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Reforming Institutions: Where to Begin?

Author

Listed:
  • M. Idrees Khawaja

    (Pakistan Institute of Development Economics, Islamabad.)

  • Sajawal Khan

    (State Bank of Pakistan, Karachi.)

Abstract

Institutions promote growth—this view now holds firm ground. 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. The question then is: what to reform first? History stands witness that generally the societies with extreme inequality and a heterogeneous population tend to evolve institutions that restrict access to economic opportunities for the poor which in turn constrains economic development. On the other hand societies with greater equality and homogeneous population typically enjoy growth-promoting institutions. Institutional reforms should therefore begin with institutions that serve to create or perpetuate inequality and heterogeneity in the society. We argue that the four different kinds of educational systems in operation in Pakistan are a major source of creating and perpetuating inequality and heterogeneity in the population. Access to a single and common educational system will open-up similar opportunities of higher education and job attainment for all the citizens, thereby reducing inequality. Diverse educational systems promote different sets of beliefs while a uniform system forges beliefconvergence in the society that in turn facilitates agreement on a common set of institutional reforms. Therefore it is the educational system that should be the first to reform. We also argue that in Pakistan, unlike some European countries in the 17th century, neither 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 the de jure power and therefore have no interest in changing the system. Foreign aid eases the fiscal constraints from time to time relieving government of the need to reform institutions. The thought of a revolution of some kind is still a far cry, the society having no such inclination. The alternative then is the gradual approach preferred by North, Acemoglu and Rodrik. This gradual approach suggests the area of educational reforms.

Suggested Citation

  • M. Idrees Khawaja & Sajawal Khan, 2009. "Reforming Institutions: Where to Begin?," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 48(3), pages 241-267.
  • Handle: RePEc:pid:journl:v:48:y:2009:i:3:p:241-267
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    References listed on IDEAS

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    1. Omar Azfar, 2006. "The New Institutional Economics Approach to Economic Development: A Discussion of Social, Political, Legal, and Economic Institutions," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 45(4), pages 965-980.
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    4. Dollar, David & Kraay, Aart, 2003. "Institutions, trade, and growth : revisiting the evidence," Policy Research Working Paper Series 3004, The World Bank.
    5. Amjad,Rashid, 2008. "Private Industrial Investment in Pakistan," Cambridge Books, Cambridge University Press, number 9780521053617.
    6. Abhijit Banerjee & Lakshmi Iyer, 2005. "History, Institutions, and Economic Performance: The Legacy of Colonial Land Tenure Systems in India," American Economic Review, American Economic Association, vol. 95(4), pages 1190-1213, September.
    7. Douglass C. North, 2005. "Introduction to Understanding the Process of Economic Change," Introductory Chapters,in: Understanding the Process of Economic Change 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.
    2. Younis, Fizza, 2015. "Institutional Change and Economic Growth in Pakistan," MPRA Paper 72938, University Library of Munich, Germany.
    3. Younis, Fizza, 2015. "Institutional Quality, Foreign Aid and Economic Performance," MPRA Paper 74147, University Library of Munich, Germany.

    More about this item

    Keywords

    Institutional Evolution; Institutional Change; Human Behaviour;

    JEL classification:

    • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • P16 - Economic Systems - - Capitalist Systems - - - Political Economy of Capitalism

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