Two mainstream views on institutional changes – voluntarism versus fatalism

At this point, itmust be noted that not all interlocutors of the dominant discourse

on institutions and development think that institutions are easy to change.

Actually, some of them think that institutional changes are nigh impossible.

They think that institutions are determined by immutable things such as climate and culture, so they cannot be changed, except through some epoch-making external shocks, like colonization.

So, for example, temperate climate in the USA is supposed to have made smallscale land ownership the natural institution of land ownership, which then led

to greater demands for democracy and education by smallholders, which then made the USA awealthy country by restraining the scope of arbitrary government

expropriation. In contrast, the tropical climate inmany Latin American countries

is supposed to have led to latifundia-dominated agriculture, producing the opposite results (Engerman and Sokoloff, 1997).

For another example, the Europeans brought with them bad institutions, mainly aimed at resource extraction, when they colonized tropical countries, because they did not want to settle in those countries due to tropical diseases, while they brought better institutions into settler colonies in the temperate zone because they wanted to live there themselves. These institutions, it is argued, have then determined how well private property is protected in a country, thereby determining its growth performance until today (Acemoglu et al., 2001).

For yet another example, Botswana’s historically inherited consensus-oriented political culture, with strong grass-roots influence, is supposed to have made its post-colonial leaders to create an inclusive property rights system, which has allowed the country to avoid the likely ‘resource curse’ (it has a lot of diamonds) and achieve successful economic development (Acemoglu et al., 2003).

The upshot of this view is that a country’s fate is already ‘written’. Institutions are relevant – no, they are more than relevant, they are arguably the most important – in explaining which country does better than others, but they are not really something that we can change – they are products of immutable things such as climate and culture, affected only by epochal external shocks like colonization.

So, curiously, the dominant discourse on institutions and development seems to prefer ‘corner solutions’ when it comes to institutional changes. On the one hand, we have the extreme voluntarism of the GSI school, which believes that institutions can be changed very easily if there is a political will. On the other hand, we have the extreme fatalism of the climate-culture school, which believes that institutional patterns are deeply influenced by immutable (or at least nearimmutable) factors, such as climate and culture, and therefore that there is nothing much we can do about it.

Against the voluntarism of the GSI school

Even though we may not want to (and we should not, as I will argue later) go as far as accepting that a country cannot get out of its historical groove which it has fallen into thanks to some long-standing ‘tradition’ or some epoch-making events, the extreme voluntarism of the GSI literature is unwarranted. There are many reasons why institutions cannot be changed at will.

Now, in the rationalist discourse of GSI, all rational government leaders should adopt GSIs, as they are proven to be the best institutions – that is, unless they are motivated by self-interests and want to preserve socially inefficient institutions that benefit them personally. The benefits could be of material kinds – for example, concentrated land ownership, as in many developing countries today – or ideational – for example, the Gold Standard in the 1920s or Marxist ideology in the Soviet Union before its fall (on the role of ideas in institutional changes, see Blyth, 2003).

However, it is not always, or even necessarily predominantly, because those who have (financial, political and ideological) power want to preserve those institutions that serve their interests that institutional changes are difficult to bring about.

First, the rational-choice framework of the GSI discourse may make us think that institutions are products of rational (and selfish) choices of individuals, but human beings are products of existing institutions, which are in turn a mixture of deliberate choices made by agents of yesteryears and the institutions that had existed prior to those agents and at least partially formed them (this is what Chang and Evans, 2005, call the ‘constitutive’ role of institutions). Given this, the very notions of self-interests and rationality are defined by history. What they want and how they think they can best achieve it depend on who the people in question are. Thus seen, in refusing to introduce a GSI, a country may not be being ‘irrational’ or driven by the ‘rational’ choice of selfish rulers, as mainstream institutional economists are likely to think. It may be following its own notion of rationality, efficiency and justice. In this sense, the path-dependence in the process of institutional evolution operates at a more fundamental level than we normally think.

Second, insofar as some institutions have been deliberately designed and codified, they often contain rules that make changes difficult. Institutions are meant to be stable – otherwise they will have no use. So, if you are designing a new institution, you will make it sure that it cannot be changed too easily. And the degree to which you will make an institution difficult to change will be greater, the more important the institution is considered to be. So, typically the constitution will be far more difficult to change than lesser laws. In other words, institutions often have in-built mechanisms against change.

Third, some other times, potentially beneficial institutional changes are not made because only simultaneous changes in complementary institutions can bring about enough benefits (Aoki, 2007). For example, land reform will work well only when the changes in land ownership are accompanied by the introduction of institutions that can supply affordable inputs (e.g., credit, infrastructure, fertilizer) to the newly created smallholders, such as cooperatives, public irrigation corporations, public rural banks – as seen in the cases of East Asia and the US examples (Chang, 2009). Unless (at least enough of) its supporting institutions are correctly identified and installed at the same time, introducing a new institution may not bring about the desired outcomes. So, it not just because of the ‘stupidity’ and the self-interest of those who lead developing countries, which have supposedly inferior institutions, that institutional reforms do not happen easily. It is also because of the constitutive

role of institutions, the inherent change-resistance of designed institutions, and the interdependence between institutions. Given that the GSI discourse’s understanding of institutional change is so fundamentally at odds with the very things that we know to characterize the process of institutional changes, we need to be very wary of its extreme voluntarism.

Against the fatalism of the climate-culture school9

9 This section draws from Chang (2007b).

Now, criticizing the GSI school for its extreme voluntarism is quite easy, if not

totally painless. However, that does not mean that we should go to the other

extreme and agree with those who think that institutional changes are basically

impossible and therefore that the institutional arrangements which a country has

inherited determine the course of its history – unless we have really huge, epochmaking external shocks such as colonization. History is in fact full of examples of big institutional changes made through deliberate human actions, not totally determined by the existing institutional structures. How is this possible? Did I not just say that institutions are very difficult to change?

The dominant discourse on institutions in the tradition of the climate-culture school thinks that all institutions in a country are permeated by one ‘tradition’ – so, for example, the political culture, and thus the process of institutional evolution, in the USA was driven by the desire of the small men to protect themselves against the intrusion of the central government, while Botswana’s modern-day political culture, and thus the country’s institutional evolution in the recent period, was indelibly marked by its tradition of grass-roots participation and consensus-building.

However, in reality, a country’s institutional complex contains various elements, and therefore can usually be described as pro-developmental, antidevelopmental, or whatever we want, depending on which particular elements we choose to highlight. In this sense, explanations that rely on culture and institutions (as the embodiments of cultural values) can easily degenerate into ex post justifications. Let me illustrate my points with a few examples.

First, take the case of Confucianism. Today, many people argue that it is a culture that is inherently pro-developmental. Indeed, if we highlighted its emphasis on education, its notion of ‘heavenly mandate’ (which gives some important voice to the grassroots and justifies dynastic changes), its emphasis on frugality, and so on, you cannot have a better culture for economic development.

However, if we emphasized its hierarchical nature (which is supposed to stifle

creativity; see Krugman, 1994), its penchant for bureaucracy, its detestation for craftsmen and merchants (engineers and businessmen in modern terms), we cannot have a worse culture for economic development. Indeed, until the 1950s, many people, including the East Asians themselves, argued that the East Asian countries were not developing because of Confucianism.

Now, contrast this with Islam, which today is considered to be the ultimate anti-developmental culture. Indeed, if we focused only on its emphasis on afterlife, its repression of women (although one should note that more than 60% of university students in Iran are women and that more than half the professional staff at the Malaysian central bank are women), and its militaristic streak (as embodied in the notion of jihad), we will end up with a picture that does not look very promising for economic development. However, we could isolate its lack of social hierarchy, its respect for commerce (the Prophet himself was a merchant), its contractual culture, its strong legal tradition (Muslim countries had trained judges centuries before the Christian countries), and its emphasis on learning (the Muslim world was the centre of world science and mathematics around the 10th century), and make Islam look even more pro-developmental than Confucianism (see Chang, 2007a: chapter 9; however, for a discussion of the anti-developmental aspects of the Muslim legal system, such as the inheritance law, see Kuran, 2004). Of course, we do not use this characterization of Islam, not because these characteristics are not there but because most Muslim countries have not been very successful in economic development.

For another example, France is usually seen as a country of dirigiste culture and institutions, at least since the days of Jean-Baptiste Colbert, Louis XIV’s finance minister. However, laissez-faire was also a strong French tradition.

Between the fall of Napoleon and the Second World War, the country was even more liberalized in its economic policy than the then very liberalized Britain in some respects (Kuisel, 1981; Chang, 2002a: chapter 2). The current French ‘tradition’ of dirigisme was revived in the 1950s after a century and a half of coma.

The point is that, even when we accept that a country’s institutions (and culture that underlies them) are given, deliberate choices still matter because there are always elements in a country’s cultural/institutional complex that are pulling in different directions.Depending on how people interpret their ‘tradition’, which aspects of it they choose to highlight, and which interpretation wins in political and ideological battles, a country could evolve into very different directions.

More importantly, over the long term, ‘traditions’ are not immutable. Cultures and institutions themselves change, often dramatically.

For example, as pointed out above, the Muslim culture was more tolerant, scientifically minded, and pro-commerce than the Christian ones until at least the sixteenth century. The intolerant, other-worldly streak became prominent only recently, with the general economic decline of the Muslim world. As also pointed out above, the Confucian societies, including China itself more recently, have transformed what once was an anti-developmental culture and engineered the biggest economic miracles in human history during the last half a century.

One reason for such cultural and institutional shifts is that, as I pointed out above, economic development brings about cultural/institutional changes, as much as the latter changes bring about economic development. For example, industrialization makes people more ‘rational’ and ‘disciplined’. This is testified to by the fact that before their countries achieved a high degree of industrialization, the Germans and the Japanese were described by visitors from economically more advanced countries as lazy, irrational, and even congenitally incapable of dealing with machinery – completely different from their modernday racial stereotypes (for further details, see Chang, 2007a: chapter 9).

For example, in 1903, the American missionary Sidney Gulick observed that many Japanese ‘give an impression . . . of being lazy and utterly indifferent to the passage of time’ (Gulick, 1903: 117). Gulick was no casual observer. He lived in Japan for 25 years (1888–1913), fully mastered the Japanese language, and taught in Japanese universities. After his return to the USA, he became a champion of racial equality for Asian-Americans. Nevertheless, even he saw ample confirmation of the then Japanese cultural stereotype of an ‘easy-going’ and ‘emotional’ people who possess qualities such as ‘lightness of heart, freedom from all anxiety for the future, living chiefly for the present’ (ibid.: 82).

Before their economic take-off in the mid-19th century, the Germans were typically described by the British as ‘a dull and heavy people’ (Hodgskin, 1820: 50). Mary Shelley, the author of Frankenstein, wrote in exasperation after a particularly frustrating altercation with her German coach-driver: ‘the Germans never hurry’ (Shelly, 1843: 276). It was not just the British. A French manufacturer who employed German workers complained that they ‘work as and when they please’ (Landes, 1998: 281). Talking about excessive German emotion, Sir Arthur Brooke Faulkner, a physician serving in the British army, observed that ‘some will laugh all sorrows away and others will always indulge in melancholy’ (Faulkner, 1833: 155). Given that Sir Arthur was an Irishman, this would have been like a Finn describing the Jamaicans a gloomy lot, according to today’s cultural stereotypes!

Another, and possibly more important, reason for cultural/institutional shift is that, to paraphrase Marx, it is humans that change institutions, albeit not in the institutional context of their own choosing.

In the dominant institutional discourse, this is impossible because there is no real human agency. Material interests that motivate people to change institutions (e.g., pressure for democracy from small independent farmers) are predetermined by ‘objective’ economic (or even natural) conditions, which will be obvious to all rational agents (that is, everyone), and therefore there is no real ‘choice’ in what we do (Chang and Evans, 2005). Or alternatively we are just carriers of cultural ‘memes’ – such as Botswanan ‘democratic’ political culture or the Confucian ‘work ethic’.

However, in reality, people make choices that are not totally determined by their ‘objective’ economic interests. Ideas, and institutions that embody them, influence how people perceive their interests (and therefore there is no such thing as ‘objective’ interest in the final analysis) and sometimes even make people defy their own ‘objective’ interests because of the ideas that they have internalized.10

10 One interesting example is the case of a Korean planning agency, the Economic Planning Board (EPB). Although it was the centre of government intervention until the 1970s, for various reasons many

bureaucrats at the EPB adopted neo-liberal ideology since the 1980s. By the early 1990s, some EPB

bureaucrats were even calling for the abolition of their own ministry. This flies directly in the face of

the fundamental assumption of self-seeking in orthodox economics. Unless we accept the importance

of human agency and the influence of ideologies on it, we will never be able to understand why these

bureaucrats went against their ‘objective’ interests and campaigned for the reduction of their own power

and influence. For further details, see Chang and Evans (2005).

We will be able to break away from the cultural/institutional determinism so prevalent among mainstream institutional discourse (unless they indulge themselves in boundless optimism of the GSI discourse) only if we recognize the complexity of the nature and the evolution of culture and institutions, on the one hand, and accept the importance of human agency in institutional change, on the other hand.

Conclusion

I have critically examined the recent mainstream discourse on the role of institutions in economic development. I critically examined the theories that the dominant discourse uses in explaining the relationship between institutions and economic development and discussed their limitations. Not only do the theories ignore the influence of economic development on institutional changes, but they are also biased (towards ‘liberalized’ solutions), simplistic, linear, and pays insufficient attention to the fact that the relationship may differ across time and space.

The evidence provided by the dominant discourse in support of its proposition that ‘liberalized’ institutions that provide maximum business freedom and strongest protection of private property rights are the best for economic development also turns out to be very partial, conceptually fraught, and full of practical measurement problems. The evidence largely comes from cross-section econometric studies, with little attention paid to time-series (in the broad sense) data. The inherent problems with defining and measuring institutional quality, especially of the composite kinds (e.g., governance, property rights system), are ignored and the limitations of cross-section regressions for highly heterogeneous samples are not taken seriously. The currently dominant discourse on institutions and development also has a very poor understanding of how institutions themselves change.

Despite their usual emphasis on scarce resource and opportunity costs, mainstream institutional economists almost entirely ignore the issue of the costs of establishing and running institutions, thus making their proposals for institutional reforms appear more attractive than what they really are. Also, in methodological terms, they are either hopelessly optimistic about the prospects of institutional change (the GSI discourse) or unduly fatalistic (the climate-culture school). I argue that these ‘corner solutions’ are the results of very simplistic views on what institutions are and how they change. Only theories that take both structural constraints and real human agencies seriously can help us steer a nuanced middle course between these two absurd extremes.

I would like to conclude this article with a plea. It is that institutional economists need to pay more attention to the real world, both of the present and historical – not the fairy-tale retelling of the history of the world that has come to characterize mainstream institutional economics today (from the Glorious Revolution to Botswanan political culture) but capitalism as it really has been.

Very often, institutional economic theories, including many non-neoclassical kinds, have been developed on the basis of rather stylized understanding of reality. However, as I have tried to show in this article, reality is often stranger than fiction and therefore our theories need to be more richly informed by real-world experiences – both history and modern-day events. Only on this basis will we be able to develop theories that are nuanced enough to let us come up with policy conclusions that go beyond the wild voluntarism of the GSIs discourse school and the simple-minded determinism of the climate-culture school. Institutions have become politically too important to be left to those who believe in these simplistic and extremist arguments.

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