Nobel Laureate Speaks on Institutions and Economic Development

Nobel Memorial Prize in Economics laureate Douglass C. North

1993 Nobel Memorial Prize in Economics laureate Douglass C. North was the guest speaker at the Ronald Coase Institute and the Philippine Economic Society workshop on institutional analysis on 13 March 2008 at Los Baños, Laguna. Supported by the Friedrich Naumann Foundation (FNF), the aim of the conference was to encourage young academics to apply institutional analysis to a variety of developmental issues and to receive critical input and feedback from some of the most noted academics in the field.

Douglass C. North spoke on an institutional approach to economic development as he has made it his life work to understand why some countries are rich while others remain poor. The root of the dilemma, he discussed, was in the way human societies have evolved institutionally. A social order develops to limit and control violence. This has usually been achieved by a coalition of elites that is ultimately based on personal ties, which is why he terms this type of state “natural.”

These elite coalitions instil order by creating rents or monopolies that are distributed among them to stabilize their base, while the mass of the population has limited or no access to property rights and political power. These limited access societies continue to dominate the modern world. However, a few societies have managed the transition from a system of limited access to one with open, rule-based competition both in the economy and politics. In these countries, often called “western,” people interact on the basis of impersonal rules instead of personal ties.

The key to understanding social development is to realize “you don’t simply impose the characteristics of an open access society on a limited access society. They don’t work,” he said. “What you do is try to move limited access societies along from being fragile to stable to mature by encouraging the growth of institutions that don’t threaten the survival of the elites, but allow them to expand and build in ways that will move them in the direction [of open societies].”

“This is of great relevance to the work of the Foundation,” said FNF Resident Representative Siegfried Herzog. “The work of building a liberal society based on the rule of law, participative democracy and a free market economy can be seen through North’s lens as a task of moving institutions towards an open access system.”

For further reading on the development of the natural state, read Douglass C. North’s article: “The Natural State: The Political-Economy of Non-Development.”

Listen to his presentation at: http://www.fnf.org.ph/podcast/news/episode-27.html