In their pursuit to explain economic performance and provide policy prescriptions, most economists take society’s institutions for granted. They seldom question how these institutions change over time. Although they have been able to make significant progress by focusing on economic relations, they have not adequately addressed some fundamental issues – for example, why some nations are poorer than others, even when they possess the same natural resources, technology, and economic policies; and, why changes in the formal rules of the game work in some settings but fail to produce their intended results in others.
In this publication, Douglass North develops a framework for dealing with such difficult questions. He focuses on economic and institutional change. His basic thesis is that “reality” is never known to anyone. Humans construct beliefs about that “reality.” At every point in time, the beliefs held by the powerful political and economic entrepreneurs produce certain institutions, both formal and informal, that determine economic performance. Competition among rivals in society, along with other exogenous factors, produces a never ending process of institutional change. This process is incremental and path dependent. “Big bangs” do not work, nor do mere changes in the formal rules of the game.
The implications of North’s thesis for Egypt are clear. Economic reforms will not produce the desired results without institutional reforms. The reform process is gradual and can be expected to take time. The success of this process requires champions.
Author(s): Douglass C. North