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Reforming Institutions: Where to Begin?

  • M. Idrees Khawaja

    (Pakistan Institute of Development Economics, Islamabad.)

  • Sajawal Khan

    (State Bank of Pakistan, Karachi.)

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.

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Article provided by Pakistan Institute of Development Economics in its journal The Pakistan Development Review.

Volume (Year): 48 (2009)
Issue (Month): 3 ()
Pages: 241-267

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Handle: RePEc:pid:journl:v:48:y:2009:i:3:p:241-267
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  1. Dollar, David & Kraay, Aart, 2003. "Institutions, trade, and growth : revisiting the evidence," Policy Research Working Paper Series 3004, The World Bank.
  2. Lubna Hasan, 2007. "Myths and Realities of Long-run Development: A Look at Deeper Determinants," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 46(1), pages 19-44.
  3. Amjad,Rashid, 2008. "Private Industrial Investment in Pakistan," Cambridge Books, Cambridge University Press, number 9780521053617, Junio.
  4. Nathan Nunn, 2009. "The Importance of History for Economic Development," NBER Working Papers 14899, National Bureau of Economic Research, Inc.
  5. 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.
  6. Rodrik, Dani & Subramanian, Arvind & Trebbi, Francesco, 2002. "Institutions Rule: The Primacy of Institutions Over Geography and Integration in Economic Development," CEPR Discussion Papers 3643, C.E.P.R. Discussion Papers.
  7. Daron Acemoglu & Simon Johnson & James A. Robinson, 2001. "The Colonial Origins of Comparative Development: An Empirical Investigation," American Economic Review, American Economic Association, vol. 91(5), pages 1369-1401, December.
  8. Raghuram G. Rajan, 2006. "Competitive Rent Preservation, Reform Paralysis, and the Persistence of Underdevelopment," NBER Working Papers 12093, National Bureau of Economic Research, Inc.
  9. Stanley L. Engerman & Kenneth Lee Sokoloff, 2002. "Factor Endowments, Inequality, and Paths of Development Among New World Economies," ECONOMIA JOURNAL OF THE LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION, ECONOMIA JOURNAL OF THE LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION, vol. 0(Fall 2002), pages 41-110, August.
  10. Arvind Subramanian & Francesco Trebbi & Dani Rodrik, 2002. "Institutions Rule; The Primacy of Institutions over Integration and Geography in Economic Development," IMF Working Papers 02/189, International Monetary Fund.
  11. Dollar, David & Kraay, Aart, 2003. "Institutions, trade, and growth," Journal of Monetary Economics, Elsevier, vol. 50(1), pages 133-162, January.
  12. Robert E. Hall & Charles I. Jones, 1999. "Why Do Some Countries Produce So Much More Output per Worker than Others?," NBER Working Papers 6564, National Bureau of Economic Research, Inc.
  13. Stanley L. Engerman & Kenneth L. Sokoloff, 2005. "Colonialism, Inequality, and Long-Run Paths of Development," NBER Working Papers 11057, National Bureau of Economic Research, Inc.
  14. Douglass C. North, 2005. "Introduction to Understanding the Process of Economic Change," Introductory Chapters, in: Understanding the Process of Economic Change Princeton University Press.
  15. Robert E. Hall & Charles I. Jones, 1999. "Why do Some Countries Produce So Much More Output Per Worker than Others?," The Quarterly Journal of Economics, Oxford University Press, vol. 114(1), pages 83-116.
  16. 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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