure o traditional Botswana included adisoryo males at local and national leels. Scholars

debate whether these assemblies which are not characteristic

of precolonia African sociey were rubber stamps or nascentform of democracy but they seem to have contributed toical stabiity and democracy in the independence era (Acemoglu Johnson Robinson 200 1 , 23) .

n Botswana the traditional rbanrural political split and theusual Arican exploitation of the rural sector was not an init




ing political strategy. Agricltal interests were a dominantorce in the winning coalition with cattle owners holding p totwothirds of the seats in the National Assembly (Acemogl

and Robinson

hese and perhaps other environmenta actors apparenty madepossible or the government o independent Botswana to srvive whilebilding instittions for economic growth. At independence the contrys ormal edcationa eve was dismally low. Faced with initiallack o manpower in an move the governmentsogt ot skilled bt oreignborn civil servants and obtainedvarios technical advice from while giving highest priority to

investment in edcation at home. For bilding its manactring sec-tor Botswana relied primarily on direct oreign investment which hasmeant domestic manfactrers demanding protection didbecome important players on the poitica stage.

Finally the case of Botswana and its vorable political environ-enables s reject crse hypothesis at least as a

general rle. he discovery aer independence of enormosy rich dia-mond mines did not throw contry of corse. he diamondresorces (which yearly accont or abot 40 percent o gross nationalprodct have been sed to spport economic growth esewhere in

resoces have ele civi wars rather than growth.he experience of Botswana seems to conrm that the conventional

wisdom concerning the appropriate mix o policies and property rightsfor growth also holds or Arica. this case oersno lesons at all or rest of Arica becase other contries cannotrecreate their history. In their search or growth the example oBotswana's political strctre may o corse help other contries tobetter their targets or politica development. However theabiity of nations to consciosy reform their fnamental politicalstrctre in a short time oen appears to be which isnot the same as saying that reormers in these contries shold give p.Finaly the Botswana case nderlines or limited to recognizegrowthriendly social conditions and predict where instittional

reorms will scceed. In the 960s or example manyeconomists were optimistic abot Arican contries sch as igeriabt had itte hope for Soth Korea. Indeed or social models areincompete.



C H A T E R

Mnimal Propey Rghts adLegal Tanspants

Assming that the refo measures have alreay passe throgh theforma poitical process, we focs here on problems with impementa-

tion. he of reform is examine in the context of legaltransplants.

he transfer of legal institutios countries has ha mixedsuccess, indicating prodcton technologies travel better thansocia technologies . he transfer of lega rules is actually an attempt totransfer patterns of behavior, which reqires that actors in the targetcontry ast an coorinate their policy moels to a new instit-tional environment. lega transfers also that theauthorities allocate resources to the of legal-ityin other wors, that they provie necessary infrastructure andinpts for the legal system. I wil discuss some of the reasons why legaltranspants fail. he other concern in this chapter ies with the minimal(forma or infoal reqired for supporting growth. In thiscontext I raise severa qestions. Is a weak or a strong state a greaterthreat to growth? Is there only a single appropriate strctre forgrowthpromoting property rights? And can a country

costreducing to provie propertyrights for growth?

Diuse Oppositon to Institutiona Reform

In chapter I arged that the fnamental reason why some contriesare poor and unable to use foregn prouction technologies is their

inabiity to apply new social technologies necessary for supporting amodern economy. hese do not setinstitutions because their leaers lack incentives or political spport tointrodce reform or because their reform measures fai when they aretried. Institutional reform fails for many reasons al of which involveincomplete social modes . In section we are concerne with iffse



Mi n i ma l opety R g hts and Lega l Tansp l ants 75

social resistance roote in incompatibility between ol an new socialtechnoo gies .

In the social sciences perhaps the best known empirical case oincompatibe social techologies is the stdy by Ptam with Leoardi

and anetti (1993, which examines the attemp initiated in 1970 byhe Italia athorities to reorm the conry's regional governments.he reorm di ot eqalize the administrative perormance o thenorthern and sothern regios. he sty attribtes the ailre in thesoth to the region's lack of social capital or civic capacity which itmeasres by traditions o association and civicengagement as indicaors . he sy is oh celebrated anconroversial. In a review essay Tarrow (1996, while praising he

stdy arges that Ptnam's boomp moe overemphasizes socio-economic and clral acors and neglects the political dimensionespecialy naioal an regiona goverments (seechapter 10)

here are three analytical modes o theorizing abot indi-vial opposition o new laws and eglations. The moe com-mon in sandard political economy ocses on straegic choicesraiona actors who rely on poicy models that correcly represent henatre of he game. It is saly assme hat the actors maximize theirpersoal weath an vae new social rles only as orreaching goals. he actors resist growthoriente laws an reguationsoy when the rles coict with their goalsor exampe becase theactors wil not partake o the new prosperity or receive satisactorycompensation.

secon o dise resistance to reorm retai all asic ea-res o the rst excep that actors differ in how hey moe socialstrucures. With uncertain knowlege o social strucures some peoplemay oppose new rles and rese to live by them becase dobeieve that rles wil proce the iteded rests. he second

emphasizes over means to a commonIn the third mode o resistance acors are stil goal oriented bt they

or heir own sake and only as means to an edsch as greaer weath. Vale res reect worldviews and moral

coes and are sickier han ordinary (nonvaled socia rles whichactors reaily when he res nambigosly fai to yielexpected otcomes. Ye vale rles are not o innie vale. Mostpeope stop living by rles i the opportunity cost of observing hem becomes high enoghor example they rather break aietary rle than starve to death. Accoring o third moe social




resistnce to leg coes n other rules cn rise when they conictwith socil vlues.

When governments try to oster growth by new socilrules people s responses re liely to reect ll three modes pure

strtegy uncertinty bout mens n ens nd vlue rulesbut the reltive importnce o the three moes wil vry with cicumstnces . As urther compiction the trnsition to new socil equilibrium or n entire ntion involves lerning s well s complex coorintion o chnging indiviul expecttions. he processes olerning revision n coordintion re r simpler when nctor trnsers ysunctionl socil in her homecountry to oreign country with rules. he o

whoe cunity new soci equiibrium is comprble to inter-ctive justments in complex gme with multiple potenti equilib-ri wheres the by single iniviul to new communityis imir to ustments by households n rms to xed prmetersin competitive mret. Not only is the ts o coorintion reltively

but lso n inividul who moves to new society n bringswith her set o vlue noms tht e unnown n highly ysunc-tionl in the new setting probbly will grully ignore the o normsi the cost o complince is trnsprently high.

The Problem with Legal Transplants

o n o legl trnsplntswhich re pime o ision o socil tecnolo-gies would gety i ou undetning o ocil bries to growthAs long s ws hve existe trnspnt countries hve copie or hdorce on them legl rules from source countries. Nevertheess literture is in ir greement tht we c robust theory with prcticl

or wht succee or il. We o nottheoretic or o positive lins between secure

property rights n economic peormnce. And lthough the lw ndeconomics provies insights into the economiceects o moiying vrious spects o moern egl systems these re

mrginl justments within stbe system. Less is nown bout con-itions o success when oreign egl systems or mjor prts thereo replnte in countries with trition or ysunctionl systems. In survey o the issues in reorm n economic eveopment Messic( 1 999) ienties severl incluing the olowing: Is ir juicil system cuse o good economic peror




mance or is there some thir factor (beiefs social capital) that affectsboth the ality of the egal system and economic performance? Doesthe of (and other legal) reforms depend on the orer inwhic the arios elements are itroced? Is it ital for scces to

integrate jdicial reforms in deeoping contries with informalenforcement mechanisms and how shol that be done? Stephenson

oices similar skepticism in hs scssio of the crret S China initiatie for promoting the "rle of law in China a conceptthat the two goernments ene in fferent terms He sggests thatweak theoretical may to the failre of the ini-tiatie When iscssing crrent programs of legal refo scholarsoen look to the failed law and eelopment moement of the 1 960s

when the United States made a concerte effort to proide legal assis -tance to contries in Asia Africa an Latin America to contribte tother economic eelopmet Mch has been written to explain whythe moement id not reach its goals Messick (1999 12627) reportsthe following themes among others: Law refo does not lead btadjsts to social law is not an engine of social change Tocose the gap in deeloping contries the law on the anthe law in action reires more than better edcation for lawyers Thetarget contries di not nd particarly attractie the nie Ameri-can legal stylefor example lawyers' abilty to inence changes inpoicy throgh litigation

I fact egal history proies examples of al l degrees of sccess forlegal transplants from lly transplants to faileones Modern comprehensie legal order for nations withbase i seeral Eropean contries in lateeighteenth and eary nneteenth centries an eentaly became oneof Erope's most signicant exports (Berkowitz Pstor and Richar2000) The main transplats were English common law the Frech law

the coe In or times most contries that pos-sess comprehensie hae one of these threecoes which now constitte the core of the borrowers' legal systemswith the transplants mostly place in the late nineteenth aneary twentieth centries Recenty of corse there has been a rsh of

transplant actiities in the foer sociaist contries of Erope anAsiaBerkowit Pistor and Richar (2000) estimate the relationship

between (a) families transpant (b) leels oflegality of property rights) The also estimate the sta-tistical between leels of legality an leels of




eveopment (measue by pe capita income) With a sample of foty-nine countiesten souce countries and thitynine tansplant coun-triesBekowitz and his make an effot to cas-siy the transplants te nglish Frenc and ema codes)

accoing to the natue of the transpant Using econometic meth-os, the study then attempts to estimate the tansplant effect Thetanspant effect measues the success in tansfeing a lega code (asocia technoogy) fom a souce county to a tansplant countyBerkowit, Pisto, and Richad compae indexes of egality (egal secu-rity, o the effectiveness of that enfoce law) in andtranspant countries to empirically estimate effect A negative valuefor the effect indicates that attempts to a paticula

socia technology were not entiely successful The stuy nds that thetranspant effect lowers a country's evel of egality on average byabout oethid compaed with the souce, which in tun is eate tolowe goss national poduct (NP) pe capita The econometicanalysis shows that the "tansplat effect can expain 69 pe-cet of vaiance in legality, in turn explains 83 pecent ofthe vaiance in P (Bekowitz, Pis and Richard 999, 3. Thelegaity variable in study is a weighted index of ve subjective prox-ies for the quaity of the ega system

A tanspant county's eve of egaity is agey by themethos to acquie the foeign coe, but the actuallegal family of oigin (ngish Fench, o ean) is of littlesignicance The develops somewhat complicate poxies forrepresenting how law has been and eceived, basicistiction is etwee receptive ad unreceptive trasplats ega-tive transpant effect on legaity is associated ony with uneceptivetanspants The basic assumption hee is that domestic demand fo thenew ega ode is equie to make it effective Counties eceive involntay tansplants only as colonies (bt not, fo example, through

in a wa) tansplants aeexcept when the inhabitants of the taget county ae familia, fo cul-

an historica easons, wit the new legal traditiontranspants ae receptive when target country is either familia with the

new aw or makes signicant adaptation of the foreign aw to its (fo-mal and ifomal peexistig egal ode Vountay tanspants aeened as uneceptive when thee is neithe signicant adaptatio nopio

Let to take a closer look at these concepts Conside a vol




untary nreceptive transpantfor eample the case of key whichscores 1 84 on the legality ine (where Switzeran has the highestscore 21 92) acquire the French aw coe in the years1 8501 927 ut ha relativel little amiliarit with the French egal tra-

ition an i not aapt the foreign lega system to Turkish traitions(accoring Berkowit Pisto an Richars cassications.Berkowitz Pistor an Richar anaze why many countries introucenew laws an keep them on the ooks if the new laws fail to prouce areasonay high level oflegality. We can argue that eep changes in its

of property rights apparenty were inconsistent with thecountrs social t the question of wh voluntar utunresponsive transplants persist remains. One possile answer is

the eaers keep ineffective aw on the ooks in the hope that the lawswi turn into an engine of social change.

Fina the statistica coefcients of the stuy alow the authors totest (perhaps not too relialy various counterfactua hypotheses .

receive the law uring 183188 without signicant aaptation. Moreover theens of Ecuaor were familiar with the transplante law. HadEcaor een in a position to evelop its own egal system inter-nay or to aapt the transpante aw to its loca conitions ack of the envelope caclations sggest that its 1994GP per capita wol have increase from $1200 U.S. to

Irelan's level ($13000 .S.). andRichar 2000 3)

he stuy tels us that unreceptive transplant is not fate. Some countries reverse the transplant effect implying that the econometric moelunerpreicts their egality performance. In the set Hong Kongaiwan Singapore Spain an Portga higher levels of legality

the (Berkowitz Pis tor 2000 27)

Analyzing he Transplan Eect

ransplant effectsincomplete transfers of socialas Pistor an Richar attempt to estimate are keyeements in the puzling ehavior of growth laggarswhy the seemto e to enet from worl As a theoretical assess-ment the Berkowitz suggests that cognition an eman consi




erations mst accont for the transplant ect. People who se a par-ticular egal code must understand and accept the principles on whichit is based and they in some sense demand a lega system.

The literatre is strogy dided on the relatie importace of

decentralized cutral factors (beonging to the third mode of analysisdiscussed previosly and political (the rst mode relativey itte attentio paid to problems of comprehending new systems(the second mode. These distinctions are of considerable practicalimportance. If the third mode of response (dised defense of tradi-tioal is the primary force behind major transplanteffects growth laggards face particlarly prospects for rapidlypgrading their socia technologies and catching p with highicome

contries . A national goernment that introduces a modern legal codedoes not have many policy options available when society at largereects new laws because they with aled res. In cotrast if the opposition to the lega code is political and based on mate-rial interests the goernment can at least contempate economic polit-ical and legislatie responses; to conter the second mode ofresistance the goernment can anch an edcational campaign to tryto conince pblic of the good properties and effectieness of thenew egal order.

How the do we explain the puzze of the transplat effect? Donew lega becase of ales cognitive processes that arepresent in the clture of some contries but not in others? Are theremore downtoearth and explanations of the trans-plant effect? How are cognitie and practical considerations linked?Shold we ask whether cognitive adjstments i alues andstrategies will be forthcoming when practical and political conditionsare met. et me rst briey expain what I mean by and political

A lega system is more than the law on the books it is a servicelegality. Like other a welfnction-

ing legal system reqires startup inestments the serices of skilledworkers other of reasonable and informed con-sumers. A transplant country will not reach a high leel of egaliy if it

ony acquires a new legal code bt does not properly attend to startpinestments (sch as buildings recording systems and diffsion ofknowedge about the system or fais to proide qaity inpts for current operations. Sch falures of a system o the

of a rm that negects plant and eqipment and




By political factors I am referring to the roe of a legal system as amanifestation of the power structure in a community and to legalchanges as tools in the struggle or contol in a polity. When a mod-erizig Third atioal govemet itroduces a Wester legal

code, the measures, if they take hod, are bound to weaken or evendestroy the power base and eventualy the sources of weath of in uetia segments of the local elite. A ew ofcial egal system can alsochange the relative wealth and power of regions and ethnolinguisticgroups . As an ilustration, consider a traditiona lega system that givespowe and egal to clans, does not allow women to inheitproperty, and restricts transers o lad to social groups. thissetting, when the national government introduces Western laws and

judicia systems that, for exampe, encourage free sale of and, more isat stake for the rural community than cinging to valued rules for sen-timental reasons. The ew egal regime challenges the power base oftraditional society. Those who stand to lose from the new system havestrong economic incentives to use all available means to oppose andundemine new order. Their response sometimes involvesintended to prevent people from taking their cases to ofcial courtsand to induce people instead to send the cases to tribal councils for ta-ditioal arbitration. Another strategy is to overburden an under-staffed edglig ofcia court system by oodig it with new cases andthen them before a verict is reache. elays bydeugig the courts or by using ijunctions, loca power brokers cancrush weak opponents, widows who seek to enforcenew iheritance rights, and later orce a arbitrated oown Such situations make it to distiguish separateroles of valued rules, naked material interests , and confusion about thetrue propeties of the new egal system.

Selective introdction of moder legal codes is a timehooredegy for minimiing isruption resistance protecting theinterests of those who control the sate. In Africa esewhere, theuropean colonia masters recognized that thei laws might conictwith the material interests and of taditional society, which madeEuropeans in some instances apply their laws only to Euopean settlers.

In other situations, the imperialists avoided legagories that were particularly ikely to clash with traditioal values butwere of limited ecoomic interest to the coonial power (Stephenso2000) For example, a Western be

traditiona amily law be le alone. Selectivity is also a strat-egy used by China's contemporary which has tried to build




re wals between sectors of the egal system he regime avois cate-gories of Western laws that are especialy ikely to undermine its auto-cratic rule favors moern aws of ownership an contract that willmake China a sae country in which to o usiness Authoritarian

Spain uner Franco saw the avantage of a comparable strategy andgave great eal of inepenence to its uiciary mae sure that thecourts hanled ony politicaly innocuous cases (Stephenson 20001 89) In their attempts to moernize, democratic governments in thehir Worl might want to minimize confrontations with the trai-tional sector by initialy seeking only those changes in the lega system

are essential for producing growth Such strategies for minimiz-ing frictions, however, raise questions minimal property

rights for growth, which is the subject of the sections that folowA new legal coe is unikey to function properly if, prior to its intro-

uction, the has not established reasonable egree of control over its territories an harmonize or containe deeply conicting socia interests he new legal system is to be effective whencriinal gangs run loose or when the state is unable to settle factionalisputes, create a poitica expan its time horizon, anlower the stakes in the political game to make it less tempting toSome scholars an reformers turn the causal reationship around anargue that a moern ega coe is a rstorer policy instrument thataffects target throghot the system (see chapter 8)According to this view, a new legal coe wil shape socia norms, har-monize material interests , consoidate a weak an ragmente state ortame a preatory one, an economic I isagree with

view an n it unlikely that new laws per se can accom-plish such changes

Minimal Levels of egalty for Sustaining Growth

he of minima levels necessary for eco-nomic growth involves both legal content an egree of enforcementFirst, we to ask what form of legaity or property rights is mostlikely to create growthpromoting incentives an behavior Market

arrangements along a broa spectrum are growth frienly proviethat they are well manage he secon issue is the security of exclusiveproperty rights Property rights are insecure either because the stateexploits its subects teir ownership rghts or pri-vate actors prey on each other an the state provies pro-tection The remainder o this chapter makes the case growth



Mi n i ma l opety R g hts and Lega l ansp l ants 83

fieny maket intittion oen eviate fom the iealtype citeionof tandad economic. In addition I biey conie whethe a weako a tong tate i bette o gowth The thi concen the divi-ion o labo between pblic an piate oganization i potectig

popety ight and enfocing contact : if the govenment doe itte topotect ownehip can ene anthee ight to a degee that i cient fo gowthaming that thegovenment i weak o incompetent bt not pedatoy? Finally thechapte intoce the negected ie of how to minimize the cot ofpplying popety ight in a poo wiitoction o a moden legal ytem impoe heavy bden o apoo conty that ack human and phyical capital the cotminimiz-

ing tategy may be to tat by poucing the minima popety ightequied fo gowth a igning enement of the ytem to ate tagein the county'

he Divese In stitut ion al Foun datio ns o Gowth

When economit evalate iffeent egime of popetyight they to ey on neoclaical model of geneal eqilibimand wefae economic. Thee image of optimal alocation ofeouce in a tationay ecoomy whee the acto haveinfomation popety ight ae flly have limite ele-vance in a wod of incomplete maket namental ncetaityeaning and technical change an whee ocia and political con-taint choice nd aect Fo example

wol expect die et and give a ailig gae to gov-enment poicy that invite hge congomeate to monopolize a deveoping key ub ecto and ewad the monopolitwith bidized oan fom a govenmentcotoed epeed ancia ytem. Yet Koea ch metho in the 90 to bi fom

it heavy chemical which geneate theocale Koean gowth miace that wa iven by the mammothchaebol conglomeate (WooCmig 2001 ) .

Context matte when govenment policymake tay fom the lai-

ezfie moel encoage monopolie and intefee in maket andindutia affai. In the Koea cae govenmentponoed monopoie wee an intega pat of a hanoed genea policy of gowth ca

by a tong govenment nitaly notagency poblem that it policy. In many othetie tate vo wit monopoly ight thei




prouction pan, an ubiize their loan, the meaure are unre-late to any ytematic trategy for achieving growth but ratherrewar for political

The Korea cae tel u ot oly that cotext matter ut alo that

economic regime, far from being tatic, are comparable to organimthat grow an evelop through interaction with environment. InKorea the topdown trategy of ymbioi between the governmentan the chaebol conglomerate graualy became yfunctional,requiring ifcut reform (Woouming 200) he two leon thatcontext matter an that internal ynamic change economicregime have general valiity. miracle are ao economicmyterie, a illutrate, for example, by the variou to

Stiglit and Yuuf 200, which ocument alway conciouly)our general confuion about the interpretation of growth mirace andtheir changing fortune.

If any generalization i poible, it i perhap that the many vari-ant of growth mirace have one feature in common: a growth-frienly poitical equilibrium. A tate where all leve ofupport or at eat accept a trategy for growth, whether impoedfrom the top own or growing from the bottom up, i likey to i-cover through trial an error ome approach to economic trafor-mation that uit it particular environment. Such marketorientedbt mixe trategie oen eem unorthoox to tanareconomic theory, but tanard theory really oe not eal with truc-tural tranformation. he part of thi i that inorganizing property right for growth, there are no nal Allregime contai eogeou yamic, along exogenouhock, are the main factor reponibe for bringing down or temporarily tarnihing economic mirace of variou kin. o intitutiona etup i inuate from the force of ecine whether it i theone upporting the inutrial revolution in Englan; the Gol Stan-

the early Soviet Union growth miracle; theWar German growth miracle; miraculou income poicie (for jointlyachieving price and low rate of ination) of ome Europeancountrie in the 960 an 970 Scaninavian wefare ytem; an

unoubtey ome of the twentyrt century miracle . Only ocietiecapable of continualy renewing their property right tructure andajuting them to new technologie externa hock an internal

are able to growth The intitutionalenvironment of a country loe effectivene when the failto ajut ytem to new economic development or new




poitical foce change the conty intittion fo the woe Newevelopment ince new technologie, new economic oppotnitie(for example, in oeign tae), an eteioration o ocialmechanim Entenche interet oen loc neceay ajtment

to new cicmtance, althogh ignoance aot appopriateepone i alo to ame A new political aance oen emegethogh change aociate with economic gowth, incling the iean fall of egion an intie o poplation change Politicalfoce that emphaize eitibtion at the expene of gowth mayeplace gowthoriente coalition

Which Is a G eater Th eat to Growth a Stong o a

Weak State?

A icion of minmal level of legaity neceay fo gowthavoi mentioning the poile theat to gowth fom the tate itelf;inee, much ha een witten the relative meit o weatrong tate The point o thi ection i that we cannot general-ize the growthfienine of wea o trong tate Not onlyoe context matte, t alo we mt tingih etween gowthoi-ente an peatory tate or government

When they pey on economc agent, govenment lowe theexpecte of etn on invetment Peatoy tate behavioinvove otight concation of aet o abitay taxation, ie inexchange o eential licene an monopoly right, an cor-pt Cocontry egeion how that propetyight averely aect growth whe the qality o property right iepreente by an nex compoe of vaio inicator of corptonan (J Svenon 998) . The ning of ch cocontyegeion ae ppote by a ecet micolevel ty of in vefome ociait contie in Eope the fome SovietUnion that how that even m in opeation to ine-ce poperty ight y ecing new invetment (Johnon, McMillan,an Woor 1999). Johnon, McMillan, an Woorf nenteprene n the ame conty t n iffeent intrie o rm

o not hare ientical expectation concening the ecrity of propertyight, whch i not png ot al intie o m ae eqallyvlneabe to explotation becae of thei iffeent locaton phycalfeate, othe facto

A tong, weloganize tate can e goo or a fo economicgrowth, epening on it orientation A powel preatoy tate i




ba fo gowth but a stong gowthoiente state pomotes growthuness its policymakes ae guied by ysnctional policy models andai to lean om thei mistakes . When govenmental weakness bingsabout isore rebellion an chaos strengthening o eithe growth-

fiendly o pedatoy states may hep gowth because even peatostates attempt to upho some social oe if ony to the ulean evenue fom pivate peators . Yet when the govenment is weakpivate actos an oganizations sometimes ll the vacuum to ceatepivate oe an buil toleaby ective institutional envionment.Theefoe no simple geneaizations can be made the impica-tions o economic perfomance a weak state becomes evenweake.

Hstoy shows that economic pogess s sometimes possible evenuing evolutionay tmes . In the caeful mico level stuy of evolu-tionay Meico Habe Rao an Maue (2003 n that new investments an enty o new ms did not y up duing the 1 9 1 834 peiodo political instabiity an social tumoil. The gowth ate o the Me-ican in perio di not ie substantially om that rateuing 18901905 when the county was an the economybooming The Habe Razo an Maue aso n that wa-fae n Meco 9 4 17 intefee with poduction an new nvestmentby isupting communications although physica estuction of plantan euipment less than schoas have believe. InAlbania of the communist peio demonstates how stong and stablepedatoy stie gowth. In 1 990 Albania was the pooest coun-try in GP per capita o $1 250 smallcountry is enowed with reserves o nickel copper nat-ual gas on coa lignite an oil an is located cose to some of themost developed counties in the wold (Bibea 1 99 1 .

Can P ivae Od e Povde M n i ma l Popey R ig hts

fo Gowh?

The section o whether pivate actorsan the oganizations ae able povie mnimal popety ights fo

gowth when the fails to o so. Both n moden and histocaltimes speciaize poduction an tade ae found in many countiesthat have ysfunctional o vitually noneisting ocial egal systems

ely in on pivate oe. Futhemoe pop-ety ights ae ound aso in as the Unite States that

highly evelope systems o public ore .




here exists a sbstantial boy o literatre with an empirica bentthat examines how privateorder mechanisms enorce ownership an

rights. In an important employing a gametheoreticapproach rei 994) analye two orms o privateorer orgaia-

tion o Meiterranean trade (indivialistic an collectivistic in theMile Ages. Lana 994 examines how rms inAsia reie on ethnic ties to spport transactions and Milgrom orthan Weingast ( 990) sty the role o the meieva law merchant anthe champagne airs in protecting longistance trae. Finally in anoencite Ellickson (99) examines how private orer gov-erns relations ranchers in Caliornia's Shasta Cotyan Bernstein ( 992 oes the same or the iamon trae in her stdy

of the ew York Diamon Dealers ' lb.In avance market economies reliance on private order is most

common in grops restricte membership becase in some schgroups the transaction costs o secring complex exchange are lower

private arrangements than ones. In those cases howeverprivate orer is neste in an eective pblic legal the evel-oping world there is evience suggest that certain contries suc asChina have been abe to move throgh the early stages o moerniza-tion and inustriaization withot the support o modern aw relying instea on private or local orer (see chapter 0 . hese contries saly o not otright preatory governments bt their legal sys-tems are antiate or ysnctiona.

o analye private orer and private enorcement thetypically relies on noncooperative game theory as well as the econom-ics o property rights n the economics o property the cost oenforcing contacts epens on transaction complexities characteristicsof traers problems with measuring an the time path oftransactions. Private enforcement is eective when two parties areocke into a longterm traing relationship switching to other

is costly. When each traer estimates that the present vale oexpecte net benets rom utre transactions wil outweigh the gainsrom cheating in exchanges which en to the rela-tionship enorcement is spontaneous. Selenorcement o contracts

can aso emerge in personaize mtiateral exchanges in coseygroups where inormation ows reely. Reptation an social noprotect trae in these an in grops base on ethnicity

religion expsion carry weightthan o sanctions in based entirely on commercial relationships

994.




Bilateral an mutiateral exchange base on spontaneos privateorer within networks o closeknit groups has a usel role in all soci-eties is ysnctiona as the general social technology or exchangein evelope economies greater specialiation expaning mar-

kets an growing nee or impersona transactions rising inormationcosts bock because inorma traing are not practicalin such circumstances. In reputationbase trae new rms n iticut to enter the market an traers earing high enorcementrisks oen turn own ors o low price an high quality when actorsosie their networks oer these bargains an Wooru

hen economic evelopment an scale eects have mae inormal

exchange institutions ineective (at the margin private trae associa-tions an other business organiations sometimes can eectivelyreplace inorma networks (McMillan an Wooru 2000 . Welunctioning private associations stanarize commercial practices colectinormation contract violations an coorinate

business organiations is eective i pror tocontracting always check their prospective traing partners have a history o breaching contractual obigations with otherorganization members. I the organiation reuses to help in enorcing contracts o members who neglect to seek avance inormation abouttheir traing the members have less incentive to ree rie onthe organization Migrom orth an Weingast 1 990) .

Enorcement through private organiations has an impor-tant isavantge: the organizations have a common to

the market an eve lock technoogical change espe-cially when the organizations represent only one sie o theparticuarly the selers Mokyr 990). ccorng to McMillan anWooru (2000 4344 neutral intermeiaries inclue meieval awmerchants aiwanese traing companies the ew York ia-

organizations on the sell-ers' sie are the meieval guils the Japanese bank clearinghouse anthe Fur Dressers' an Fr Dyers' Association. In the early stageso moerniation business organiations in place o the government

oen supply tolerably secure property rights or their inustries.lthough business organiations ten to monopolie trae an limittechnological change these problems can also occur uner public

he state as it becomes stronger is likely to to privateorganizations that have qasigovernmenta roes ining property rights. o protect their prerogatives governments will to




epive pivate oganizations of this powe an pgae the legalinfastcte of the state o, in the wost case, sppess pivate lawan create a

The prely economic choice etween plic an private ore lti-

matey epends on the elative cost of each system. To fnction pop-ely, pivate ore eqies athe collection ofwhich the altenative of having ecose to an ecent jical systemwil moify. McMilan an Woodff (2000) n in the sty of tansiton ms n asten ope an the fome Soviet Union that p-lic oe and pivate oer complement each othe. When the two ae

the vale of a maginal nit of private orer instittionsincreases with the eveopment of the fomal legal system, an

ecency reqres that the two foms gow togethe. McMillan anWooff also nd that infomal netwoks an fomal lega systemsae sstttes, whch means the impotance ofthogh infomal netwoks shod fae as the legal system mates.

M n miz in g the Costs of a Lega l System : C lea Ru les o a

Sophist cated J ud ic i ay?

he complementay reatonship etween privateoer instittionsan the law sggest that at some point n the economcpocess, moen coe, especialy laws of owneship anwil e neede. owa the en of the twentieth centy, fo example,the national leaers of China felt that its evelopment process reqiremoern commercial laws and that the eliance on locally spplieights col not contine Biling a moern legal sytemmakes heavy emans on the esoces of a poo conty, especiallyon its hman capital. In some owncome contres a sophisticateegal system wo eqe a sstantial shae of the stock of

college gaates . heefoe, we ask whethe in il-ing its legal system, poo makean rene the system at a late ate.

The leastcost strategy for an effective legal instages is lagely a matte of speclation R. A. Posner ( 998) an Hay,

Sheife, an Vishny ( 996) make a case fo a resst stategy. heybeieve that a poo conty faces a fnamental choice etween sing its scace esoces fo costly eforms of the legal system an sing those esoces fo a ess costy investment in evsing its legalles o make them elativey efcien, clea, an simple. In many cases,the of laws an reglations will eqie throwing ot




le that uvive fom a pevio peio Pone itingihe betweenthe ubtantive efciency of ue, which efe to thei diect economicimpact extent to which they mpove the allocation ofan the proceral efciency of rule which epen on how they affect

the cot or accracy of ing the egal ytem.In lega ytem, openende tanar ae the altenative to clea

an imple e Stana involve concept ch a ba faith negligence, o neaonable etaint of tade, an on eciion baedon tandad ten to equie ophiticate awye an juge an aoid boy of pat cae to povie legal peceent. When the cot of

upgrading jiciary i very inveting in the povi-ion of clear and imple rle may the choice. The iavantage

of impe ubtantive rue i that they aot alway ae incompete inthat they o not cover al poibe ituation and tate Deciionbae on iltting ule can be inefcient but when the t i eaonaby goo, omewhat unophiticated jdge wil n it eay to etectviolation an come to eciion becaue they o not

legal reaoning it i eay fo otieobeve to whethe or juge ae folowing the law.Welleigne poceural ule can inceae the of atggling judicial ytemfor example, by recognizing only writtencontact o by equiing that claim of allege of ightbe le within thee yea Rle that eqie cetain to beefeed to bining abitation wil lowe he jdicial wokoa andencouage the etablihment of tae an othe buine oganiationR A. Pone 998).

Thoe who aocate a rulert tategy for eveloping a legal y-tem in a poor contry hope that a impe tart wil encouage economicgowth an initiate a vituou cycle of gowth more weath an neweman fo a bette legal oe If the qaity of the jiciay i initiallybelow a cetain level of competence an honety howeve, the jicialytem may imply ignoe no matte how ecient theyae, uggeting once again how clt it i to genealize about mini-mal right for



ConclusionThe Subtle of Major Institutional Reform

he new intitutional economic ha mae goo poges in analyzing the ole of in haping economic the el

les fomuating pinciple of policyin many crucial area. the wold, convincethat ititutions matter for gowth, increaingly ee way to improvetheir intitutiona envionment. n thi book, dicus oppotunitieand limit fo mao intitutional efom when elative economic backwane o impefect intitutions ae utaine by socia equilibia,when exogenou hock an new ocial moel ae the chief foce

when hitoy, political economy, nincompete nowege contrain the potential refom path. he mainnovelty in my approach i an emphai on incomplete anocial moel that guide deciion y policymaker a wel a otheracto. My concept of ocia moel i iectly relate to the iea ofmenta moe in the wok of Noth 1 990 . n the foegoing chapte, expained what mean by socia model an attempte to mae theconcept for the of intitutional refom

Rathe than rehahing the main argument of the previou chapter ,concluion an to summarize my views.

he example concern the of introducing effectivefo managing ocean heie . ntituional faiue in ocean sherie habecome a mao problem woldwide for both rich and poo countie,eaing to ovehing and even the disappeaance of h toc. ague that the govenance poblem in ocean heie illustate howeconomic poges oen depens ointy on new poduction technolo-

gie and matching advance in ocial technologie. he commonpoolchaacteitic of ocean herie imply impoved tech-noogy a well a geater emand for can detructive cone-quence if thee deveopments ae not matched by appopriate ocialtechnoogie . n the at een yea of the twentieth centuy celandboowed and modied a new ocial technology fo managing it 200




mie sheries zone. he experience vivily emonstrates how exoge-nos shocks poitica economy and incomplete socia moels shapelargescale reorm.

A Modeling Vew of the World

Institutiona reorm is a game involving payers with incompeteknowege who cope by basing their actions an strategies on incomplete social moes o varying qality. Socia technologies are modelsthat explainnot necessarily accratelyhow elements osocial instittios interact creatig particular reglarities inand aggregate otcomes. Poicy moels also a o social

modes escribe the reationship between goas o pblic or inivialpoicy an the instruments or reaching the goas . Al actors both pb-lic an private se policy models to ormlate their strategies .

As the previos chapter reports reormers have oen ailed to trans-plat social rom one to another and to make theinstittions work eqally well in new setting. political econ-omy provies severa expanations o aile reorm an the perseveranceo mperect institutions. The incentives o the rling poitica ina target contry are sometimes incompatibe with the newpowerl specia interests may ensre ony scaedown or nsatisactory versions o the new socia technology introce orecentraize resistance can nermine the reorm ert. o complete this

o obstacles I have ade social moels as an important variable.Social moels incorporate visions o how the social worl works in bothpractical an ethical terms. Institutioal reorm can ail whe authoritiesor the pblic ack practica unerstaning o new socia technologies orwhen critica social groups see new arrangements as illegitimate.

Recognition o incompete moes modies our views o the processo reorm. We are not srprised to see unexpecte outcomes uniorme responses to shocks (such as rejection o workable

interactive learning and consing eedback rom majorsocial experiments as well as problems with alientions in a new environment. The introuction o social moes as a

variabe in the policy process also raws attention public and privatestrategies aime at promoting moels.

mperfect Insitutons and Ocean Fiseres

inustrial contries sally rely on an secureproperty rights in all major activities ths restricting to levels



Conc lus ion 93

unpoctive an waste activities. hee ae two impotant ecep-tions to this genealization the popety ights guiding the use of envi-onmental an ocean sheies. In al pats of the wold,ocean seies ae eploite in a wastel manne the Law o the

Sea Convention in 1 976 ceated a 200mile eclusive economic zone focoastal states, mutinational open access egimes pevaie invauable shing gouns. he shing nations wee not wiling o ableto jointy manage ocean sheies in an effective manne. In aition topoitica consieations, high tansaction costs as well as new enty bythi paties thwate egulatoy attempts. he consequences o openaccess fo valuable natual esouces ae wel established in the litea-tue. They invove oveuse an epletion of the esouce ent as wel as

wasteful aces to be st to captue the esouce (Godon 954 . It wasinitialy epecte that with a 200mile ecusive coasta zone, shing counties wou effectivey manage thei omestic sheies. hesehope have not been eaize. Cuent technologies and high tansac-tion costs make it impactical to enoce ecusive ights to

migatoy o an taitional govenment egua-tions of ocean sheies have vey oen faile to stocks ankeep costs own.

In an aticle amenting the poo state of eepsea sheies (Boaan Revkin 2003 the Ne York mes agues that Icean'sepeiment with new technoogy point the to effectiveinstittional efom in sheies management he most impotantecovey stategy o all is simply to sh ess, epets say. his can bemanage in many ways . Havest imits can be set with allotteto iniviuals in a who can ten tae Icelan has set thestana fo this appoach, which has also been aopte in a fewAmeican sheies. . . . Envionmenta an consevation goupsincuding Cato the pactice. I now sketch the tubuent histoy of instittiona efom in the Icelan sheies, theole of economy

The Icelandic Fisheries: Shocks New Social Modes and

Institutional Reform

In Icean uing the pocess of moenization the sheies lubicatethe county's engine of gowth. Athough thei impotance is deciningthe sheies emain o the economic

fo 4050 pecent o total epots o goos an sevices.he institutional envionment o the aects not only the eec-tiveness o the industy also economic gowth, the of




wealth an variou other macroeconomic propertie of the nationaleconomy. In a mature emocratic country a pivotal role for a ingle

ha two important implication: It i very cotly or theauthoritie to tolerate groly inecient intitution in thi inutry

an the inutry lobby i very powerful but it interet ten to beencompaing an to overlap omewhat the national interet.

In Icelan an unanticipate erie of upply hock in the herieupet the ocial equilibrum an create opportunite for reform. hert hock occurre towar the en of the 1960 when the herring herie collape. By the mi1970 cientit ha warningabout precariou tate o variou pece o epeciallythe co. In the 980 thee report more trient the catch

wa faling an an necient rat race generate by a hingay reg-ulatory ytem raie cot Fallng total catch increaing cot anhuge inutry oe were unacceptable for Icean. he authoritieinuentia egment of the inutry an the pubic graually came to

the managing the herie a imperfect. Pivotalactor were now reay to conie new ocial technologie or govern-ing the inutry.

The reformer ha few choice. E. Otrom (990 ocument caewhere loca actor who hare commonpoo reource eforganzean et internal governance rule for effectively uing an managing their reoucefor the utilization of a patue or a ake. Butocean herie in Icean ack mot of the characteritic require forpontaneou elmanagement acoring the theorie an evienceprovie by Otrom. Libecap' ( 1 989) work on herie aloupport thi concluion. In particular inutry' trong cial orentation heterogeneity of operator an the mean of prouction an the cattering of the inutry all over Icelan hamper eforganzation. A for a conventional market olution imply leavng anunregulate an carce commonpool reource to market force willbring pervere reut 1954. the experience withirect government regulation ha been unatiactory: the reguatoryregime that the government or managing the new 200mileone ha malfunctone. The problem were partly caue by inherent

contraicton n the which create incentive for exce capac-an partly caue by weak enforcement of both government tar-get for total catch an eet ize. By the mi 980 reform ha become

an both government were to revietheir moe an conier a new ocial technoogy tranfer



C o nc l u s i o n 9 5

able quotas (IQs) which intouce eements of exclusive popetyights into the commonpoo egime of the sheies.

In the mid 980s IQs wee best known intenationaly as innova-tive ad effective istruments for limiting the cost of inustrial ai pol-

utio and had foun appication especially in North Ameica. A ma-ket i tadabe polution pemits has the advantage of assigning thetask of cleaning up industial pocesses to ms that can do so at leastcost. Favoable expeience with tadable pollution pemits eadily suggeste that the metho (socia technology) could be extended to othecommonpool probems. A smooth maket in tradable shing obviously would assign rights to mostIn Iceland smalscale experiments with individua quotas had

when hering sheies wee esumed in 1976 and ha been added focapelin in 1 98 0 . A 1 98 5 law extended the system to the vital grounshsuch as cod an 1990 completed the system. IQsbecame the management system fo all of Iceland's ocean sheiesexcept that small boats had their own system.

The Lmis o Reform

Athough fea of collapsing sh stocks had induced authoities toevise thei moels of sheies management an ceate a willingnessto expeiment with aical efom policymakes id not have feehand when the IQ expeiment began . he stuctue of an IQ systemcan take many shapes each its efciency and istribu-tional Icelanic policyakers face sevealchoices when implemente the system but the politicalof thei choices is faiy obvious . I focus hee on four central issues:

1 . A system of inividual quotas is possibe without tang owith vaious estictions on in the quotas . Fobiing o imiting tae the eciency popeties of an IQsystem but may potect highcost operators which can bepolitically example as part of regional poli-es.

2 . he govenment can initially give the quotas away sell themo ent them. he authoities must ecide between fee quotasand soe fom of shing fees .

3. he govenment also which socialinitialy eceive and whch ones be pemitted to




by or rent them at later stages Possble canates for theserghts nclue owners of censed shng vessels shers theprocessng economcally depressed regions thelic at large an foreigners

4. To be healthy and economicaly successfu ocean sheriesreqres management takes an encompassng vew anattens to bologcal condtons he responsbty for overallmanagement can be vded n varos ways between thendstry and government agences

with these policymakers made followng decisons: They permitte an encouraged trae n qotas imited

traing rights to omestc owners of lcensed vessels In the rstthe government handed out indviual quotas for free Inita alocationwas te to actve shng vessels wth each vessel recevng qota sharesin proportion to its catch hstory in prevous years Fshng rights arerestricte to Icelandic citzens The government manages thesettng total allowable quotas for speces montorng the opera-tors organzing marine research and takng action to protectthe resource for exampe by temporarly cosng breeng areas I willnow consier these ecsons and their signicance

ompare to other prvate ndustres the government s deeplynvolve n the sheres Icelan's IQ system ssesthat usually le with the rms themselves or wth ndustra associa-tions The management an protection of sh stocks rests almostentirely wth the government The government sets and enforces rulesdeterminng mesh size and gear puts sensitve ocatons off lim-its to shers and regulates the size of sh that can be harvested oreover government agents monitor the locaton an catch of every vesse hese factors nderpn a hybri ownershp strctre combnesboth prvate an state property rghts Uner the aclearly ene set of prvate rghts ofand use of a share n total alowable catch (AC) as wel as transferrghts but the state has taken over varous ownership roles especallythe ones of maintenance an protection The law further complcates

the ownership structure by specifying the Icelaners collectivelyown the resorces in the 200mile zone explcity stating that shing rghts acqure uner the qota system are temporary an can be wth

When a government gves away rights such asqotas qotas or licenses to operate taxis and permits trae



Conc lus ion 97

in these rights the initial recipients receive winfal gains whereas sb-seent owners who prchase these rights from the original benecia-ries make no gains: In a wellnctioning secondary market theprchase price o qotas or icenses eals the epected net ftre gai

of aciring the rights. The decision in Iceland to granfather theotas an han them ot for free is not nie. When governmentsisse formal ser rightsotasto longestablishe indstries thatalreay have mae sbstantial speciaize investments the most common method of allocation is to grandfather the rights and han them

for free . In contrast for relatively new activities with short his-tory an where previos specialize investments are nototas or licenses are more ikey to sol or actione off. Icelan is

a specia case however in that its chief resorcebase indstry is ofvast signicance for the national economy which sally is not tre ofevelope contries .

Delayed Reaion

In modern Iceland few measres have evoked sch otrage asthe "free otas . The interesting probem for s to eplain is not whythe government followed a granfather re an initialy alocated freeotas bt rather why the came with a sbstantia eay andwhen it came why its intensity was so otsiers n itto nerstan.

The legislation of 1985 and 990 establishe the ITQ systemwas not controversial. At the timehad wrecked the creating aarmig and wellpblicized losses In the pbic min the instry was broken. When deciing how toalocate the inivial otas the government faced a broken instrythat had a "rst possession claim on the resorce and maor politicalmsce. Both consieration ot levying ser fees on the instry.

he reason that negative reactions to the "free otas came with aelay i related to the problem of incomplete models. In economicsCoase's (1960) theorem (a social moel) provies the standard epa-

nation for why traable otas wold graaly increase protabiityin the and raise epectations abot market price of otas .Accoring to Coase free echange alocates property rights to actorswho most vale the rights ecept when high transaction costs preventtrae. In a shery trae wol lower cost(throgh reorganization of the raise otpt price (becase o




more ective marketing) an increase prots t took most membersof the international economics profession several years to ly appre-ciate Coase's an it is still ebate In Icelan of 98 590 oly a few experts aw te ynamics o traable sherie qo-

tas in terms the Co asian moel Most people typicaly associatefture recovery in the instry with restoration of sh stocks such asthe co an even the market for qotas initially i not anticipate thata sizabe portfoio of shing qotas wol within years be worth millions of olars At the time of this writing (2003) the shing inustryis booming relatively little progres has been mae in restorig thevalable stocks

Before iscussing the otrage explosion a few wors are neee

abot the problem of evalating major instittional reform The fee-back from comprehensive reform is oen ncertain becase all otherthings are not eqal Mixe signals from a social experiment howevermule the ebate an set the stage for moeling wars In Icelan

consion has from the fact that the primary economicbenets rom experiment to this point have been case byraical of the instry rather than restoration of shstocks To frther compicate maters evience an sggest thatrising prots in the sheries have reslte not only from the new TQsystem bt also from two aitional factors major improvement inproction technologies an raical reform of the nancia system (anew socia technoogy) ew proction technologies incle general-pupose an largescale shing vesels process the sh on boar Inrecent years several small specialie in sh process-ing have lost bsiesses affecte oen pt the entireblame on the TQ system The nancial reform of the 990s wasanother turning point Prior to the reform poiticaly appointe managers controle the nancial system the rea interest on loans was

an a eqivaent to a subsiy n this environmentthe granting of oen political motives or croyismFinancial reform eprive the sheries of hien sbsiies an com-pelle the inustry to rationalize its operations As they overlap in timethe effects of the three factorsTQs new proction technologies

an nancial reformare not separabe ncomplete moels an theconence of explanatory factors have mle an prolonge theqota ebate Some critics focus soely on restoration of sh stocks an

not of the inustry when perfor-mance or regional islocation is uner consieration those ebating oen feel free to focs on only one o three cloely correlate variables



Lord Perry's Quesion and Reguaory Overfishing

Conc lus ion 99

Broa an Revkin note that the most important recovery strat-egy is simpy to sh less which requires selecting an appropriatey low

vaue for oal alowable catch an enforcing hat target. With herecognition of 200mie sheries ones vauabe sheries are usualyuner government regulation which implies that overshing is a faiure of reguation or reguaory overshing. In an ITQ system if hegovernment sets excessively high targets for total allowable cach or is

to enforce its TAC target the effect on sh stocks is more oress ientical to what wou uner any other regime given thesame level of excessive shing.

Eage an Thompson (2003 repot hat in 995 the House of Lorshe a series of hearings on the istresse sate of the British shing inustry. At inquiry Lor Perry of Waton aske why (amost asheries management systems have faie to stop gross overshing.Lor Perry wonere which of three factors was mosty to blame:wrong avice scientists about tota allowable catch propensityof politicians o set larger targes than scientists recommen an failureby shers o obey the reguaions. "Those to whom the question was

he Fisheries Secretary an the Depuy Direcor of the Direc-orae of Fisheries Research i not answer i (651 Experts apparenly o no have a reay answer for Lor Perrys question. Again weface incomplete moels an ata. Eagle an Thompson scholars at theStanfor Fisheries Policy Project take the challenge ata fromtwo feerally manage overshe sheries in the nite States. The

ientify a subtle question: "While research haspreviousy been one on the poenial poliica an social causes ofovershing in reguae sheries . . . there is little o none on the quesion of these forces actually manest themselves in sheries management (e.g. to wha extent o sheries ignore scienicavice or to enforce 651 In other we possessony very uncertain an incompete social moels of the subte reation-ship systems an the of politiciansaministrators an shers. In Icelan many experts believe that the

ITQ sysem has moie he behavior of anshers. Overshing is ess extreme uner ITQs than uner prior regulaory regimes but fears of he consequences of overshing may have

over time inepenenty Incomplete moels o fmarine biology aso sheries man-

agement. moels for sheries are of little value




ne they can raw on relable knowledge abot h tock Uncer-tanty abot the ynamc of life in the ocean, however, compicateherie management, inclding enforcemen Unexpecte develop-met o h tock provde fe for peer of alternative theorie

abo life in the ocean an abot appropriate managemen tech-niqe

Fighting over the "Free Quotas

In Iceland of he 1 990 the ebate heated it became redan omnae ocial core The ytem it pporter

oppotion ha erce The of he come

mainy from two orce The r grop con of peope whobeieve that economic life in ome mal commnitie incd-ng ther own ha been averely affecte by ITQ ytem whchthey blame for a growng concentraton of the indtry in a fewregional center Thee critic ypically want to abolih the ytem ini enrey and replace wih orm of direct reglation c a ahingay ytem 18 Their oppoition i characterze a protec-tion of peronal maerial nteret. From or the other maincla of opponent i heoretically more intereting becae here theoppoton eentaly eologcal an ret on model of legtmacyThe core belef that the here are the property of the Icelancpeople, and pariament eentaly committe theft when it initallygave free o the The mot vible avocate of thepely moral view are both o he Le an of the

trggle i eological ecae materal cicm-ance of hee crtic wold not gnicantly improve if he governmen were to heed ther propoa Their action nea repeentoca model at war (and perhap tty fncton where ncreae nthe of "neervng other enter wth a negatve ign

To the extant ITQ ytem, the opponent a major-iy vote in parliament Hence, norm entreprener have emerged forcreating at he yem an to he oppotion into abroa poltical movemen The general pblic ally no very

inerete in organizaton or competing form of manage-men an reglation, bt a groly illegitimate action by he governmen are anoher matter To explain why free qota conttethe leaer of the antiITQ movement havemodel of legitimate ownerhip, which they oen in hitorcal con-text with ln to famlar cltral ymbol Central to argment i



Conc lus ion 201

the iea of a "national commons o "popety of the nation , an foillstating these concepts, efeence is mae to owneship of theancient of the Icelani sagas (which the Danish goven-ment geneosly gave ac to the Icelanes in the 970 o owehip

of the national pa at Thingvelli, the ithpace in 930 of the con-tys Attempts ae aso mae lin natioal owneship ofocea esoces to the conty's anciet commnal montain pastes Vaios moa an pactica agments ae oth common anpopa Clegymen have peache in thei Snay semons that it isimmoal to an sel sh in the ocean befoe it is caghtfo geneations spot oght licenses fomfames an othe ownes to sh fo an salmon in the

akes an ives Anothe popla agment is that neseving win-nes in the qota lottey, lie al winnes of ig ottey pies , will is-sipate thei wealth sometimes with isptive economic effects

he social moel of national owneship, which ha a cental oe inthe classic eate pivate an owne-ship, as etne in a new fom an a new now involving own-eship of natal esoces athe than owneship of factoies A 2000epot to the Icelanic paliament y a committee of highlevel civilsevants an expets on the sject of tilization of nata esoceshas ecommee that the legislate caim nationa owneship oveal nata esoces in the conty that cently ae not stictly neexclsive owneship (incling mch of the highlans in centa Ice-lan an the ocean (Alinanefn, litge 2000 he epot -the ecommens that the govenment nonowne anaat natal esoces in cstoy of the nation to pevent spiseappopiation y pivate actos It is ecommene that the conty'sconstittion be change to explicitly ecognie these two new foms ofpopety As a s ig of the athos ' peoccpation with thei ew owneship the epot ecommens that win enegy, notoiosly

othesome in e in of the nationWin enegy in Icelan will neve e a scace esoce; theefoe, theecommenation concens the ethics of ownehip If pivate entepe-nes ecie to invest in winmills fo geneating eecticity, they

shol pay the ownes (the nation fo se of the esoce fee sewol e the

At the eginning of the twentyst centy oseves mayn it ha to why the ebate the fee qotas is stillalive he oiginal fee allocation of qotas too place




between 1 98 5 an 1 990 A great many of thoe who receive the initialwinfal gain have ol their ota an mot crrent owner havereceive no winfal Moreover the organization hachage ramatically many o the bigget rm are ow owne by

large grop of ocholer To an otier a propoal for recalling the ota i an to hitory Yet the contry' argetoppoition party the Social Democrat mae recall a hing fee acentral theme of it platform he propoal call for a graal ratherthan whoeale withrawal of the right with a xe percentage of thetotal recalle each year he governmet wol then ret ini-via ota bac to iry

Earlier I menione Lor Pery' eion reglatory over-

hing an the manner in which prere for overhing manifetthemelve in ifferen management cheme Fiherie ecoomit

Scott ha hat he element of exclive righembee in a ytem of inivia ota might graally implant aene of ownerhip in her an give rie to elfman-agement by he intry he ame piri govermen ofZeaan which i he only contry Icean e an ITQytem o manage it herie naonwie ha graaly evolve cer-tai management reponibilitie to commercial aeholer organia-tion hee organization are aly compoe of IQ owner whotae ome reponibility for managing the hery in whichthey are active (Yane 2003). At the beginnig of the twentyrt cen-

thee traner of management reponibility are till omewhatmoet an they government In view o worl-wie failre by government in retorig toc biling cce-fl taehoer organizaion i a major chalenge an opportniy

In Icelan ocial moeling ha no rne in thi irection he bitterebate over the coneence of reorganiatio an free tranfer ha crowe ot the btle ie containe in Lor Perry etion

the foc on trengthening government monitoring a enforcement an aigning incetive on vario margin



Notes

Chater

prgress has been made n ths area wes he p

f r a vars arl cntrbtns, see gel 2000

2 Nans that as a fas the f a are an

rankng f natns als can change cnsderaby when we measure natnal ncme

per hur f wrk nstead f per capta but t s unlkely the rerderng w putpr n a

3 Sudes hat estmae he wrd dstrbutn f by gvng ach nd

dal ne data pnt genera cnclde that he ncme dstrbn beteen

s a greaer fntnsccuntng fr sme 70 percent f he vrn SlMrtn 2002).

a 970-9, tat he wrld as abecame rcher ths perd that there was a sharp declne n the nmber f

bew he lne f (r . S llar(s) ay, an tathere was n dramatc ncrease n wrld he perd f we

ge each nddual ne daa pnt nstead f reang nans as daa pnts.evesas deped ece ecc pgess

amng he bln Chnese ndduas and blln ndans The declnng r

f 700 ppsebe vewed wh The data fr the wrld dsrbn f ncme are ncmete, an rent esmang rceues can generate rent utcmes Recenwrldwde trends n are cntesed ssues. r a dfferen vewpn seeUned Nans 1999.

4 veass (ad ay es) ague ta aa pduc stastcs

veresmte ecnmc grwth becuse hey gnre r mprtncaegres, such as csts asscated wh depen f naura

resurces r harmfu splver effecs such as plutn The crtcsm s vad but

the f csts an f netand grwth are a least partly ffse by a prpensy n cal stastcs

t grwth by n lly regserng n thequaty gds ad sevces (dv sy Css 996) by ceasgncme grwh creaes demand a clean envrnment when pepe are ff the f gds



204 Notes to Pages 0-12

has fo

vasg ew ad eatve cea podcto pocesse ad ew et

ods fo measng enonmental damage and fo ceanng p5. Cted 2002, ased on

data adjsted pchasng poe pat PPP) cased b exchangeate chest was the pooestLeone

6 The two banches of aewhch focses on shottem the capact

an econom, and th alocaton n aaet te wt popet gts ad soe gve eve o po

technoog Noneconomsts mght be nteested to know tht gowth theo of

econom the man level of anass Development economcs whch has cose tes to ae mcoeconomcs but also eas wth macoeconomc ssues, secalzes n the economc poblems of developng Development economcs emphaszes ssues sch as stuctal tansfomatons fom agcultue to nst,demogaphc tanstons, and behavo of and othe economc n

socetes also looks at soca and change ad deveopet ecoocs soetes ecectc

methods nd voltes the hetocl nom of mnstem economcs tht onlstated of tpes o ae

oen eceves the cod fom othodox economsts Once a tmethee was a e calle eveloment economcsa banch of economcs concenewth explanng wh some contes ae so pooe than othes and wth pe

scbng was fo poo countes to become ch That ed no onge exsts"ga 995 , 6-7; see aso sca 9 )

7 n the gadate edcaton, economsts ae led to beee that thee s onlone egtmate wa to stud socet: the basc neoclasscal appoach, wth ts

emphass on goous eqlbm anass and expctb who beefs

behnd ths vew s an dea of a geneal theo of socal phenomena n ts edphscs has good pogess an nceasngl moe genea theo, andpscsts ave bee sccess sg epca tests to scee te teoe S

la pogess n the std sstems has not occed, althogh hgh theo n economcs has leves of sophstcaton totheoetcl phscs Pehps Losb ( 99, 4 ) s ght when he ges tht

spcalze nmap eatve eas onto empcal obsevatons wheeas economsts and othe

ae e wth of

. tue o cosed ecooes teatoa tade aows toopeate the

9 . sets dds, socl he

to do t a to fo

plete knowledge the thn ncomplete



Notes to Pages 2- 6 205

or growth theory also lns techncal change toecooes o scae, as we sa see

Athogh do not dscss ther theores here, classca economsts begnwth were of growth.

Rttan prodes a n eceent dscsson the three aes grothnsee lso Solow 1 994 R R 99

recs te of aborto a of leaves physcal captal

e ate o extesve gowt pe te peod caot + where stnds for the process of lborsvng techncl chngeand (or a xed of captal to

labor, the captal stoc aso grow at rate + to accommodatethe naonal worforce, but there s no mechansm that ensues that eoe's savng and nvestment actvtes wll expand K exactly at the rate (/ + alanced

growth requres that the sum + be equal to the country's savng rato, s,dvded by the xed rato, v or ( = + n arrodomar termnoogy, a that exprncs growt at rat + s at

ts ata ate, bt te gowt ate as sot o + o a ow sav

ng nd nvestment rte the economy s growng t ts wrrnted rte.and to rato,

ther vers on dd not catch on Moreover, pror to the appearanceof the SolowSwan moe, aor areay ha descrbe the roees of a neoclasscal growth theory formally presentng a model

Neoclassca growth theory has als deveoped multsector growth modes wt sepaate poducto uctos o dvdua sectos o a atoa ecooythat add p to the aggregate fncton

7 growth theory assumes perfect competton Athough varous

forms of necency charactere all economes, they are not part of te neoclassca

Accordng to Robert Solow (200 1 , growth theory wa s conceved as amodel of the growth of an So far as caneve apped suc a ode to a deveopg ecooy, because tougt tat te

nderlng machner od appl manl to a panned econom or a elldeeloped economy Ths s not a matter of prncple, warness"

Constnt retrns to sce tht lrge economes hve no ecencyadvantage over economs n an n the sof both K and by a gven percentage aways ncreases output by the same per

20 astey tat te cotes cae a ad tey eceve tonvestment and b tat an rato of 35 whch s the

of cted




22 s who Solw's 195 7 arce whhe epca a eocassca gw eoy, a e epca

ork of Kendrck and Denson, hch noled asl more dggng and calclaR a essay

sreng groh heor, Abramoz dscsses mos of he major deas alg wh may ha and or heorss use n her models (R R

23 2000 a of he of oal facor

24 has a sophscad complexeoeca ad epca e opcs e eoeca

juscons for ggrege producon uncons, he mpcons of denngof over conse

q of ncreasng o scale, he pros and con of sng economerc mehos n growh acconng, an a hos of sses (arro 99; en 2000)25 The basc Soow mode o aow for boh and physcal

capal, has been horoghly The deermnans of he level of seadysaencome are sascay sgncan and have he predced sgns,he rgressons ypcally explan a small poron of h Thca evdece o edogeos o ew gw ey as cea ccodg o

Wczrg 2002, of he mlplcy of models of growh,a Tess' of

growh heory are a over he place 2 6 o r references an greaer ea concernng he orgns an mehos fnew or endogenous growh heory, see Journal o/conomic rspctis 994

27 n he lae 1 90s and eary 990s, a wave of regresson sdes sogh ndec suppo o ew gow eoy by esg e covegece ypoess o eoclassca groh heor, bu ne groh heor, nlke neocasscal groh theor,does no predc convergence of per capa ncomes n rerospec, he convergence

conroversy was no a producve enerprse (Pack 1994 Romer A vasemerged, srces of

The ronc le of a paper by Sa1aMarn Ran Two MllonRegressons," he exploraory hose regressoudes a oay cde ecooc, po ca , ad soca vaabes oc ad

(2000, 2) and sons o some generalwhch we he of regressos"

Cgue e l 997 provdes neresng crosconry ess of of he proposew sona

2 There were n fac soaed aemps o echnologca change anof eoclasscal growh hory, hey dd no cach o

wage ad o a cca evew, see W e avanew growh heory, hese early are now seen n a lgh

Chater

1 Krgmns Ohln Lecures (995 re dedced o mkng he hrdo



Notes to P ages 24-26 207

2 n a knowedge arieacto do ot ow te bac o te coce et o te appopate ode,

hie an nforation proble arie hen actor lac nforation about the diof the a et or a See

Stenon 2003 .3. Of the to the approach, thework of Herbert (957 bet known Sion nyze choice in terof th of sacing in in ocial cience i known a boundd rationality ccording to thi view cognitive itationcopel pople o ow and od ther n a tp. powe, geeay ecogzed teoy a ot eeged to expa ad pedct ow

tine re fored nd how they chnge n the new economic, nydo not

action cot of aking decion which thee interpret a contraint ranactioncot analyi of uch natue i actually a hybrid of Sion' boundedratonaty approach and neoclacal econoc deciion by agent are oftenulaed in er of inituton have the cogntive role ofcoordnating decon and iplifyng choce (e lei 1 83) . he ocaodeapproach which heappoace ad tat oca acto, e oca cett, ae etcy od

e of ther environent nd then eek ther gol in term of theeidea that caal hape

ica acon i we known n politcal cence the orgn and ofuch mode are not we underood and eohane 1993).4 Until 600 or many new technologe cae fro China and

the Mddle Eat The reaon why thee region did not generate an ndutria revout o copaabe to tat te Wet a potat o ode ttutona ana .

5 hi arguent include the pobility tha ndividal cizen of a poor

country coectively poe full knowedge of odern production technologie butfacor prevent of

n addtion to coonly acknowedged econoc potcal and ocia dincenthe of knowedge the can be a retricting

6 aete ad ecott (2000) tae a a a aowe vew ta do o

the iplication ne groth theor deeloping countrie . Their anal ito econoic a are iperfection" and not

explore underlying oci nd poticl fcor.7 L me, R R and social tchol-

ogy but they ue t to decribe the producon routne of actor in pecic indutrier he

social tchnology to decbe owedge o te eca weebyocia create and the ter modl odecre or are baed onor ide o echnologe oe y

or

8 rule re the bone of enforceent ehniare the ucle, and ocial ode are the bran .




9. (1990) the betweentos. Coase oes a expaato ba sed o tasacto costs o te exs

ence o rms (organizations) At one leel o analsis, rms constitute socal sshat are to larger as he

ne instional economics is still ague abot the reationship beteen socal ssat dierent10 Consider the complictions o eectivey trnsplnting US corporate w

o anothr wth leal to reach arable evel o legait to that o the United States. When the basic

o both and transplant are the tasko taspatg aw eatvey tte owedge o soca tecooges. e

sociy cose Nordic Denmrk, Finlnd, Icend, Norwy, ndor decades ease

in many areas 1 1 . See Alt an Shesle 1990; anks an anushek 199 . he Journal ofInsti-

tutional and Thortical conomics 998 incudes a special section with nine essays on Views and Comments on the New Institutionalism' in Socioogy, Poitical Science, and Anthropology. or the impact o economics on contemporary poiticalscience, se G Miller

t te aggegate ee, o eaed tasacto costs o opeatg a

property rights regime s Y or Z the trnsction costs o privteactors as wel as costs o as

and the police13. n this book am concerne wih instittional onew social technoogiesthat raise a community's aggregate weathreorms in this sense are amost) never Pareto improvements, which require thato oe be ade wose o by te cage but stttoa eos (as deed ee)in principe meet the KadorHics elare criterion. A KadorHics elareimprovement occurs when those who gain rom institutional reorms are techni

cally abe to copensate the losers (ignoring the transaction costs o the copenprocess stil be better o beore.

14 Demand or reorms need not iginate at the top oa socia organiatonmay om he changes in legisation, or rivateues, oweve ae suay te peogatve o potca o goveg bodes. ve

hen the ne institutions comes om belo, there is no guarantee thathe proposas are backed by a o socia

1 . he trnsition to in tern rope hs generted nterest in these

an Rolan 2000 provies a gooo these ndings

16. have recently concluded that it is

se to betwee te edate ad (odeeper) o economic he basic growth determinants that the litera

are to trade,openness , n enomic policy does belong in his c

For drect

eects on per cpit income eves o these three ctors in regres



Notes to Pa ge s 33-38 209

recently or heycocue tat te o totay oates te eects o geogapy

hereas openness is insgnicant an has a negate sign . he stu aso uncoers reverse eects. o

institutions an thus has nirect on eesAs I n chapter change, as the nrouction o wellunctionng j ucil syste, puts huge resource emns

a which not be able to aor thelegal proessonas an recoring systems. My thess however

is that absence creble by key actors is mor ky (te ew te eay yeas ta ae te atea

Chater

he oth section n this Economic Institutions he oernHstory o Long Waves raws on Eggertsson 997b

2 Full knowege o coming ecne an colapse, however, shoul havemae members o Stans basc (an the atlarge an their

3 e Wegast oe actuay oy o potca

he moe expcitly tht the hs set up eectve economic struc(property or

to operate the economc system o politcal instablity an preatory behavior by the government. Oson's Stalin has one better thanruers by initially combning a stabe potical wth an eectve economic equilibrum.

4 s ate as te 980s eve soe btte ctcs o te Sovet ege weeincline to oerestimate the countr's economic perormance. In the 970s, sanar Amercan textbooks o economcs sero usly contemplate the possibty that

living stanars in the might so on overtake those n the Unite States a poltica

o nationalizationenatonalzaton cycles In hs view, the cyces reect attempts by governments to lower the political that sociaoes ae euta a (b) tat pubc etepses a pvate etepses ae

ecient. He then argues that at certain times it is politica expeient orgovernments to nationalize raise tax prots ratherthn to increse regur txtion. Lter, when nterest rtes re hgh n the polit

cost o taxes s also high the best or toincrease their is to se the amiy jewes (the pubc enterprises). Rosa

hs ata or the hal o

te twetet cage t s stace ca be see as soey stribtie (shiing the tax buren) because public an priate rms are assme tobe we the as to costo proviing cyces hve Ross key assumpton about policymakers consistently believng that nationazatonentionzton hs no implictions or prouctivity is not convincing




7. Copaso betwee oe pays a age oe evaatg

instittions. In the United States the perormance o unregulated intrastate airexas and rle the

ing the national airlines shod be aboished (Vietor 19) across o varying o oten hep aign inregons he o the British Conservtive Prty used exmples o stte

to ht at n 1 928 a orytion noted that the state railways in were reported to be at the mercy o

eaders and their ay overpaid thecoa es wee deeed to be ves o ececy (as bySingeton 199 9).

8 . cyces

cyces o change I we believed that market economies experiece severe crashessay every 0 or 00 yearsthese crashes might give rise tolong cyces However the case or ong cyces as orth

by Kitchin Juglar Kondratie and others remains to be proven. he estern powers oen as part o their policies o imperia

ism oped trade China Japan and other Bta a s ate a s te eectoate was ess ta 00 000 a

tion o 4 milion. he Reorm Act o 1832 opened Priment to the business via the o gave the

vote to twothirds o maes inaly a 1 9 1 8 act opened the vote to males overtwentyone an women over thirty (Checklan 1989 08-28).1 1 At the time o this writig i 2003 however some o the states o

the ormer Soviet Union still more or ess ollow the Soviet mode 2. 2002 accoutg scadas te Uted States ceated a () cs s o

condence in aisseaire capitaism hich led to calls or ne regulations

Chater 4

1 Externa shocks can aso have positive eects by cracking poverty traps a creating or as chapter 10

2. e dscusso ts secto daws o te st sectos o

3 . For an introduction to on traditional systems o socialrity in developing countries see Ahmd et . see lso d e Jnvryan Saout Newbry th o an thmaiontrasationosts perspective in a o the theory o

Also th

wo Bswage ad oseweg ay ot a geea teoy o ecoocinstittions in traditional rural areas Binsanger and McIntire ( 1987) eplore the

o tropical ad adUdry 1989) nlyze in seirid Aricn d

Chavas (1989) examine risk and transactions in semiarid tropics and Fachamps 1992; networks in societies in terms



Notes to Pages 50-56 2 1

o and ownsend (1992, generaaayss ad cotact ecoocs a epca ad teoetca

o Asian illage communities, and Cheung (1969, 1970) pioneered the stud oterms o costs.

4 o eort reduces epected ealth, then risneutra actors or actors a I actors diversiy in spite o expected redction in weth, their ction cn be interpreted s

to or Athough al nd strong positive correation between temperature

and hay yild, thr is only a wak correation btwn and ite patte sees (Ogve (ggetsso Capte 7 Wy ce

lnd Strved, gives ller o the history o the

6 In 28 1 the Icelandic parliament raied a new law code, Jnsbk, that was modeled extensively on the Ggs and remained in use in the nineteenth centy.(Even in the twentyrst a handl o Jnsbk laws remain in eect)

7 In the census o 1 703 , some 90 percent o all male heads o arm households oy 2 percent o mae arm aborers were married men or widowers. llegiti

macy airy low, and had childrn owdlock latred (Vasey 377)

8 For Icelnd ws the Dnish Crown. I the scope o rishad the entre

by cold spells and vocanic activity would have been specic risks in theingdom. the royal in Coenhagen had oerated a relie sysemor Iceland (which the Danish Crown did poor with Icelandwod have reqired supplies to be stored mosty in Iceland rather than in Dena . Stog te sppes cead oweve wod ave soved oy pat o teproblem, because poor communications ithin the countr oud hae hamperedthe distribtion o spplies, especially in winter. Dring the crises o the eighteenth

centry, sporadic attempts by Copenhagen to send sppies to Iceland onderedo poor

9 Rodri (1998, 4), data or 1 10 regresses average growthrates in on rates in 1 960-7 and on a constant term. heegesso yeds a 2 o oy 0. 2 (ad a coecet o agged gowt o 0. 39).

When Rodri ecldes 1 1 Eas t Asian counries and his sample thecoecient on lagged growth becomes insignicant and R2 to0.02.

Robert xprsses about international crosssctionregressions social variables A paricuar stye o empirica work seems tohav the o growth and the

body o copaatve data coped by ad esto( 199 ) It rests on internationacross section regressions ith the aerage grothrates o as nomic cors on side esiy growh i

growth rate were easiy acted. I had better admit that I do not nd ths acondenceinspiing project It seems together too to bis rom oit



Notes to Pages 56-63

td variables to and abov al to th that tho vey deet atoa ecooes ae ot to be epaed as tey

represented dierent points on some elldened surace.reverse o is

act poitical12. we cannot by theeders

Chater

e dscusso ts capte s based o geea assuptos coceg

the o growthriendly environments. In ormust to assets

trary seizure by private and pubic actors (2) acilitate and toleratethat lower transaction costs in rodctive an rovide macroeconomicstabiity and essential goods and the and importation

o pure and appied knowledge.. or a orma anaysis see aso Oson1 3; cGuire and Oson 6 . See

aso 979 988 .3. ot aso cosdes agecy pobes o wo ey o a

lrge number o representtives or pubic goods nd coecting txes.gency power by the

may harm the economy4. n a oneeriod model o taxation s* is reached when anincrease in the rate o taxation beyond s would negative supply eectsreduce the tax base national income) by a larger proportion than the proportionalcease te ta s o te povso o pubc goods te ue ceases spending on pblic goods nti a urther increase in pubic goods ependitures bone dollar increases national income jut enough to add one doar to tax revenes.

I the tax rate is the last dollar invested in growthenhancing pubicgoods by two doars dolar

additiona tax See Olson 2000 8 95. e that the reles on a sma band o and

oe eectve to ewad te suppotes decty ta to use pubc goods toincrease spporters incomes through the eect on groth.

6 . anaysis o democracy ignores agency between eaders nd the voters tht support those leders incuding the role o poweru specilinterests.

7. Several have recently experimented with transerabeshares or their sheres. IQs a o

popety gts ad goveet (see capte8 . h e buing and seing o conries is not nnon in histor A s ate as

States as theU. S. Virgin Isnds.

9 . For the denitive account o the selectorate mode see Bueno deet 2003; see lso Bueno de 2000 nd Buen de et 1 2000



Notes to Pag es 63-77 2 3

Th slctorat taks lbrty with ofvat goods" ad goods." o xap, pvs cooc gatos,

sch as granting of onopol rights to spportrs, ar classid as prat goods .I ow to

Moror, popl also sho loat to th crrnt ladr of a dctatorathy th nxt ay vn wors. In awhr th liklhood of constitton rforms is virtlly zro, th trntv o

ictator s anothr I ow to 3 High rats of conoic growth in th Sovit Unon Sta spcay

th plans, s to contradict th clai that a sa wnningcoato ad a ag sctoat a assocat wt pocs o cooc staga

ton Econoc growth th Sovt Uno, howvr, ws closly td both to thrrs' tast for and to prcvd to a

ary to t ral and maginary xtral thrats to Prvatin th contry was iniz an hl at th bar ini rir for antaning th hath an nrgy of th workforc Th adrs thn alocatd thps to projcts intndd to bi d conoic and litary ight.

4 S chaptr 4In th modrn and wr aong th to

xpa t s o t Wst wo d ts o appopat popty gts.

6 Historins trc th conomic rgnc of northwstrn bck toof rct accss to

has bn lnk to rdrcton of trad by nw gographicscovrs . h svntnth cntuy saw th clin of any cits associat wthth dval trad Itaian ctis ad ctis of th HansaticLag.

7 S Wgast 7 o c t dbat potca scc aboththr dmocratc als or litd gornnt cos rst .

8 For xamp, thy ar indiffrnt ex ante abot which sid of th road to

drv on

Chater

S aso Uniersity of ennsylania Law eiew 6 .2 S aso Ehrnbrg 1 77

3 to th conoics of trasacton costs, xprinc goods sappr o th rkt nlss prodcrs k crdib coitmts to dvr th

of spci for th Eggrtsson 0, chaptr Ifrs ivst larg dvlopg a brand na for a xprinc good i thlong thy wll los thr if dscovr a

t ta was posd. atoa wgoods on trst (ithot bing abl idiatl to asr thr tr qalit hn

aloss of cpl. Th os

apply to arf consption nss old byrs can pas s xprinc on tonw




4 (16 boosts ccy by thatdocatc potca pocsss a ct. Wtta's agt wc gos agast

h thrst of th pbcchoc ltratr rss on sha mprca fondatons.5. stdy ss as cas of

ans Labrador ho adoptd nors of cs propr rghts n land hdmand cratd to wastfly xplot th rgons bvr popaton Erc Posnr ( l 6

tas howvr that th ata collct by Elanor whchndcat that th nw proprty rghts mrgd n th d 700s whras r tradng had rachd proportons by th ddl of th cnt

os ay av aggd by two cnturi.

6. A ndntl mpts for modng noclsscl conocs ws prof thory for of and

Th ffort has prodcd a arty of thors that hav strong wa or nonstng ts to th stanar conomc arag (Coas 37 Pttrman 188. In asrvy of dffrnt approachs to organaton dnts h folowng lns of attack n adton to tradtonal croconocs: odrn

organaton managrasm prncpalagnt modls bhavoralsmth of contract vw transactoncosts coocs R. R.so ad Wt's paag ad owgbas tos. ost o

ths pprochs chllng wth vryng grs of ntnsty th stndrdof actors

tools spcay from psychology an a nw assmptons th lv ofanalyss th nformaton avalab to actors an th abty of actors to rocss nformaton and mak optmal dcsos Ths altrnatv thors also prsntnw mthods for aggrgatng ndvdal csons and modlng th foraton and

voto o owdg ad pcs.7. Th thors of fctonalsm fal otsd m casscaton hch rfrs

ony to thors that ass mthodoogca ndvdals.

8 Kohan and n a thoghtf rvw of thosss also dscss basc

of statc and dynamc analyss Intrnatonal poltca conomy mrgd n thand conoc mthods to th of trnatona

(673 Statc tatoa potca cooy as b ctcd o tag p

ncs and dntts for grantd hl gnorg and othrconcrns as ncrasd ntrst n rghts and

tl sss (67374. S Intrnational Organization Hchtr nd Kzw a rvw of aso a for a

dyac thory

. Aok 28 to a

dyac t: y ow t agts cogtvy vs t owjctv ods n rspons to xtrnal shocs or ntrnal crss n a corratd

[th to sr a ofchng.

capabl of

wh thr ntrsts ovrlp



Notes to Pag es 82-87 2 5

Frstbst ar wth l ando tasacto costs, ats a totca o agay costcts.

2 For or dta ad rfrncs, s ggrtsson 1 8b.to law, wr of rqst

sarchs srpls hay n thr gnral ara, both in thr on and nighboringagnts anyi th r hd stord or foddr th thy for th witr Srpls hywas to b sold and ord to in th as th Thlaw prscribd svr for thos who rsd to coply wth th rdis

sch: Thir wr to b and th rcv a. aw pttd o oc to ov ay, ad as wo

rcvd wh dfding thir cold ot cli copnstion,crow cas was thos

rsstng wr kild Th law also cratd an ictiv for popl to xposborn nghbors who hd thir rsrvs . If th nghbors rfusd to tra, thos whorst th hay t at half pric ad also rciv half th n"Eggrtsso 8b,

4 A cod spll i 18-80 th shp by thrhs, oranials. n th cold sp th loss 87 , shp, and for

t pod t oss o gow sp, abs, ad oss ad

of ws to 884,000 shp, or n vrg of 3for ach

5 Thr ar two ky xpaatios why w hav ttl vidnc of advocacyfor hay storing ad vstock anagnt rior to th svtnth cnty: cliatchangs ad th history of pritig Prtg was rst n clad in thsixtth cntry for pblishng rligos txts. th at sixtnth cntry, a gna coo g o tpats occd t ot sp, cotg toth nintnth cntry. Wth ths cat changs , th foddr criss in Icandicfaig prsably bca or rgt, as did calls for rfor.

Coditios prodr Icad did ot ak ctra storag of hay agood wr sca advantags storag

a arragt clandc fars wr not gropd itoviags wr scattrd ach

7 ccodg to jaaso 3, 8 , t cos tat xptd

th listoc planning sd th rl to allocat pbic forth givng ach far n dstrict a vto .

ly no fds wr forthcoing nd th shortlvd xprint rlid ostly onTh di not rly on corcion. Two or a

yar appotd oca spctors vistd all fars th co ad advisd thfarrs how to foddr In on th

aagt o a t as t dstct was atd ad ad ad toswho took spcaly good car thr anias rcvd spcal rcognition.

that actors prfr gratrss wlh sc y .

actors oprat s

Hofstd 80, 11, 18 probbly hs don or thn ny othr




scholar to th ida of social Hofstd taks thcoctv pogag o t d. o ta ad a a ct xap

of a Hofstdtp std that analzs th rlationship btn bsinss organizaAt a abstract brg

ork b Hak, Poppr, Hinr, Hoand, and Arthr, intrprts rational bhaior as follows: n a actors not , and cannot, to th llof ch nd vry prticur probl sitution thy confront Instd

thy rly on that rct and

to w xpric. "20 . (18 that antinor a givn si

cts, t ag o sa . a' s dpd o

srvbl tipping points, iplyig, for xp, tht smll policy chngs cn hvlarg ffcts, and vrsa.

of ths2 1 . E. A Posnr ( 6a, oints out that th athoritis can assis norvioators and rdc th wight of sactions by that hid thcircvntion of a nor A govrnnt, for xapl, can provid lga spportor actors who structr oans as sals or lass to avoid laws. orovr, privat nor both in Christanit and hav historicaysoca tcoogs o aws. . . os

intrprts mrkt in trdbl ission rights, which ws in th UnitdStats as nor of a that

to pot, not too h old or was incit bcas it did ot distingish btwn highval an owval ollutrsbtwn irncs in thcosts of rs of claning As for th Icadic cas, I hav not

fond instancs whr th authoritis soght to hlp vioators of th haysharingo to d t ccuvtos.

22. ndor and Sistak (2001 arg that thirdpart nforcnt is thdning charactristic of social norms. hirdparty nforcnt rfrs to sanc

tions for dviating fro social rus that ar by pop who ar uaffctd by bt o

ad forcnt intrnaization or sfsanctios a coxist with third ar intrstd in all fors of inoral

23. v G, a upubsd auscpt, poposs t o owg pocdr: First, sing historical and coparati inforation, sort ot hat tchno

logca and factors can b tratd as and whattionl fctors r to b trtd s ndognous, tht is, b xplind. hn,

a contxtspcic, ol thos actors dn th xogous ruls of th ga ad sov for possib quilibria nd

if of ths ar for th of th insti

actos dg to b ay, wat stoca' actos can b considrd rsponsib th slction that

to of24 . drivs cndiions k n llo

cat toward or incras

in ovrl lvs o f thnic ctivitis in socity



Notes to Pages 92- 0 2 7

5 are not an of th Sngleat ay eve o etc actvty s aso poss e .

6 One of the themes that the antiodernists nitiall emphased as thatdegenerate to

than farming. The folloing ctation o the Octoer 838 Icelandic jo na Sunin an article opposng of eetwhich hd consi sted of open rowbots cptres the spirit of the trditionasts: That we the anwretchedness of the sailors on decked vesses than we are fro that of other sheren s against the of things n

7 vaat o t s soca ode st ceta cces bot e

ic nd s the fmiy fr ide which hs hd consderbe policy

8 The Marxist party apparently was not as divided as the other parties over the merts of farmrural versus inustrialuan fe erhas ecause theMarxists saw as an inevtabe historical stage

9 The country is still withot raiways.30 ayes s rle s a statistica forula or pror eefs n light of new

inoaton. This is the ormal ratona to eiefs in a probalistc evoet

Chater 7

The eigrah to ths chater s cite n Cutting 955 6. Ths chater s arevse verson of Eggertsson 996 Sectons in chapters 4 and 6 material fro

the econoic history of Iceland as llustration and provde additona (bt notesseta acgoud atea o ts capte.

The chapter's concding section oos brie at the noledge proeinvolved n evaating the of strctral change n historical Iceland.

Athough varous cltral eefs or social dotlessy helped redce thecosts of do not go as far

as Hastrp who concudes that the Icelanders were actaly iprisonedby the entality does not expan how the passedo oe etaty to aote wc s te asc weaess etates

socal approach Bre In Iceand a approachst explain the collapse of instittona n nineteenthcentury nd the contrys vgoros response to the opportnties offeed y En

an nterlopers eenth an sixteenth Dring the coonwealth perod 930-6 woolen cloth aml was

the aer the wth orway

ed s skri epace aml as te basc expot. Byooen prodcts ere no onger the contr's maor export. In 36 the Cron

of Icelands exports towho Bergen s de Dn

kingdo reexported celandc ski to ther arkets in EuropeGelsinger 98 8 horoddsen 94 54 notes tht lredy n the




celandc stocksh had a alityedteaea ego, ad o cotepoay aps cead was soe

times non as Stoaa.3. of was based of

the la see, for eample, Friedman 9794. socal storage of andeffectve vestock mngement in cend see chpter 6 nderminedthe th of sharng was of theffectve informal system for coping with specic risks . The haysharng

in tsef, however, was not a crtica factor n holding back theo a stog depedet sg e peodc cses povoed by poo

livestock mngement, in effect, were n incentve to more emphss on thewere by factors, as we shall see.

5 Toward the end of the tenth centry, the celanders established twocoonies in sothwestern Greenand, whch sggests Iceand was fly settledby the year 000 t s not entrely cear why the commonwealth ended in a civl

war, leading in to a nion with the kng of orway, bt popation pressres and economic stagnaton probaby were factors by Engsh shng ntrests, began tlted th economy thsg secto ad, as te woe o, ceated a boo cead

tht probby extended into the sixteenth Fnlly, the economy a perod of steep the period of trade,

60 787 The rst signs of recovery appeared n the early 800s theremodern age contine ntil the ast years of the nneteenth centry.6 The drop in happened most the 3th and

4th centries and dring the socalled Little ce Age n the period between 00ad 900" sso 986, 3 tese peods, a a aveage a tepeatecased sbstantial drop in the primar rodction of grassland 986,

35 . celandc faing depended on the yield of grassland7 the eighteenth centry anish athorties several attepts to

the elite alow by

see the rst section of chapter8. Crew sze on an contemporary vessel, was not

age eog to pose ay pobes o scae o te sa ceadc coty .

9. Eropean coonial poersfor eampe, the dd notmantain a strong presence in overseas territories on aof ntonls who recrited rge nber of loyl oc gents. did notfolow in celan. A 809 episodenforma reance on cooperation om the loca An adventrer of origin n Iceand on a organid his

spates to aest te as goveo ad tae ove te t ts te,sided with France, was at war England. Jrgensen pro

of the contry for twoA si by ship dethroned Jrgensen, who ended his dys s

0 The new ships hd two msts nd severl sis insted of the one mst tht



Notes to Pages 07- 2 2 9

had een of the two thea oe ceadc stoca wtg as

een rather silent aot the Engish era in Icelandic histor art ecase relafew of are

and liraries. Mch the recent interest in the eriod has res lted researchlate historian who on BritishOn 6 Henry wrote to John re of Oxynford

of that ye esyer all the ogers of thos artes have or licens to dearte in the viage towardes Islond as they haveen to do in assyd . . owr lly interly loovydte yg o eae at . . . coayyd . tat . stee oe

nd exstorte his there geynse ryght nd conciens 955 Intraders to Crown's

reresentative in Iceand In 467 they kiled the Danish kings in thetry an ing this era an Englishman ecame isho over the northe haf ofIceland and Jnsson 99 49 77

In 1 53, Christian II of Denmark offered Iceand oth in Amsterdam andEngland as collateral for a loan needed to defend his throne andJnsson 74.

e wee ee dg o te aseatc wc tey

were emers. To void lienting the English the did not fvor trde yits

4 Ails 97 rovides the classic historical of Danish monooytrae in celan. or the enitive moe analysis see Gnnarsson 98 3 whichhas created new ersectives on the economic history of Iceland This chater

enets extensively from his work. Gnnarsson has estimated the Crown's andecats coe o te oooy. t 66 te ce o ceses to tadeith Iceland as ket lo and the Cron reied on taing the trade. After 166,taxes and dties were aolished and the rice of icenses was raised sally to

what the arket cold earCrown from fasteads

income from shing oerations For a rief of how the Crown todeal with its agency in distant celand see 983,

6 e dstto o ad ad wea) stoca cead was eaay

neqal more so than in an oincome contriesshing season mostly ace in winter there was

dend for or in the rrl sector The mrgin cost of sing servnts the was ae the to

landownersthe laws of the of forid

ods excet we ees o a ag te asson and ason he laws hat took the

orway a fory referring o of workers Hlldrsson 970 34.to

cretion of for tying together nd mige nd lor constrints




1 9 . A Jnsson 1994 n an excelent analysis of the Iceadc ecooc syste te peode peod a o te

relatons beteen the farng and shng sectors econoic regations and thesyste prces

0. Althogh preodern Iceland laced a police force ndidalas thieves anddeth or sve lbor n Denr

xe in was not allow . thecrown decided which prces shod exs and these changed very litte til 1776 withthe exception of the perod when the prices were

to te ceades. e oopoy tade pce sts coespoded we to

the very old price lists in Icelnd ntern trde which hd chnged litte since the

Exchange n preodern Iceland coodtybased abstractof value. sh was the value unit ost use n foreign trae an el (a unit of coarsewas ost comon in doestc trade 1983 9)

3 . The ship was ost at sea, and the Crown gnored the message (Thoroddsen 94 74) The Protestant eforation eroded the and wealth of theIceandic bishops and by th sventeenh the sees were no longer the powe depedet oce tey ad oce bee .

4. The voyge of John Cbot in 1497 nd by Deceber tht yerword reached Italy

of Iceand fro which place there comes a great of sh called stocsh(tchell 977 1 55 ) The iscovery of ewfounlan, however i not ut an ento Englands Iceand sheres In the English initially repressed

agrculture aowng ony sa plots gardens) a mirror iage of the industa ogaato o peode cead Sde 980 cted Gasso 983) .

5 . The French ade ther reqest for a land base in 18 55 hen free trade as ntrodced in Iceland As a folowp in 1856 the Frenh sent Prine eroe

a nephew of Bonaparte) on a visit to Iceland The reqestwas

6 A arge majorty of Iceanders were not drectly invoved in the sheriesfor the of n 703 that 69 percent of

a ceades wee egaged ag oy, we aote 5 pecet osty

the northeastern region) ere inoled oth in and t on drng the onths of hay harvesting sggests very itedenggeent in the sheres. The reinng 6 percent ncdes prriy hose

ngae oth n an h shin seasonnsson

7. n the 750s Sli agnsson and others nanca the

Cow, attepted to stat gt dstes eyjav as we as sg opeations with decked vesses. The attempt partly of oppostion o

of trade felt

8 . new of the toward theend of the twenteth see for exple Mgnsson 1985



Notes to Pages 2 -32 2 2 1

A. and G .

9 Denmar lost oth ts na and ora onng the osing side n theapoleonic wars .

30 n the preos centres, transportaton constrains rled ot largescaleom celand. the was opened to foreign thednneteenth centry mgrtion gents Aeric qcy

3 t i s a l so that the landlords contempated whether an effectivexport in the wth international contacts transit new

ad ew teco oges to te od a secto, wt ts Vgage tec

nology.3 For of

anayss to expore n an elementary fashon how two decades ( 1 730 ofweather favorale to ritsh agriclte acte the roction of anfactes .The there concerns whether a temporary increase in agricltraltivity helped or retarded the ndustrial evouton. Formal analysis cannot resolvethe qestion negative nd postive ets are nvolved. Epirical ndicat that the net effct was trivially sa.

33 o te as avy seaced sg vesses

off celnd in n effort to stop egl trde with the cenders nd fondof the fro in northern

regon the onths 71 734 A nsson (1994 argues that the very low reative rice of laor in thesheries free services of far laorers the winter ecase

of the restrictions in the laor maret, made operators in ceand sstitute laoro capta te sees, avog sa ope oats wt age cews. e pcestrctre ths renforced the poert trap. Yet in the nineteenth centr, henDenmar egan lieraiing celand's foregn trade a odern shing indstry

emerged even though ost of the aor restrctons reaned foray

Chater

This chapter dras sstantial on Eggertsson 997a, 1998a, 1999.

Tnergen 1956. Frisch pioneered forpnning nd pocy prposes t plished reltvely ttle of this nternationaly see Johansen 1 95 reconies his dt to Frsch's wor on decision ode s.

n his ater ohansen a went eyond the tradi

toa pag ode ad copoated tea teoy, gaes, adinto his representation of the panning process.

3 tes that Frischde nyss nd in 1944

niversty of Oslo eorandm.

4 Tnergens dstincton etween nd or



222 Notes to Pages 331

s than inias et cotos , ceases tax ates, o ew weae eetsay

neash fndaental changes in the social ss e. Dt 44 eaoraes this point and ost acts two

5 . The dea is not ne. In 938 economist agnar crticzedTinergen policy and thatshift when pocy chnged Heckn 99

6. The for A . who scovered what he saw as a stale nverse relatonship etween inaton and the level of

over extended prods n odern history. His

dgs o a tadae" ps dcated tat goveets coose

ther fvorite low rte of nempoyent ntion, leit t the cost of hghy of aggregate

work showed that a stale Phillips does not exists the apparent reationshi reaks own when attet to trae less ore ination forore ess

7. 993, 0-5 provides a fascinating sary of stdies y Ss and in which they odel a prvate sector that knows it s ratio

nal xpectations econoics and an irrationa" that dos not andeeves a ps cve. Usg data o te Uted

Sttes, estites ode of the governents ernng process where thecorrects ode

8 Politica acroeconocs is a research progra that spans a wide range oftoics an attracts the interest of oth econosts an olitcal scentists. Alesna 995 45 sts the following topics as aong the exapes of recent work in the

ed: politcal siness cycles, the potcs of the governent dget, the potcalecooy o gowt, te potcs o ad staato poces, poes oeternal det and capita ight n less deeloped contres, the effects of differentelectoral systes on econoic policy, and the perforance of coaliton and nor

ty governents reative to single party governents9 . W = G(

versally recognzed econoic goals and potically otvated econoic goals special for potical econoss see all

ecooc decs os as saped y potca cosdeatos te odes , te ta

get preference fnction old take the W

Chater

. Copared to the ideal a secondest soton can nvolve an inferor econferior or oth.

. e Bea vestgato poay te e oentiona transition stdies riten econosts. Man anstrea ornals

resed to to to

3. One can ony speclate aot how a relale theory of instttional change,f it eerged, ffect the econoic prospects of poor contries The net effect



Notes to Pages 4 -46 223

e ither or On he a and wideytsted teoy sod ceate a boad o tecca ad ds

agreeents ao ho to reach spcic goals. Moreoer ne heoretical insghts toolsfor for

capaci to ae credle coitens to inestors ao t the secr ofther assets. On negatve a nw refors byplling side etphyscl vei of gnornce nd ng cryst cler to

refor ofth e thatther ndr a new rege e lea.

4 n neoclassica econoics a state or s f thereexsts a state wee at east oe acto s ette o ta B ad o oe s wose

off. f l ctors optie governent eders rtonl ctors woldstate over cost as cost of

bocs the ove to see Hettich and Wener 9935 To be conssent we shou also oe exerts as sesh axers whpersona agendas The following secton toches on these when dscssingthe preferences of OECD policy advsers.

6 Critics soetis clai that theories that derive soca fro theof actors who ther are teng tha the ar

peect o opta. ese ae stae bees. Costaed eads to

the est of words ony n the nrrow technic sense of est choice conest for a to

t n general it s not otia to ose a leg7 Quantitativ olicis an ualitativ olicis are ters that Tnergen nrosee chapter 8

8 Even hogh quantitatve policy easres do not threaten a stabe politypo tca peeeces ad potca cetaty ay stcty t qattatve pocyeen ro tn scal and monetar polic in an nstale politica enironent.

9 Th deternacy paradox is also nown as the Bhagwati paradox.

Oson (965 ade pioneerng contrtions to theapproach whch to to stae.

derivave has eerged varos laes as the theory of rentseeng and econoics 97 Tollson andoc 980 oso 982 983

n contres here the alance poer is fragie th e lits for alsoextend to standard acroeconoic elongs to what hav caledqntitiv polcy. Mnstre r firly in condeningcrtan conoc as ratstion excessve spply of oney or credt rationing (Kreger 993 Econoists

to on t are now lkely o

expa te o acoecooc poces as stategcy rational poitcal actors.

was ofMny h s pproc eginning of

rst as of the ew two

p dvoctes of onetrsm were Milton Friedn nd the te of Krl Brnner




Melter. The dirence etween the two was

y tecca. ad ete epcty eected te socaed S ode

an presented an alternatie fora oe of onetar inences on the econosee oro 003.

13 . See and The iea that peope rel on a series ofns in antionry ioogy who do not view the in s n integrte syste for processing ata a as a larg an network of nctionaly specialied devices" and Tooy

39. econoics trats prrencs as Cosmids a ooy ae ope tat a o psycoogy ad ecoocs

ght e le to crete science of preferences" 33 .Deardo offers a of an

approach to ental odes with an ephasis on appications in poitical psychoogy. e recognizes that foral theorists are ncofortale with the incoleteness of the models or elief systes that this revealssdy of eief systes in ass plics is a semina contrition that has forecaes frae the deate political elief systes Converse ephasies the

ack of systeatic thinking recent thorists orderto ts wo y tocg sceatc odes tat accodg to eao gve

loca coherence to thinking necessriy providing gloly integrated view. . . are prototypes

scripts or categories that provide a frae of reference against which eperience is coare an (8 1 . An alication of schea theory is in Larson 9 85

15. Also signicant is inertness of ndivia ehavior case y astentcosts cdg te te eqed to dscove ow to se o epo t a ew syste oto make astents s ch as changing o s

16. Lineck 1995a, -13 sggests a poicy of reistrition that s

stantially redces incoe ineqaity need not ower the for frther redisof can the

voters who then to ask for ore The dean foralso increase that the of epens

o potca decsos ot o aet oces ewadg actos o podctve co

tritions.

Chater

1 . In terms of 4 we can say that the instittions necessary for growthar the circe the lae state of

te ecooy. s we ae ee deag wt pocy ta acoeconoic polic reslting state of the econo" refers to the instittiona eni

. The concerns of los reson. in re

rospect, oern socia science is not ale to predict with great accracy the econoic nd politicl h the Dnish Crown sy in the 1 600s



Notes to Page s 54-62 225

celand to set a llscale the of foregners f theeot ad t s easoabe to expect tat doestc ad oeg vetos

collectng rent from the sheres ould hae become the countrs chef poer bro

n sharp contrast to the son of Stger and an of hs coleagues at theof Chcago , Harberger descrbes heroes as on bpublc servce nd s not seekng personl gn of n knd n n cse, ther role

the reforms not these the we aerward and one reformer became the presdent of hs

4 Ths vw contrasts recent poltca that odewtces poc as beg paed aead b atoa owadoog po tcas

who desgn strteges tht nvove poc reversls mdstrem; seeand

5 The does not exame the role of precolonal6 A seconbest verson of emset's theor of roert ma have abetter emprcal record than the rstbest oe Accordg to the secondbest verson, actors operatng wthn mperfect and cultural nsttutons have apropest to create ocal that maxmze ther ont wealth, gven the

that actors ar ratonaweat seees, oe expect to d secodbest aageet

mn res, especll where the propert rghts does not depend onprocesse

7 some nstances, as Acemoglu, Johnso, ad Robnson (2000 showcolonal became the founatons for growth8 See for example North and engast's anass of socal transfor

matons n seventeenthcentr Engand, whch, the beleve, created an nsttutoa evoet eabg gad to gow c

9 Smar arguments appl aso to dscoeres of aluabe ne marets for

known natural resources The phrase resource curse refers to a forces that the ds

cover of releases, the

ease, whch orgnall s assocated wth the Netherlands aer the dscover ofSea gas a dsease scenaro, the dscover a

esoce tat s od aboad aes te vae o cuec, ag

doestc goods ess compette th the products other natons n a sense, theother

See 999 , 758 , for smpthetc dscsson of ebers de thtthe was a rvng of earl

See Qan, and egast 995

engast 997; and 2000 an of

a edea sste Uted State, see V. Ostothe economc propertes of as

and for 00 ear,scholrs not hve consderbe n 990s b

4 of the n ngnd dd not nd




the had the ofup ote Egad

15. Dnamcs comparabe to maretpreserng federalism could aso emergeallow tade

nputs labor and outputs across ther borders1 6 . started engang ofwhere the households n the villge begn to contrct with the ocl government for

a x of grain xchange for a Thpractce was ater mitated b other regons and also promoted b the central gov

B 984 almost all farm across China had adoptd this

etod" (o ad 2000, 6.17 . ndeed the stte hs ttced prvte enterprses severl generl

aer

campagn of 19 8 the beralzaton campagn of 1 987 and mostrecentl, aer the Tiananmen Suare of 1 989" (Qian 2002, 2018 Qan provdes a detaled anass of favorable ncentve effects of the

sca sstem n China, ncludng explaning how the sstem constrans the government red its revenue.

19. Part control of personne in stateowned enterprses SOEs gves theetepse pat cottee extaoda powe ag stategc decsos,

whch cretes tension with recent plns b the government to interncorporate practices to SOEs.

20 At the outset of the twentrst centur there are a few dar on thehorizon. Echom reorts that a startlingl fran new reort from the[Chnese] Part' s nner descrbes a spreadng pattern of co

lective protests and group ncdents arsing from economic, ethnc and religious cocts Ca ad sas eatos betwee pat ocas ad te asses aetense th concts on the rse.

,

21. The Sovet econom and ts sateltes were organzed n functiona mn

stries (branch organzaton and sar actvtes were n ggantic factores. was aong

whch the Sovet econom alowed regona ntatve and experimentaton(oand 2000, 56-65; Qian and 199. The has beencopaed to Uo eaces, ad te Cese oe to o eaces

(llason 1975. and expeientaton om beo ere unlel nEastern Soviet leaders probabl felt b econocslowdown thn dd the Chnese eders

22. Eastrl an provies ata on enAfrca

2 . 2002 a of th

pobes o evese as we as dect ad dect eects Geogap caact leves directl or can do so ndrectl, or trade.

of do not affect of a does

chnge we need worr reversefro weath to evels affect of



Notes to Pages 70-75 227

whch a statstcal ofth ofto o ecooc gowt . at o te eect o o ecooc

groth s actua the effect of groth on qualt o nsttutons. There exst,contro for reverse

24 The stud uses sure responses b nestors to easure the qualt of instThe assets safe o25 See nd Robnson 2000 for theor of the role of potcl losers

26 that tates are vable onl when the contro al the terrtor wthnther bordrs, Hrbst on conditions that lt angoveets' ab t to coto te teto ebt tat pobes o

stte oen preceded colonls nd cls tht it s crtc to understate over

27 Mstrst also made soe newl ndependent n Afrca esewhere reect the otcal an econoc sstes of ther former rulers an insteaexperment wth controandcomand econoes and seek hep from SovetCban, and East Geran econoic advers.

28 See chapter 5 29 Botswana has rcent bn hit hard b th

pcatos o ogte ecooc gowt te twett ae

tn.0 e need to ore about to

pact on odernaton Advsor assembes n tradtonal socetes for exame, ancayas n na an sura in Arabiaare oen ao r sources of conervats

Botswana' s record n han development eqall ipressive, wth onepotat excepto ecto. ao epass as bee paced o povdng basc educaton and prar health care throughout the countr. Prarschool enroment has gone fro 66, 00 n 966 to 9,000 n 9 95 , representng an

average growth rate of 54 percent per ann n recentdecades, greater 50

feae enrolent Meanwhle econdar schoo and enroent from alower base, both at dgt growth rates" ord Bank

ca o. 6 , 2000: Botwaa: Exape o udet co

noc Poc and Groth," , http//.orldban.org/a/ndngs/english/

Chater

Th th eve of b th denst of

coa socete, ad sa assocatos. Cvc egageet s eected ewspaper readershp and otng n referenda th Leonard and Nanett 99.

2 scholars that arein forer socl nd persis n new

setting becase actors are oen sow to adst ther socal odels and strategies.




Even f ths were of al rules a ong lag suchatoa a potat soca oce.

. Although the ne beteen judca and egal reforms burs at the margn,core of a refor of to

the j udca branch of goernment and such related enttes as the publc prosecutor and oces, assocatons 999,

4. The .S. Agenc for the orad other prvate Amercan donors underwrote the program, whch engaged profsors from eadng U .S . aw schoos 999, 5 .

5 . Beowt, sto, ad cad det o te

tht s, wth modern legl order mostl deveoped t home. Thesetres are the rance, Geran the

States, and the Nordc faml (Demar, nad, Norwa, and Sweden TheStates has eveloed ts own lega order, there s an earl nuence ofEnglsh common aw The laws of ad Swterland, dstnct,beong to the German legal fam.

6. The transplant the sample receved ther foregn lega sstems 79-945.

7 . e taspat eect s estated w e cotog o tpe o ega a .

Germn cvl lw prt offsets the trnspt effect, t to 24 percent,law and aw do offset effect. The

ndng b Berowt, Pstor, and Rchard of a postve statstca relatonsh between the uat of roert rghts an er cata ncome s cormed n man other see, for exampe, Knac ad Keefer 995

8. The authors nd that the transplant effect nuences economc deveopet o dect toug te pact o ega t; tee s o dect eect. eestated lnear regresson coecent mples that a percent ncrease n legat s assocated wth a 475 percent ncrease n per capta" (Berowt, Pstor andRchard 000,

9 . proxes are of the oflaw,

rs of expropraton, and rs of contract0 . addton to 0 orgnal law the saple contans

eceptve taspats ad 8 ueceptve 6 out o o te eceptve

transplants are ountar and 4 of the 8 unrecepte transpants are oluntar"Pstor,

Tmur Kur to he uthor tht Ture dopted theCoe n It not to

t s more correct to sa that adaptatons were slow ad tetatve ratherto sa that t dd not fact

eceved ec aw o two ote taspattres, Span and Venezuea Pstor, and Rchard 000, .

for to be a deand forso on boos wll be n nd eg

for law are responsve to deand. If the

trnsplnt dpted the lw to ocl codtons, or hd



Notes to Pages 8-9 229

wth basic egal of the aw, then we wouldexpect tat te aw be Because te aw be used, a stog

demand for la ould prode resources for lega change. here these conditions are we order to as as an

orgn countr here the a as deeoped internal Pistor, and2000, 2-.Rulers other thn colon folowed strteg of shieding trdi

tiona law. the cochange famil law 26. n both cases rers made the changeamonarch in th case in the second. owe this toua.

5 Moreover, reforming governments void replcing wenctoning.

1997) observes that some new ndependent states abolished traditiona commonroert regimes that governe natural resouces an instea nationaze theassets id so providng effective goveance and enforcement Thechange sometimes gave rse to open access and dsspaton of the resources.Accorng to Ostrom, central government reformers oen lac apprecation ofthe and th sophistcaton o tradtional rights. Traditionacoo popet eges ca be tat vove a

enforcement mechnisms oen locted at severl socet levels, thtof a he asset s a well

dened common propert regime, an eas dentable of insders contros the se an of the resouce an hols exclusive er rghts, which outsiders do not enjo The rights of insers are formall recognized b the

state, although n tradtional societies rghts of isolated groups sometimes arebased o o oca custoa aw ad soca os .

6 See aso McMillan and Naughton 99

Conclusion

At the beginnng of the millennm, the new economcs s agan. theor, Aok (200 ) and pro

vde ada studes. ceogu, Joso, ad obso (2000), exag te

colonal orgns o comparate deeopment, hae string edence orpath depenence, an Trebb

(2002) controlling for reverse cstion nd ndirect effects, nd sttstic sp

port for the of ovr an in

deveopment. Leadng scholars nvoved in internatonal economic reformSachs and Stgtz, have viws, wght

to te pocess o gowt. et wt a gowg teoetca interest n nsttutions, opportunties and imits for insttutional reform hae

2 See so nd

. Regulating sheres is a partcularl dicult Glfason and(2002, 25) list fctors tht complicte in this re the high cost of




a offshore; the large of jonuaed o aaged ad te extee degee o tedepedece aog te cost ad

prodcton fnctons"; the seere nstablt of these nterdependent cost andand of to

exact the prodct mx of jo ntl prodced speces caught ." These for factors closetechnoogies nd how dscoveres n the ntur scences cn soci tech

b Glfason andetman offer a new soca technoog for deepsea shees n whch agoernment board prces on anded to create desirede poposa s a e w et te copetto o soca o des t s aea

4. M chef for the of the new sheres mngement sstemare reports a report b

Aulndanefnd a committee on natural These reports are avaable onl in celandic5 At the begnnng of the twentrst per capta ncome n ceand is

among the hghest n the word Athough the sheries pla a centra roe n theeconom, on percent of the abor force s emploed in shngand prossing, and the 5 percnt thegoss doestc poduct. e sae osg ad pocessg te ecoo

tes from er to er, there s longterm downwrd trend other sectors now grow faster or more see the eb page of

the of ceand www hagstofa s6 A moratorium on shng for herrng was imosed dung 972-75The ban was lfted n 976 when ndvdual were The quotas were tied to vessels wth a histor n the herrng sheries . n 979 the ndvidual

becae taseabe at te equest o te dust A ew eas ate Qs ere ntroduced n the capeln sheres n a smlar tostep manner

7 Under a shngdas regme, the government sets a target for tota catch

and then estmates how man das t w take the current shng eet to meet thecatch target the forces

to ower its estmates of total shing das The regme creates incentves tomore shps more engnes, and more

8. e goveet cesed o vesses wt sg stoes po to

the ntrodction of the TQ sstem. The countr s spreme court nalidated theserestrctions on The government now licenses avesses tht re pproprte equpped

9 the prce th present of the expcte

net income from the resource 0 as wel as th of the com

os" odes to te coapse o s stocs e sees model" s a relatvel sophstcated version interpretatons to

effort wll access

s n ncrese neffort ero from sher is Moeover,

when sh stocks rech ver low eves t s possble tht the stocks copse for bo logca reasons uttng an end to the sher, at least temoraril The sustanabe



Noes o ages 98-200 231

mode aso how to the rent a sherte goveet o a coto tota eot ad eect te eot eve

and assocated stoc se that maxmes net ncomen the mode the dfferencebetween the total cot The

mode usual holds organzaton constant not aong forof the an ncrease ncheved b djustng effort n some constnt unts

On th sd, and two have recovered and celand has avoded the collapse of tocks as cod and haddock thatother natons experenced

e copettve te sg dut cead ec

ogned tht fresh sh oen hs the hghest on nternton mrets; proproduct owers

Lord Perrs thrd expanaton can also be seen as of governmentadmnstrators to enforce the rles4 Eage and Thompson do not provde answers call for

more data on scentc advce and management decsons The beleve, howeverthat there s no one answer to ord Perrs not even for a snge sher77

Sce te te ost a ue o ees aageet cead

nvolves smll shng bots opertng ther own complex sstem of regulpart of TQ sstem The a

pament necessar for gettng support for the TQ sstem s a classc case of regator fae Owners of small boats an ther commntes have strong reresentaton n parament

One sch theor cams that sh stocks are decnng as a result of overcowdg ad te appopate aageet espose s to aow geate sgeffort. The theor s popular n shng communtes around the orld

7 th a populaton of about 00000 ndvduas, olgopol s the usual sate

of affars n man or most celandc ndustres but not n the sheres ndustrthe recent The s

that most celandc sheres rms sel ther n compettve nternatonamarets, the largest ceandc are ther eadngteatoa copettos. e evauatg copettve codtos te st step

should be to the reeantMan o f the crtcs beleve that ther home do

we under shngds socal n of

ther efcenc characterstcs and acks tools for comparng aternatve dstrbutons of weath n of the TQ

espodg to ts tadto odeg, ave peseted oa ateatcamodels showng that a the were ntall sod or rented s more TQ Because trade has

wored smoothl, models see other hghcosts

20 n 200 the government mjort n prlment the present TQsstem bt man or most ooston members wou ke to change the sstem t




s that of the wll for a governent foowngte atoa eecto wc w be ed o ate ta 2007.

2 . n m e, the hstorcal communal mountan pastures resemble the current Q Each a based far sze for

mas he or she could graze n the pastures, and the qotas coud be rented ot. Thedd not pa an fee of the22 The report dentes three tpes of pblc propert stte propert tht cn

be sold as banks and of the as well as n custodof the naton that cannot legtmate be sod.

2 . To get n parlaent aor the sste co

pose woud pobab ave to be ade wt tose wo atogete oppose eetrnsfer of The compromses mght nvolve vrous new lmts on

of to protect

24 n 200 , the ceandc government responded to crtcsm free quotas wth a lan to charge the ndustr for the cost to taxaers of managng the ndstr The pas about half of these transacton costs, whch arse

from varous montorng and research actvtes.



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Oxford Press.ade, acy. 2003. e Caee o Staeode Oai

ztons: ew Zeds Experience in Deveopi sheres CoMement27



Autho Index

Abramovitz, Moses , 22, 206Acemolu, Dron, 69 70, 1 56, 1 7 ,

1 72, 1 7 3, 225, 227, 229

Ais, Jn Jnsson,Ahmad, Ehtsham, 21 0esa, beto, 35 , 222

Aen, W., 27od, Gabe . ,

At, Jmes E, 208Aoki, Masahiko, 80 , 62, 2, 21 6 , 229ason, 2 9

Arnott, Richard, 8

Arrow, J,sersson, afr, 9udaed, 230

Axerd, 76Azzi , Corry, 77

aroch, P., 3aneree, bhit, 3

effrey S., 208

ardhan, Pranab,arro, Robert J., 7, 206arzel Y 27, 7, 83ates, Robert , 7, 80, 9, 95, 2,

awn, Katheen, 15ecker, Gary S . , 223edo, Joata,

enham, Alexandra, 1 0- , 222

enham, Lee, 10- , 222enNer, Avner, 93erson, A, 29erkowitz, Danie, 77 80, 228, 229ernstein, isa, 1 87

hawat, Jadsh 5, 3 ,

ibera, Eez, 86

nmore, Ken, 76, 80inswaner, ans P. , 206, 2 0

E ,arnason, Tor, 85 , 88 , 2 1 5

90

Dvid E,od , edec, 78-79ordo, Mche D. , 22road, . , 193, 199rock, Wiam A , 206

romley, aniel ., 2 1 0

7 , 223uchanan, James M. , 1 3 1 , 223-2

de 35, 39 ,

urke, Peter, 2 7

Jesse , 0 1

Careaa, Mate,Chai, S 9-95

Chavas, Jean Paul, 210Checkland, S . G . , 209

N S . ,eetak, 222

206Clark, Andy, 2, 93Coase, Ronald ., , 7, 81 , 83 , 1 97,

Conerse, Phip E . , 22

Cooter, Roert D , 80, 93Cosmdes, , 22Cttin, Chares . , 2 7, 2 1 9

avies, R. . , 5

Lous, 207



256 Author ndex

eo, adod, J , 9 ,

emset, Harold H , 78 1 56 1 58 59,

James,93 22, 229Mthis, 10

arry . , 36ixit Avinash K 13- 5 6

222oa, Evsey,

rze, Jen 20N., 76

Steven, 206

Eae Josh, 99 23 1Easterly, Wlliam 5-17 53 1 7 1 1 72

205 226Eckolm, Erik 22Eetsso, hinn, 3, 26, 52

7 76 83 85 87 88 89 1 03 , ,

22 1 23 1Ehrenber Ronald G , 77Ellickson Robert C 8 1 83 1 8

acaps, ace 2 0 2 Fenadez, Raq el, 1Ferier, Water J, 216

Fiueredo, Rui J P e, J , 9 5

Foe, Robert W , 203ola, B 2 1 6od A C 39

Frankel, Jee , 0Fratiani, Michee,Fririksson, St 28

Friedman, 2232irk G 26 76

John R ruce E ,

Geschenkon, 60207

Godon, H S , 9 3 1 9

Ge, e 7

52 0

2 1 9 220 22 1

Gs At,

ustafsson, Haad, 8 9

Hae, Stepen

221Hall, P 5

Halldrsson 6a 29Hansen, ent, 32-33 17

Eric A , 208

Harrr, Arnold c. 1 5 225ad, 76Harrod Ro

Hay, Jonatan R , 1 89 90A von, 99

Hechte Micae, 2 1 Heckman, J J , 222Henin Chstian 63 66

Hebertsson Tri Th 59Hest, Jeffey, 227Heston, Aln, 1 8 2 1 1

223

His, Robet, 50Hills, John, 2 0Hinih 5

Hirschman, Alet 0 20Hoff Karla, 8-9

Hofstede, Geert,HolanderHul, rooks 789

Carles, 206

, 76

Jn, 1 0

Jhnesson, okell, 90 1 1 9 1 20



29-30 1 3 1 37

Johnson, Smon, 69-70, 56 1 7 1 1 72 225 229

Jnsson,

seir, 220Jnsson, erstenn, 87

nsson,

Jovannovc oyan 1 0

Kador icholas 205

Knzw, S., 21

Katz, Avery, 82atzenstein, Peter . 80, 2 Keefer, Phlip, 206 228Keohane, Roert . 80 207 21 eynes, . aynard, 2 27-28 12

1 33Kllik, 2

Kndeerer, Chrles P., 29Matthias, 27

Knack, Stepen, 206 228nudsen, Christian, 2Kornai, os, 168Kranton, Race E , 9Kas ner Stepe 80 , 2 Kremer, Mchael, 5 3Kreps, Davd, 1 5

Krstjnsson, Aaeir, 1 0

Krueer, Anne 1 0 1 13 1 2020, 206

Krn, r, 38 78 9 -93, 95, 7,

Lnd, Jnet T . , 1 87

Lands, Davd S , 225Larson, W , 22

1 1 0

ruson 0ar Leonard, 7,

W. , 3

Mrre, 80 2 1 2Ross, 226

Lews, W 1 3

Auho I ndex 257

Gary 2,i, , 20

9-50 22

Loasy, J., 20

Xaoo,Lucas, Roert E , Jr. , 1 8, 29, 3 1 3 3

Harold, 390

asso, as S ,220

Marx,

Mathas, P, 2Noel,McCloskey D N 39 221McGuire, Martin c. 2 1 2McIntire, John,

Ronald,MMilln, Jo,

Andre, 170Melter, H . ,

Merithew, M, 10Messick, E , 1 76,

Milrom, R 1 87 1 88

Miller, Gary J. , 208Miller, Wliam Ian, 0 1

Mitchell, A. R . , 220Moride, D. E , 39Mokyr, Joel, 10, 2, 57, 8 8

Morrow, James, 62 66 2 1 2 1 3Mowery, Davd c 0

5

Peter,

207Nanti, Raffaela Y, 7

229

eso, hilli, 77,

205 , 206, 207Newery, Dvd M. G., 2 1 0Noll, G. ,

Wllim D, 206



258 Author ndex

c. 3, 2, 27, 28, 8,70, 73, 7, 76, 93, 9 , 208, 2 2, 2 3, 22, 225, 229

Nove,

Jee 20Sten,Joh V c 76

Olve, Astrid E J , 2 Oso, 3, 3-35, 3,

Ostrom, or, 80, 83, 90, 9, 22999, 225

Owe, M ,

Pack Howard 206Parete, Steve , 207Parkh, 62, 225Pattson, Joh c.ps, A W,

Pistor, Ktr, 77 80M F, 36

Pollard, S 2Poer, Eric A , 7, 75 , 8 -82, 88-89,93, 2 , 2 6

Poer, Rchard A , 29, 89-90escott, Edwad c. 207Prchett, at, 53

Roert D , 7, 75, 227

Putterma, 93 ,

Qa, Yiy, 58, 63, 6, 65, 66,225 , 226

Rafsson, Seibr,

223Rzo, 86Reelo, 2Revki 99

Rchard,

cte, udo, 26, 76Roerts, J

Roand, Grard, 27, 0,208 , 226

Romer,M ,

Root, Hito 35, 39, 63Rosa, JeaJacques, 209

Roseber, 57L 80

Rosezwei, Mark R,Vero W, 7, 20 5, 20

Sachs, 8 , 59,229

Elisabeth, 2 0Xavier, 203, 206

Sampat ave N 207Samuelso, Paul A, 29Saret, J , 222

E , 2Josep A

Schartz, Aa, 22Scott, 202,

Se Amartya 20Shepsle, A , 208

Shlefer Adrei 89-90Sider, Gerad M , 220

Uwe, 36, 7

Simo, Herbert S, 32, 207Sims, Chrstopher A, 222Sileto, J, 38, 39

62-66,

Skidelsky, Robert, 33Smth, Aastair Smith, 62-66, 22-3Soow, . , - 5 , 7 , 2 -22,

205-6, 2 J, 02

Steisso, J, 207Stephenso, c. 77, 80 ,

eore J , 3 , 223, 225

E ,

229Federico, -7, 225

226, 22973

Summers, Robert, 8, 53, 2



2 9Svesso, Jaob ,

Sensson, L. E 0-Swan, Trevor,

Sistak, Pior,

T·ow, Sidney,Robert P,

Thopson aron H. 99 23 Thoroddsn, 03

orsesson, rn, 87 0 05

22 2 8 2 9 220Tiebou, Chares, 6Tiberen, Jan 2 8 33 39 22To ison, Rober D, 223Tomassi, aiano, 66-6 225Tooby, J, 22

oe, ao, 67

Townend, Rober M, 2 Trebb, 20, 208 226

229Tock, Gordon, 223

Udry, Chris, 2 0

Vanber, Vikor J, 2 6van d e Wae, 57

Auho I ndex 259

E., 52Veo, H K , 37 5

Vishn, Robert W, 89-90

Roain, 206M , 8 59Jre W ,S L 223

Weinast, arry R , 35 68-73 7 8095 5 87 88 209

Marin L. , 229-30E 26 28 7 6

8 3 2 226Jan,

Winter, Sidney A 76 2 Witan, Donad A , 2 Wo o Wi Thye 65

Meredih,Woodu, Cstope,

88-89

Chenan, 6 226

Yande, Tracy 202

Yusf, Shahid, 8

Zecher, J R , 39Zoea, Gy, 59



Subject ndex

Africa otswana rowth mirace1 7 1 73 227; economic decinecaes of 1 70-72 227

Abana sociaist owth probems of1 8

ato pocy coopeatodeec

tion diffeenti 75 88-90

yess d pdtin of beiefs 95

otswana modern rowth sorces of1 7 1 73 227

China datack approacftre deveopments 1-7 227;ea eos 77 82; ode eco

owthcontracts: denition inked

contacts2 19 ; an owth

converence hyothesis 31

decentaization/centaization onwaves 42-46

decision theoy mathematica 12 8130

detemiacy paadox. ee

endoenos poicydeveopet ecoocs 204

diideandre eqiibrim 8-73

ecoomic rowth: nddemocracy/atocracy 59-73212 3; extensive 0 205; histoica

seventeenthcentry Enan68-9; intensive mode experi

ence 0-1 1 42-4; pnctuated47 53 58 21 1 ; ise of the West roeof tae 69-70 2 1 3

economic poicy theory of 4 28-3722-22; basic assmptions 29; conveece 3 ; stets ues o

poicy odesdeed oe o ecoo

mists 130cuador ea 79 228

poicy 5 142 45; and

coaition oitics 1 44-45; deees of

eedom and optimaityand ent seekin 144 223 ; and

soca os 45 ; ad teoy o eco

poicy 42ethnicity: diversity and rowth 5-57;

ethnic aniosity theory of 9 9395

faie socia moes abiity of

4 1-43 2 0

ame and

noms 90 9 ; epeated ames and79-80

s aw code of Iceandic Commonweath 5 1 2 1 1 2 19

owtedy evo

ments: diese fondations of

1 83-90; enea 82 2 2 ; privateoder imits of 86 89; stbiity ndenoenos ynamics anda ston o weak state 185 8

rowth reressions internationacossconty 20



262 Subject Index

rowth theory: rowth, 05;ode

endoenous (ne) roth theor,04-5; ap

eneral, roth06; rowthrds, 922; model,

-13 , 05 ; 2 ;

neoclassca rowth theory 14-6 05

Icend: brrers to reorm, 1 53-54;o

ree trade, 1 1 6 1 8 , ; early modern erod , antmodernzatonmodel 93 94; equlbrum trap,

14-1 8 , 1 23-4; orces ndontrap, 1 , 224-5;

tral oranzaton,peod,

norml huner stor5-53,

toal response to rsks, hstorcal,48 , 5 1-53, 1 1 ; landownersh, hstorcal 1 10-4 ; vestock manae

ment, hstorcal, 5 3, 83-88 , 89-90, ; oopoy tade wt

ocean sheres mode nstttonal

reorm, 19320, 3032; poltca

pressures, 0 21;reform path, storca, 8-

peect stttos ad cooa

roots, 5; 47,

41-4; mperfect,4142, 1455; exoenosy mperect, horo efect, 60-6;

necent norms, 8083 ; and neoclassca weare

3; ocea see, 30; adopposton deooes, 94-9 ;

5; sele62-66,

ocean seres, 30-32ae ceta pa, 44;

trends, 45-46, 1 0 ;4446

nsttutonal polc: counterpoc,denton, 7 , 1 9 1-9, 08; demand

or, 208; ncomplete models ndfeedback,

essons rom macroeconomcs

moden reorm,oatve, esouce

cost, 80-8 , 09 See also leal

Italy, reonal overnance, 1 75 , 227

Jnsbk law code of Iceand from1 8 1 , 1 1 , 2 1 9

Korea, rowth stratey

aw and

o, 177, 28eal systes ealty,mal levels or rowth 82-90; mn

me cost o, openendedstandards stratey, 1 0; orns of,

1 77, 8; ruesrst strate,189-90

el trnsplnts (trnsers, 1 74 90 ;

motves, 174 76, 180, 7 28; leaty, roducton o, 1 80-8 ; resstanceto, tadtoa cotes, 8;

selecte ntroducton, transpant efect, 178-8, 8; transpanteect, o, 17879, 228;

efect, o,transplants,78-79; S Cna

tvemted orns o, 70-73

to refor175-76;

ers, o , 5;poltc brrers, 53 54, 224;



and shries See also

pocy; soca eqb

m

acroeconocs andbounded rationatyKeye

134222 potical 222 and rationaexpectatons 33

aetpesevg edeas

225-26

ethodology: ratioality207; inforation roblemknowedge proble 20 method

oogcal individualism 24; rationachoice 4 0; soca modes approach 24 207; specazed theoes 23; teoes spees o cope

tence 23Mexico

tmes 89onetaris 223-24

nationa income (product): dstrbutiono 9- 0 203; as dcato o we

9-10 203 measreent problems 203-4

neoclasscal ecoocs generalof 204

new economics overvew

Zeaad ocea sees sttu

tons 202

ocen sheres: istitutiol

regulatng22930 regulatory overshng

ope access : sees a d potica ehavor 0-2 -7

system ( orserch for

orgniztons deniton 27 208

Suject Index 263

cycles/reversas : andovatos 37; 36-40;

transitons 36 ;gold 39;

priateplic ccles 40; natonaiation/privatiation cyces 36

nd ew soc models 3840; pref38;

ters of soca models 3940policy odels: and rational

ty cogtve ad psycological approach to 224; completemodes for

growt 222 23 deiton 26 207ve 146;modes ad feedback

197-98 ; as intermediate targets ofpocy 1 36 and knowledge

147-48; (indiodes ad atoa

epectatons 33 ; strctrefor war of

modes at OECD 46 war of

200-20

privateorder institutions 8 8-89property rights: dention 27; nimal

for groth 82-90; prateordermechanisms 87-89

Protestnt ethic 6 225

reform and iperfect knowlege: ieoogcal r 32; microlevelcopatty 30-3 ; acoeve

incopatilit 3 reform paths: otswana 5 70-73

Chn 5 1 6367 226 estcostpath 1 39-40; SSR 5 1 67-70 226;Zaia 16

reativ thess

ego ecoocs o: aee co77 23 ; 7-77;

norms 78-79

of 66-67; pres

grops 63



264 Subject Index

crse, 1 58-0, 73, 225ss: dvescato, e

eral riss, denition, 50 instittionalin

49-53 riss, 50

selectorte theory See insti

hocks exoenos 47 53-58, 2 0socia by indi

trps, 4, 26, 47, 48-49, 52-53 ,

traps, escape rom, 1 56 63socia instittions: enition, 26, 208 onterm dynamics o, 40 48 5 1

socia models : denition, 2, 207 andatern transition to marets, and escape

taps, cead,

historicl, ndowners vision, 100,

sheries, 1 93 95, 23 modelin viewo olicy 92 an oosition ieoloies, 94-95

socia nors antinorm poicies, 88-90coopeatodeecto deeta ,87-90 denition, 77 dnamic theory of 90-95, 2 14 fnctional

(eciency explanations, 7880,

inecient, 80 88 as a eal syste,

82 and economics,74-78 o

socia secrit, in traditional contries,

socia technoloies: as barriers to1 1 , 24-26 , 32-33 , 208 denition, 34, 26 individ trns

as o,and reorms,

transpants Sovet ecooc dece, 2,

radalism, 67-68 hazardos to

sabotae reorms, 69 70state, 34-35 , 209 and Weinass divideandrle35 , 209

tpp pots, ad etc ste92-93

costs vs real

ied, 27 39, 208 and comparative29

27Trkey, leal transpant, 79, 228

efare state, Eropean, internaldynamics, 1 50, 224

91 93, 95

Eggertsson - Imperfect Institutions; Possibilities & Limits of Reform (2005)

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