Institutional evolution and economic development in Iran and Turkey

Iran and Turkey historically had outwardly similar politoconomic experiences. Particularly after World War I there were both similar institutional reform programs on the two countries’ agendas and convergence in their economic growth and development levels. However, this convergence came to a standstill with their picking of totally diverse economic institutions in 1980s. This study attempts to provide an analysis of this diverse transformation of economic institutions in Iran and Turkey in light of the new approach proposed – The Clash of Paths (CoP). We assume that institutions are not typically chosen for the general benefit of society, but are rather imposed by groups with political power. We propose that the establishment, reformation and transformation of economic institutional structures in different countries are endogenous to two important determinants: (i) diverse political institutional structures that determine formal constraints on political power relations; (ii) diverse societal ‘mental models’ that create informal constraints on cognitive and relational patterns. The ‘formal’ and the ‘informal’ constraints evolve in interaction with external institutional paths that a country's path clashes with. In this study we also construct a simple bargaining game to integrate macro aspects of institutional evolution drawn under CoP to a micro-level explanation of the emergence and change of institutions. The micro-level analysis suggests that institutional evolution is very much connected to politically powerful groups’ decisions to reach or reject a consensus, which is something that is built or destroyed on the basis of actors’ projected utilities. Actors’ decisions in turn are dependent on their ability to solve the collective action and resource mobilization problems in order for their commitments or threats to be credible.