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Reforming Institutions : Where to Begin?

  • M. Idrees Khawaja


  • Sajawal Khan

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 bargainthough 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 systemthe 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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Paper provided by East Asian Bureau of Economic Research in its series Microeconomics Working Papers with number 22981.

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Date of creation: Jan 2009
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Handle: RePEc:eab:microe:22981
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  1. Lubna Hasan, 2006. "Myths and Realities of Long-run Development : A Look at Deeper Determinants," Development Economics Working Papers 22193, East Asian Bureau of Economic Research.
  2. 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.
  3. 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.
  4. Dollar, David & Kraay, Aart, 2003. "Institutions, trade, and growth : revisiting the evidence," Policy Research Working Paper Series 3004, The World Bank.
  5. Dollar, David & Kraay, Aart, 2003. "Institutions, trade, and growth," Journal of Monetary Economics, Elsevier, vol. 50(1), pages 133-162, January.
  6. Douglass C. North, 2005. "Introduction to Understanding the Process of Economic Change
    [Understanding the Process of Economic Change]
    ," Introductory Chapters, Princeton University Press.
  7. Raghuram G. Rajan, 2006. "Competitive Rent Preservation, Reform Paralysis, and the Persistence of Underdevelopment," NBER Working Papers 12093, National Bureau of Economic Research, Inc.
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