ON INSTITUTIONS

THE PARADOX

Institutions are important levers of societal coordination. We can complain about how dysfunctional our institutions are - or how they can be doing better. But implicit in these complaints is a presumption that we need those institutions to be functional at their designated goals. This presumption is true. Societies have grown large and complex - hardly can social coordination be imagined or done without the cooperative, preventive and punitive arrangements that we now call institutions.

Still, I am left with a puzzling question about how we now define the roles of institutions. We agree no society can function without them, but we also believe they are supposed to be the ultimate arbiters of all important social behaviour. Everything from music, art, commercial exchanges, mobility have most of us always yearning for some form of institutional intervention. Either in a preventive regulatory form or in positive innovative form. I find this puzzling because an institution is a human creation. It did not appear wholesale in human societies - but rather a product of centuries of tinkering, experimentation and cultural evolution. For example, we expect our judicial system to arbitrate in fairness and with justice, but can that be divorced from our collective ability to act justly or our beliefs about justice? Are our expectations about institutions reflective of how much they have grown in size, power, and capability?

Before we go down the rabbit hole; let us clearly set some boundaries. What do I mean by “institutions”? The everyday use of the term simply refers to a bureaucracy. This is an acceptable use - for bureaucracies are the specialized organs of institutions. But my use here will be more expansive. By “institutions”, I am referring to the formalized set of rules that necessarily govern the general interactions of the people in a society - and the set mechanisms for enforcing such rules. These rules can be binding constraints, specified codes of conduct, ethics, and prohibitions. This definition achieves two things. It broadens our view of institutions beyond specialized functionaries like bureaucracies. By my definition, institution covers everything from the Constitution to the local council’s reception desk. It also expands the scope beyond public organizations. Private entities like firms, charity, and religious organizations are vital social institutions. Secondly, I think it helps to distinguish institutions from other forms of social cooperative mechanisms like norms and culture.

There are clear institutional differences between prosperous nations and the ones playing catch-up. Perhaps this is what forms the locus of our expectations. And there appear to be valid pieces of evidence for that. The case of Korea is a common example. After the brutal war that split the country, the two new territories travelled different institutional paths. The result is that South Korea's economy is a thousand times bigger than North Korea's. The two countries had similar origins, people and culture. But adopting two radically different systems of governance produced clearly divergent results. Social scientists believe this is a very credible natural experiment. Daron Acemoglu and James Robinson (A&R) in their popular book “Why Nations Fail” distinguished institutions as either extractive or inclusive. An extractive institution legitimizes and exercises its power by simply collecting “rent” on natural and human resources within its territory. Think Nigeria under decades of military rule or North Korea’s manic autocratic governance under the Kim family. The opposite of this arrangement is an institutional arrangement that enables the productive and creative capabilities of people. Examples are Western Europe, Singapore, South Korea, and the United States. But are these countries shaped by the institutions they built or adopted? If yes, what influenced the choice and process of developing inclusive rather than extractive institutions? I think this dichotomous way of looking at institutions yields an intermediate view. Prosperous countries will fit into the innovative axis, while poor countries will fit into extractive. This leaves us hand-wriggling about which comes first. Even if we detail how different countries arrived at the innovative-extractive axis (much like A&R), it still tells us very little about why countries developed along their particular axis. We need to understand what makes a country evolve along the institutional paths they are today. And what hope exists for a change of direction if needed. We need to understand how institutions develop.

FROM MINDS TO CULTURE

Though humans are born into a deluge of information - from other humans and the environment. We are born with cognitive equipment for minimum viable survivability. Through the processing power of our brains and our senses acting as receptors, we manifest our inherent grasp of survival via our intuitions and instincts. We are also not solitary players in the survival game. We are born into families and settled into small tribal and communal groups. Even in today’s world of highly dense and impersonal cities, some of us still choose the proximity and familiarity of close-knit communities. With group-living comes multiple repeated interactions with other people. We need not reach far back to primitive societies to show how this works. A few years back I moved to a growing suburb in Lagos with a small number of households and very much a close-knit community.

Most of us are strangers to one another, but our interactions are connected and repeated. We always run into each other when leaving for work in the mornings and when coming back in the evenings. This was a community with no formal institutional presence, so governance of the community is a commons - meaning we all had to take collective ownership of the problems to fix them. Public goods like security, electricity, drainage channels and roads were secured through the cooperative efforts of residents. How is this possible without the presence of bureaucracy or hierarchical authority?

If we step back into the human mind - we can infer that there are standard intuitive traits that are part of our natural cognitive toolbox. These traits aid sociability and cooperation. In my old community, for example, we are normative greeters. People who simply go about their business and do not greet anyone are considered rude or snobbish. This greeting norm did not emerge in a community meeting and no one actively enforces it. But most people abide by it because it’s what you expect other people to do. I hated this norm and frequently feel a strong urge to defect. But I was raised by my parents to be nice, respectful and cooperative. This is hardly a satisfactory resolution for why such norms exist. Why did my parents instill such values in me? Does my refusal to say “hello” to my neighbor in the morning make me an uncooperative member of the community? You might be surprised that the answer is often a “yes”. This is not a logical truth; it is a psychological “truth”.

One of the basic condition for human survivability is safety. Humans have lived through brutal tribal and communal conflicts for thousands of years in the struggle for survival. We are always looking for signs of danger and safety. Perhaps salutations and greetings (when we had languages) are a form of what Daniel Coyle called “belonging cues”. In a sizable community of non-relatives, greeting may signal to other members of the community that you are not a threat to them, which might lower their anxiety and guarantee your safety against preemptive or hasty retaliatory strikes. Like the new black family on Wisteria lane, we do not automatically trust strangers.

Many norms like greetings, naming conventions and others, have been elevated to the level of societal identity and culture. Culture differs from norms in one important aspect - it acts on a much larger scale. Note that the instincts to achieve cooperation and norm enforcement already exist in our minds. We have intuitive grasps of concepts like reciprocity, justice, fairness, and altruism. Some experimental evidence confirms that parts of our brain enjoy punishing people that wronged us as much we also enjoy rewarding the people that do right by us. The problem with our instincts is that they are highly unstable and costly as the population grows and exchanges become more complex and impersonal.

Culture helped us solve this problem. Some social scientists have suggested that culture and institutions are not separate categories. They argue that culture should be seen as a set of informal institutions. For our purposes here, culture simply refers to the beliefs and values (morality) of a society. For minds to achieve cooperation at scale, they need to be co-opted by culture because beliefs - propagated through stories, mores, rituals, and other social vectors - scale faster and better than instincts and facts. You may start as a small tribal band of normative greeters as a safety signal. But as your tribe grows in number, instinctive judgment becomes harder to maintain. Older members of the clan may start telling scary stories about snobbish non-greeters who met a bad fate. And how greeting is a “nice” and “courteous” thing to do.

Surely we do not always control how much culture scales our intuitive instincts. There are many kinds of beliefs and values that have become generic monoliths called African culture or Asian culture. Culture has evolved beyond particular sets of beliefs into “ways of being and doing” in a society. Everything I have described so far is an endogenous process. But the influence of the environment carries little weight in most theories of institutional evolution (to be fair, this mostly limited to the social sciences) and this misses an important path in the journey from minds to modern societies.

FUNCTIONAL ORGANIZATION

Functional organization was a natural cultural evolution because of the overwhelming struggle for food and safety. Protecting your progeny, relatives and members of your settlement is vital to survival. So is ensuring there is a stable source for food. These two activities dominate the existence of early humans. But the success or failure of ensuring survival depends on the environment. The earliest human settlements were hunter-gatherers. Their survival depended on the availability of hunted animals, tools for effective hunting, a terrain that limits their exposure to larger animals that can kill them, and tools to defend themselves against attack by an animal or a rival settlement. Hunter-gatherer settlements adapted organizational forms and practices that ensured their survival from these threats.

This is also true of safety. Defense against the multiple sources of threats depends on the nature of the threat as much as the terrain. Environmental conditions and shocks not only shape the nature of human activities, but they also create selective pressures for shifts in those activities. Climate change and disruption to food sources, leading to lower average consumption may be responsible for the invention of agriculture. And with this shift also came newer forms of organizing for safety and survival.

But how is this process cultural? Ensuring your survival is of practical - if mortal - concern. I have argued thus far that our cognitive instincts already ensured that culture scales better and faster than practical problem-solving. But this merely treats culture as a tool. The beliefs and values of any civilization are baked into the activities that surround its survival. For example, hunter-gatherers have strong sharing norms. A food source can be unstable and successful hunting will be unequal, so this is a classic practical reciprocity. A form of social insurance. But ensuring the stability of these norms across multiple unrelated households requires beliefs about equality. We can say the same even for practices that do not appear practical, like burying the dead and associated rituals. The separation of instincts, norms, and beliefs here serve an analytical and explanatory purpose. But the human brain does not function by having such discreet clean breaks. The workings of instincts, norms, and beliefs are cognitively seamless.

The continuous nature of cognition makes the evolution of organization complex and fragile. New ways to survive can emerge out of environmental disruptions, but old beliefs and values are never erased from memory and the associated rituals or practices may take a while to disappear. This is problematic because new ways of organizing around survival will generate new sets of beliefs and values.

Agricultural production needed new ways of organizing for continuous food production that can sustain feeding and trade. Hunting may have made the domestication of dogs useful, but agriculture needed oxen. Defending a growing, dense and sedentary agricultural settlement needed tactical organization and security strategies. Doing these things required specialization and hierarchies - which should contradict hunter-gatherer culture. The effect of cultural cognition, environmental disruptions, and adaptive organizational forms are all mutually-reinforcing and constraining. For example, an environment with good weather for diverse agricultural produce will exercise lesser selective pressure on people to find new sources for food - and hence the cultural cognition will reinforce rather than challenge existing organizational form. The opposite effect can be expected in an environment less productive for agriculture. Many scholars have argued that low agricultural productivity in Europe created tight Malthusian constraints that yielded new cognitive niches for the culture of exploration and commerce to emerge in Europe - which culminated in the successful implementation of the Industrial revolution.

It is worth noting that a change in cultural cognition and organization is not a rapid population-wide process. People of status had to take the lead. Defending a settlement or territory - and even warfare - brought the emergence of a dominant warrior class. Other forms of non-combat specializations and belief systems brought the emergence of a prestigious administrative, philosopher and priesthood class. The history of civilization is not merely that of processes, but also that of strong human characters. And the success of organization encourages its spread.

But this spread does not lead to equal success. There are endogenous divergences. That’s because outputs may be easy to replicate but cultural cognition is harder to copy. Building a wall around your territory may be part of an overall defense organization that requires other strategies like how your soldiers position themselves in case of an attack. A rival territory that learned or copied how to build walls will not have access to the other knowledge and strategies. Even if it manages to understand your processes, replicating them could be harder because the knowledge is flowing top-down. Organizational forms that emerge from the adaptive and cognitive responses to their local environments are more successful and resilient.

In today’s world, we have mastered nature - and incentives have replaced environmental disruptions as a source of selective pressures. Organizational forms can now be transplanted thousands of kilometers apart. Global memes like human rights, inequality, fair trade have become the vectors of cultural cognition. Bureaucracies have grown bigger and we now look up to them for care and direction. But the convergence of organizational forms did not yield uniform result. Despite the incredible progress we have seen in human welfare and betterment - we have not learned much about how to build and design institutions.

INSTITUTIONS AND PROGRESS

When organizations succeed, the history and process of their success are analyzed - and then copied in many other forms. It is often assumed that this copying is successful because it produces similar output. Suppose a Nigerian billionaire visited a Tesla factory in America with the sole intent of copying its production process. If after about a year, our billionaire unveils a locally made electric vehicle - we can applaud the tenacity and ambition of her venture. But you can rarely see someone praise this as innovative. It is merely technological transfer. We have assumed that the “inside view” of the factory our billionaire had, provides a precise knowledge about how Tesla works. But this assertion is a mistake - for it presumes that you can know exactly how an organization works and that knowledge can be used for successful replications. If our billionaire is any smart, she would have gone to learn how to make electric cars rather than how Tesla works.

The “fallacy of transplantation” is true of private organizations as much as nation-state institutions. You can hire a “Lean coach” or have multiple “Agile” sessions and still have a bloated, slow and inefficient operation. This is because each company possesses what management scholar Rebecca Henderson (the grand matriarch of disruption) called “managerial cognition”. Civilizations and countries do have cultural cognition that oversees the ecosystems called institutions.

The nagging question still remains - why some nations progressed faster than others? How did the nations that have innovative institutions (ref. A&R above) designed them to deliver prosperity? There are different answers by brilliant scholars that have tackled this question. I do not claim to know better than them. But I still find most of the answers unsatisfactory. “Bourgeois values”, “culture of commerce”, “protestant ethics” are all good theories, the problem is that they do not generalize well when isolated as a causal factor. I am in favour of a more robust view that prosperity is a product of a long process of selective environmental pressures, cultural cognition, and organization. These are mutually-reinforcing factors and rooted in our biological history.

Thin explanations of progress have led many smart people to declare that “progress is not natural”. That the commerce, ethics, technologies, and institutions which built the modern world are singular discontinuous moments in history. This “entropic” view of progress claim poverty is the natural state and that prosperity is what needed to be explained. I agree with the latter project. Progress needs to be better understood. But the fact that progress was slow on the human time-scale does not make it extremely improbable. The history of life itself is powered by many innovations. Cooking may be a fantastic human invention, but metabolism is an even more wonderful biological invention. And the relationship between the enzymes in our guts, our taste and olfactory senses and the brain that came up with cooking is a complex but well-choreographed Darwinian dance. What would have been “unnatural” is if monkeys had invented cooking or the airplane. The enrichment of our species may have started a mere three and a half centuries ago. But we needed to learn how to speak, make tools, chisel on rocks, grow our foods, build crypts, pyramids, mosques and cathedrals before we built ships, factories, railways, and global trade. Since when did success start at the inflection point.

DELIVERING PROSPERITY - THE WAY TO DESIGN

Institutions are products of social complexity and specialization. They are designed for specific goals or to meet specific needs. The process by which the job is done is largely opaque to all but the functionaries within the organization. And though transplanting institutions into different local contexts does not work; the outputs or goals of institutions work when they can be wisely replicated. Markets work everywhere. Property rights improve welfare and prosperity in all society. Justice and respect for people’s rights are justifiable moral outcomes everywhere. The problem of institutional design is that we tend to specify their ideal states rather than their goals. Philosopher David Wien has argued that institutional design is both an architectural and an engineering task.

The major drawback with conceiving institutions as an ideal state is that it can yield what economist Lant Pritchett called “isomorphic mimicry”. And we are all too familiar with this more than we know. In Nigeria, a lot of us gleefully assume we have constitutional liberties because we have a constitution. We think we have an “independent” judiciary and central bank. When these institutions are compromised by political power and interest we rightfully get angry, but we are still entranced with idealism in the demands for reforms. Even policymakers and expert observers fall into the same “ideal” trap. Pritchett noted that development experts are in the business of selling solutions rather than solving problems. This is similar to market-friendly analysts and critics like me who think “cost-recovery” tariffs are the solutions to the electricity problem - or blurting “land reforms” when the problem is housing. We see our ideal solutions as the panacea without even carefully diagnosing the problem.

Instead of pitching ideal states in designing institutions, Pritchett has advocated a method called “Problem-Driven Iterative Approach” (PDIA). This focuses the design goal on the problem and letting the territory define the map. In her very important book on China, political scientist Ang Yueh-Yueh noted that what we call good institutions like property rights and professional bureaucracies are “market-preserving” rather than “market-creating”. Creating markets in economies and cultures unfamiliar to such institutions is the first problem to be solved. She further noted that “market-creating” institutions look wrong compared to our ideals of good institutions. For example, ensuring that a government ministry delivers on public goods (e.g roads) may be a more important starting point than accountability. Hence an idealistic commitment to “anti-corruption” may fail to deliver economic growth needed to boost people’s welfare.

“Failure analysis” is better than idealism in designing institutions. By focusing on particular failures feasible solutions can be discovered and adopted to achieve a desired social outcome. If our goal is to improve power supply from the current abysmal state, then we can diagnose the constraints and inefficiencies and fix them at all ends of the market.

Can we then infer that ideals are useless? Should government abuse and trample on people’s rights to achieve social order? Should a blatantly corrupt regime be tolerated because it delivers public goods? We must be careful how we approach this problem. Ideals are important and useful guides - but they are not the primary goal of institutional design. Wien sees institutional design as both applied ethics and applied social science. The compromise between what is desirable and what is feasible. An institution should be designed to deliver a specific output - and also be designed to be adaptable. Ang Yueh-Yueh reminds us that once designed (or bureaucratized), institutions are not self-reinforcing. This means that key agents of adaptability need to be identified. Private agents need to compete to be adaptable. Public agents should be incentivized for prestige and influence rather than absolute control over resources and society.

APPENDIX - THE CASE OF NIGERIA

Looking at Nigeria in the light of what we can learn about how societies and institutions work - we can examine a few propositions. I think the so-called resource curse hypothesis explains the political economy of sub-Sahara Africa. The vegetation is lush and friendly for agricultural production. There is probably less selective pressures for new forms of exploration and organization like sea-faring. Also, most conflicts were internal civil war. Large-scale military adventures or threats would have favoured political centralization (see A&R. though colonial contact brought technical adoption).

These early conditions set the stage for two related critical developments. The first was that the slave trade brought the advent of extractive institutions. Selling people into slavery became a huge rentier business, and the weapons trade with the European slave traders fuelled the fire. Cultural beliefs evolved to justify this equilibrium. Colonization was for exploitative commerce and it further entrenched extractive institutions. Even the abolition of the slave trade and subsequent decolonization could not budge this inertia. Secondly, with the discovery of commercial natural resources (oil, diamond etc) the local political class of post-colonial Africa had very little incentive to build inclusive and accountable institutions.

The case of Nigeria fits this framework. There was little political centralization before colonization, even the 1914 amalgamation did not homogenize the country’s governing structure. The North had some centralization due to the legacy of the Sokoto Caliphate and Islamic theocratic system, but southern Nigeria was disparate and was caught in a wave of self-determination which further weakened centralization. The slave economy was an extractive one and the emergence of commercial trade in natural resources was powered by coerced labour. The British colonial government entrenched, and in some cases built this system. What emerged at the dawn of independence was a country with very little chance of building inclusive and accountable institutions. The political elites were diverse and mutually suspicious (see this documentary on Nigeria’s first elections) of each other. The fabric of governance was stretched in traditional, nationalistic and progressive directions at the same time. It did not take long for things to fall apart.

Economists have analyzed the political economy of resource-curse for decades. But the discussion mostly focused on the fiscal implications and the present institutional rot of excessive reliance on revenue from natural resources. Equally relevant is how natural resources shape the origins of institutions, and there is a budding literature here as well (e.g Wien here). The important insight is that the resource curse persists in economies that do not already have restrictive (accountable) political institutions before the reliance on resource revenue. A good counterexample to Nigeria on this point is Botswana - one of the few success stories of sub-Sahara Africa. Fearing the expansion and aggression of Cecil Rhodes’ British South African Company, Botswana’s tribal chiefs approached the British government for the full annexation of the country in 1895. the British indirect rule system largely preserved Botswana’s existing political structure before the annexation. Here is Acemoglu and Robinson’s description of their political structure;

   …the Tswana states had developed a core set of political institutions. These involved both an unusual degree, by sub-Saharan African standards, of political centralization and collective decision-making procedures that can even be viewed as a nascent, primitive form of pluralism……the political institutions of the Tswana, in particular the kgotla, also encouraged political participation and constrained chiefs….

They (A&R) also noted that chieftaincy in early Botswana was not “strictly hereditary but open to any man demonstrating significant talent and ability”. This may have set the stage for Botswana’s eventual success. But the crucial development was the nature of its post-colonial institutions and political economy. A&R writes that “by quickly developing inclusive economic and political institutions after independence, [Botswana] has been democratic, holds regular and competitive elections, and has never experienced civil war or military intervention.” Contrast with how quickly Nigeria's first republic collapsed under the yoke of rigged elections, corruption and a military coup - that led the destructive path to a bloody civil war. On the nature of the political economy that emerged after independence in Botswana, A&R is worth quoting in full;

“Though the early growth in Botswana relied on meat exports, things changed dramatically when diamonds were discovered. The management of natural resources in Botswana also differed markedly from that in other African nations. During the colonial period, the Tswana chiefs had attempted to block prospecting for minerals in Bechuanaland because they knew that if Europeans discovered precious metals or stones, their autonomy would be over. The first big diamond discovery was under Ngwato land, Seretse Khama’s traditional homeland. Before the discovery was announced, Khama instigated a change in the law so that all subsoil mineral rights were vested in the nation, not the tribe. This ensured that diamond wealth would not create great inequities in Botswana. It also gave further impetus to the process of state centralization as diamond revenues could now be used for building a state bureaucracy and infrastructure and for investing in education. In Sierra Leone and many other sub-Saharan African nations, diamonds fueled conflict between different groups and helped to sustain civil wars, earning the label Blood Diamonds for the carnage brought about by the wars fought over their control.”

By contrast, oil prospecting started in Nigeria fifty-seven years before independence in 1903 - though discovery took fifty-three years before success in 1956. But by then the stage was already set for state capture and there was no chance to work out a credible arrangement that restricts state control of oil revenue and holds government officials accountable. The role of the resource curse in thwarting institutional development in Nigeria cannot be over-emphasized - though we cannot lay the blame solely on the motives of key players alone. Like I have stated above, it is a causal mix of mutually-reinforcing and constraining factors of the environment, culture, and the emergent organizational patterns. The coasts made the slave trade very profitable (compared to landlocked Botswana). The reserve slave labour also powered the growth of commerce in cash crops like palm oil. Extractive institutions became the de facto functional organization. Crude oil discovery firmly cemented this institutional form. The prediction from David Wien model is that if unrestricted and unaccountable governance precedes fiscal reliance on revenue from natural resources, then it is very unlikely for a new institutional arrangement to emerge. If this prediction holds, then the road to reform and good governance in Nigeria is a long and uncertain one.