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Reforming Institutions: Where to Begin?

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  • M. Idrees Khawaja

    (Pakistan Institute of Development Economics, Islamabad)

  • Sajawal Khan

    (State Bank of Pakistan, Karachi)

Abstract

No society is devoid of institutions but many live with poor institutions. Institutions promote growth. This is a view now held firmly and widely. The task then is to ‘engineer’ growth-promoting institutions. Endogeneity characterises institutions; for example, groups enjoying political power influence economic institutions, but political power itself is a function of wealth. Given endogeneity, if the task is to design institutional reforms, the question then arises, as to what to reform first. We use the theories of institutional evolution put forth by Douglas North, Darron Acemoglu and Dani Rodrik and the historical experiences of different countries in the context of development (or non-development) of institutions, to determine the starting-point of institutional reforms, if the objective is to design institutional reforms. We argue that in Pakistan, neither large commercial interest nor fiscal constraints can force the de jure power to reform institutions. Typically, large commercial interests in Pakistan have thrived on favours from de jure power, and therefore do not have teeth. Given strategic interests of foreign powers, foreign aid will alleviate the fiscal constraint and the ruler-citizens bargain—though reforming institution in exchange for tax revenue will remain a dream. The country does not seem ready for a revolution either; the thought process that typically precedes revolutions seems to have barely begun. The alternative, that remains, then is the gradualist approach preferred by North, Acemoglu, and Rodrik. Institutional reforms in Pakistan should begin with reform of the educational system—the introduction of a common educational system for all and sundry up to a certain level. Two reasons make us chose the educational system as the candidate to start the process of institutional reform. First, a common educational system will produce a shared value system which, in turn, will reduce the heterogeneity in the society. Lesser heterogeneity in society will then facilitate an agreement over the minimal set of institutional reforms. Second, politicians being myopic, the de jure power is more likely to concede to the demand for reform of the educational system as compared to the demand to, say, put an end to rent-seeking. The former will affect the de jure power a generation hence, while the latter will affect them today.

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Bibliographic Info

Paper provided by Pakistan Institute of Development Economics in its series PIDE-Working Papers with number 2009:50.

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Length: 27 pages
Date of creation: 2009
Date of revision:
Handle: RePEc:pid:wpaper:2009:50

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Keywords: Institutional Evolution; Institutional Change; Human Behaviour;

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  1. Daron Acemoglu & Simon Johnson & James A. Robinson, 2000. "The Colonial Origins of Comparative Development: An Empirical Investigation," NBER Working Papers 7771, National Bureau of Economic Research, Inc.
  2. Lubna Hasan, 2006. "Myths and Realities of Long-run Development: A Look at Deeper Determinants," PIDE-Working Papers 2006:12, Pakistan Institute of Development Economics.
  3. Dollar, David & Kraay, Aart, 2003. "Institutions, trade, and growth," Journal of Monetary Economics, Elsevier, vol. 50(1), pages 133-162, January.
  4. Keefer, Philip, 2000. "Power and Prosperity: Outgrowing Communist and Capitalist Dictatorships. By Mancur Olson. New York: Basic Books, 2000. Pp. xxvii, 233. $28.00," The Journal of Economic History, Cambridge University Press, vol. 60(03), pages 919-921, September.
  5. Dani Rodrik & Arvind Subramanian & Francesco Trebbi, 2002. "Institutions Rule: The Primacy of Institutions over Geography and Integration in Economic Development," NBER Working Papers 9305, National Bureau of Economic Research, Inc.
  6. Raghuram G. Rajan, 2006. "Competitive Rent Preservation, Reform Paralysis, and the Persistence of Underdevelopment," NBER Working Papers 12093, National Bureau of Economic Research, Inc.
  7. Amjad,Rashid, 2008. "Private Industrial Investment in Pakistan," Cambridge Books, Cambridge University Press, number 9780521053617, October.
  8. Dollar, David & Kraay, Aart, 2003. "Institutions, trade, and growth : revisiting the evidence," Policy Research Working Paper Series 3004, The World Bank.
  9. Douglass C. North, 2005. "Introduction to Understanding the Process of Economic Change
    [Understanding the Process of Economic Change]
    ," Introductory Chapters, Princeton University Press.
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Cited by:
  1. Adnan Haider & Musleh ud Din & Ejaz Ghani, 2011. "Consequences of Political Instability, Governance and Bureaucratic Corruption on Inflation and Growth: The Case of Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 50(4), pages 773-807.

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