Institutions and Small Settler Economies

A Comparative Study of New Zealand and Uruguay, 1870–2008

A. Schlueter

• Publisher: Palgrave Macmillan
• Year: 2014
• Print ISBN: 9781137448286
• eBook ISBN: 9781137445674
• Topic: Economics
• Subtopic: Business General
• Index: Economics

Are institutions the main cause of sustained economic growth? Institutions and Small Settler Economies provides a comprehensive improvement in our understanding of institutional contributions to economic growth based on North, Wallis and Weingast's (NWW) institutional theory. In this exciting new volume, Schlueter offers a substantial range of novel insights into the socio-economic development trajectories of two deliberately selected New World economies: New Zealand and Uruguay. This study sets itself apart from other publications through its impartial analysis of the strengths and limitations of leading institutional scholarship, as well as its rigorous comparative methodology involving a substantial set of quantitative and qualitative data.

CHAPTER 1

INTRODUCTION

NEW INSTITUTIONAL ECONOMICS AND THE THEORY OF SOCIAL ORDERS

Why have some countries become so much richer than others over the course of the last two hundred years? This unique phenomenon in human history, to which some refer as the “era of modern economic growth,” the “Great Divergence,” or the “rise of the West,” has provoked many highly regarded social scientists to come up with alternative explanations, and there is no sign that their supply will abate in the nearer future.¹ More recently, academia has widely acknowledged the outstanding role of institutions in determining an economy’s fortune during this particular period (Acemoglu, Johnson, & Robinson, 2005; Hodgson, 2009; Rodrik, Subramanian, & Trebbi, 2004).² There are also several recent scholarly attempts to combine these fundamental insights within a single consistent framework. Douglass North, John Wallis, and Barry Weingast (NWW) present their contribution, what will be called the “theory of social orders” (TSO), to a larger academic audience in their joint book entitled Violence and Social Orders (2009). This study uses their ambitious concept as a major point of reference in order to evaluate whether new institutional economics (NIE) can finally provide conclusive answers to the above-stated question.

Scholarly inquiries into the role of institutions have a long tradition. From the nineteenth century, the German historical school, and later American institutionalism up to the 1940s, provided many valuable insights (Hodgson, 2009, p. 5; Rutherford, 2001, p. 180). Representatives of old institutional economics (OIE), such as Thorstein Veblen, Wesley Mitchell, or John R. Commons, favored inductive comparative research on actual economic history and applied an interdisciplinary approach. Their attention was devoted especially to the role of informal institutions, such as social norms and habits. Despite early successes, the lack of a tight theoretical core and the revision of some of their crucial psychological foundations led to the school’s marginalization in subsequent decades. NIE, in contrast, emerged in the last quarter of the twentieth century owing to revived interest in institutions (Coase, 1998, p. 72; Williamson, 2000, p. 595).³ Frustration about perceived gaps in the prevailing neoclassical research paradigm, the development of new tools for analysis, as well as the limited results of early technology-driven aid programs in developing countries in the 1960s caused a rapid increase in institutional research. In contrast to their predecessors, adherents of this new approach seek to extend neoclassical theory by taking into account new findings from adjoining fields, rather than completely replacing it. The list of contributors is long and contains many acknowledged scholars, such as Armen Alchian, Harold Demsetz, Steven Cheung, Avner Greif, Ronald Coase, Douglass North, Elinor Ostrom, and Oliver Williamson, with the last four having received the Nobel Prize (Klein, 2000; Ménard & Shirley, 2011). The core of NIE, with a focus on formal institutions and organizations, has identified the overarching importance of transaction costs, private property rights, contract law, and civil freedom for generating enduring prosperity. However, there is still much controversy among economists about this set of “global standard institutions” (Chang, 2007, p. 20; Engerman & Sokoloff, 2005, p. 645). The evolution of institutionalism continues into the twenty-first century with a perceived convergence of the schools of OIE and NIE (Hodgson, 2009, p. 18). This study will, it is hoped, contribute to an enhanced theoretical basis of NIE, especially in regard to institutional change.

Besides the general claim that “institutions matter,” research in NIE has diverged into very different fields of research. Usually, there is a separation made between the Coase-Williamson firm-level analysis and North’s broader approach to informal and formal institutions at the national level (Hodgson, 2009, p. 4; Ménard & Shirley, 2011, p. 1; Williamson, 2000, p. 596). Even within the Northian branch of NIE, research objectives and time horizons diverge considerably. Greif (2006), for instance, focuses on medieval Europe and the Muslim world, and Fukuyama (2011) spans his research horizon from hunter-gatherer societies up to the French Revolution. The distinction between just two major fields is, however, not all-encompassing, as Mancur Olson and the collective action approach, James Buchanan and the public choice theory, or Elinor Ostrom and the political economy literature represent further important research streams.⁴ Modern representatives of these streams, such as Bates (2001), Olson (1993, 2000), or Przeworski, Alvarez, Cheibub, and Limongi (2000), have run on very similar tracks to the Northian school with almost identical research objectives, but have been less well received by mainstream NIE in the past. Notwithstanding the great variety, “Why the West?” is certainly the most frequently discussed question within this branch (Vries, 2001, p. 7). The present book also attempts to provide further answers to this question.

Several scholars have already attempted to combine perceived key institutions for long-term socioeconomic development into a single framework. Early contributions often followed the Stufentheorie (theory of stages) approach, especially the works of the (pre-)German historical school (Hershlag, 1969, p. 661; Sombart, 1929, p. 10).⁵ Further theories of stages are numerous, with Marx (1977) and Rostow (1960) probably being the most prominent examples. However, many of these frameworks faced harsh criticism immediately after their publication, mainly because of either being ahistorical, presenting only one-way paths of development, or focusing on the wrong factors (Hershlag, 1969, p. 677; Olson, 1985). On the other hand, the aforementioned reemergence of institutionalism has revived interest in establishing an encompassing “general theory.”⁶ Despite numerous offerings on the academic markets over the last decades, a viable representative capable of fulfilling most of the high expectations has not yet been found.⁷

Among the most recent theories competing in the academic market, the theory of social orders proposed by North, Wallis, and Weingast in their book Violence and Social Orders (2009) deserves special attention.⁸ The authors intend nothing less than to “provide a new framework for interpreting the course of human history over the past ten thousand years” (p. xiii). Just as ambitiously, North et al. (2009, p. 2) maintain further that their construct of two distinctive main ideal types, so-called limited access orders (LAOs) and open access orders (OAOs), and transitions between them is sufficient to account for all major socioeconomic differences since the Neolithic revolution. In addition, the TSO also attempts to integrate, extend, or revise other similarly oriented and highly influential works, such as Acemoglu and Robinson (2006), Bates (2001), Clark (2007), DeSoto (2000), Engerman and Sokoloff (2005), Greif (2006), Landes (1998), McCloskey (2006), Mokyr (1990), North (1990), Olson (1982), Pomeranz (2000), Rostow (1960), Spiller and Tommasi (2007), or Tilly (1992).⁹ Another point of interest is the authors’ considerable efforts to combine the research streams of NIE and public choice theory.¹⁰ NWW’s recent contribution is also astonishing in a different way, since North had published a similar theory in Understanding the Process of Economic Change (2005) only four years earlier. Furthermore, Violence and Social Orders constitutes the culmination of a joint research episode by three highly acknowledged scholars, which can be traced back to their paper “The Natural State: The Political-Economy of Non-Development” (2005) and has resulted in further analyses thereafter.¹¹ In other words, NWW’s recent contribution seems to outmaneuver all of its competitors by incorporating rivaling ideas into a comprehensive framework and by making universalistic claims. It therefore provides a good synopsis of the existing knowledge. Hence, evaluating NWW’s theory of social orders is also an attractive opportunity for providing meaningful answers to open questions within the general academic debate.

Violence and Social Orders has already received a notable amount of attention in the academic world. In reviews, the book has been described as “a must-read for social scientists” (Stefancic, 2011, p. 395), “an excellent read” (Bates, 2010, p. 756), and “a valuable new perspective on the institutional foundations of successful modern societies” (Harley, 2010, p. 1201). NWW’s major contributions are seen in their reflections on the Weberian theory of the state (Delanty, 2012; Kiewit, 2010), their assertions regarding Olson’s famous collective action paradigm (Stefancic, 2011), their timing of the rise of the West (Haaga, 2010; Harley, 2010), and their differentiation between different kinds of social interaction (Snyder, 2010). However, a substantial amount of criticism accompanies the praise. Some scholars, such as Bates (2010), Holden (2010), or Kiewiet (2010), challenge NWW’s broad claims of novelty.¹² Although general unanimity prevails about the central role of transitions between social orders in NWW’s discussion, Bates (2010), Holcombe (2009), and Holden (2010) consider them to be insufficiently explained. Likewise, there is further substantial disagreement about the historicity of NWW’s approach.¹³ Consequently, Margo (2010) does not consider NWW’s theory a success, and according to Holcombe (2009), “it leaves the reader with at least as many questions as answers” (p. 392). In other words, the first evaluations by the scholarly community have alternated between praise and criticism, as well as between affirmations of novel contributions and claims of severe omissions. In addition, the ideas presented in Violence and Social Orders are already the basis for a fair amount of heterogeneous following-up research from the original authors or other scholars, the publication of the edited book In the Shadow of Violence (North, Wallis, Webb, & Weingast, 2013), and further case studies, such as those undertaken by groups of researchers from the Agence Française de Développement in Paris and the Higher School of Economics in Moscow.¹⁴ Thus, the amount of alreadyexisting additional analyses demonstrates the relevance of their theory for the general debate within institutional economics. However, more conclusive research on the key characteristics of NWW’s theory and its applicability to actual economic history is needed, especially in regard to incremental institutional change and comparisons between LAOs and OAOs.

NEW INSTITUTIONAL ECONOMICS AND SETTLER ECONOMIES

Comparative research about the diverging paths of nations during the era of modern economic growth provides a real opportunity to study the long-term impact of institutions on economic growth (Vries, 2001, p. 31). This also facilitates a meaningful evaluation of NWW’s core propositions about LAOs and OAOs, which they state mostly in relative and complex terms. In addition, they do not really talk, as shown later, about recent development miracles, such as Singapore or China. Even if their theory would not be valid in the case of these growth stories, it remains an open question, whether their propositions hold for Western economies. Among the many possibilities, studies of the socioeconomic development of modern settler economies, often called “neo-Europes,” play a particular role in institutionalism. NWW’s research is also connected in many ways to the developments in these countries, albeit on a somewhat superficial level.

The era of modern economic growth, a term most directly connected to Kuznets (1966), has changed the world dramatically over the last 200–250 years. Among other things, it has led to the emergence of the so-called Organisation for Economic Co-Operation and Development (OECD) club, with its member states’ current per capita income being more than 50–100 times higher than those of their poorest counterparts (Crafts, 1999; Feinstein, 1999; Williamson, 1996). According to the general academic view, an economy’s central orientation had to shift from agriculture to industry and to services through a complex process, and also to weather multiple periods of rapid globalization and de-globalization in order for a country to become one of the currently few members of this exclusive club. In this connection, the transfer of institutions from the European core to overseas colonies before the industrial revolution facilitates a natural experiment concerning the impact of initial institutional frameworks on long-term economic development.¹⁵ On one hand, the United Kingdom (UK) and some of its former major colonial outposts, including the United States (US), Canada, Australia, and New Zealand, were some of the earliest members of this exclusive club.¹⁶ On the other hand, Mexico and Chile are the only former Iberian colonies to have entered the OECD club, and they did so just during recent decades. Moreover, together with their former colonial power Spain, as well as Portugal, they have a significantly lower present-day average per capita income than the “British” subgroup.¹⁷ Furthermore, other ex-Spanish colonies, such as Argentina and Uruguay, still draw on their prosperous past to polish up their mediocre present. In other words, there appears to be a strong causal link between the initial colonial setup and present-day national income levels. This has led to the evolution of a so-called British-Iberian dichotomy in many academic works over time (e.g., Haber, 1997; Landes, 1998; La Porta, Lopez de Silanes, & Shleifer, 2008; North, 1981, 1990; North, Summerhill, & Weingast, 2000; Olson, 1982; or Robinson, 2001). Proponents of this idea argue that current income differentials between both new worlds depend on crucial differences in their informal and formal institutions, such as legal frameworks, property rights protection, income distribution, and affection for trade and competition, caused by their colonial heritage.¹⁸ Their argument traces back to Max Weber’s famous dichotomy between Catholicism and Protestantism, or the role of culture, and its influence on economic growth. His argument has been hotly debated in academia even within the institutionalists’ camp and has been questioned several times.^1...

Table of contents

• Cover
• Title Page
• Copyright
• Contents
• List of Tables
• List of Figures
• List of Abbreviations
• Acknowledgments
• 1. Introduction
• 2. Unbundling Institutional Theory
• 3. The Golden Age of the Two Settler Economies
• 4. The Great Divergence Between New Zealand and Uruguay
• 5. Decades of Stop and Go
• 6. Conclusion
• Notes
• Bibliography
• Index