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Over the recent past, the area of institutional economics hasincreasingly gained momentum. Two of its main contributors, Douglass North andRonald Coase recently won the Noble Prize in Economics. Many factors may bepresented to explain the long eclipse of institutions from the field and therecent resurgence of interest in the subject.
Mainstream neoclassical economic theory has consistentlydiscarded institutions and institutional change from the analysis and pushedthem in the background by assuming that they are exogenous. Economic factorsare the main fundamentals in explaining economic development. In this context,economic development is seen as a universal process whereby development stagesare dependent on quantitative economic factors such as capital, labor, land,and more recently, human capital. This view has obviously misrepresentedreality and failed to explain growth differentials among countries in time andspace. The lack of empirical evidence with regard to the â??convergencehypothesisâ? lends support to this claim. A country might accumulate asubstantial amount of physical and human capital but be locked into a low levelof development if its institutional set-up is not right.
With regards to the rationale explaining the renewed interest ininstitutional factors, the answer is multidimensional. The first explanationlies in the recent cognizance made by international financial institutions suchas the World Bank, and by policy makers alike, or the fact that macroeconomicdiscipline and conventional economic reform packages are not enough to putdeveloping countries on a sustainable development path. More fundamentalchanges are needed. The notion of governance which has appeared more frequentlyin recent literature illustrates the new perception of the type of the neededchanges. Governance may be defined as â??the manner in which power is exercisedin the management of a countryâ??s economic and social resources fordevelopmentâ? (Williams 1996: 157). Better governance requires reformingseveral aspects: notably improving the efficiency and operation of thegovernment apparatus and increasing its accountability; enhancing the legalframework by improving the efficiency and credibility of the court system;clarifying property rights; clearing law texts from incoherence andinconsistency; and enforcing the rule of law; guaranteeing transparency and theeasy dissemination of information; and harnessing participation of civilsociety.
Other important reasons for the revival of interest ininstitutions, are the success stories of some East Asian countries and thedemise of communism in Eastern Europe. Presentproblems notwithstanding, the spectacular growth rates enjoyed by many EastAsian over the last two decades or so, have been attributed to a great extent,to the presence of enabling institutions. Decentralized, politicallypressure-proof, and high quality bureaucracy; commitment to shared growth;transparency; accountability and participatory polity, are among the factorspresented in explaining the success of these countries. In the opposite camp,Eastern European countries are often portrayed as instances of institutionalfailure with respect to the latter factors.
The third explanation for the recently rekindled interest ininstitutions stems from the recent changes in the world economy brought aboutby globalization that has made very apparent the cost of non-reform. The paceof the changes entailed by globalization compels national governments to reactby changing the rules of the game, i.e., reforming their institutions. Thefight for survival and against the risk of marginalization in an increasinglycompetitive and integrated world, requires the creation of market-friendlyinstitutions; a stable economic environment; a higher degree of preparedness toadjust to external shocks; proper regulations that influence market outcomesthat are not socially optimal; the provision of public goods such as propertyrights and basic social services; and the protection of the vulnerable and theenvironment.
Institutions and institutional reforms are of paramountimportance for the Middle East and NorthAfrica (MENA) region on several grounds. The process of its integration in theworld economy is slow in comparison with high performing developing countries(Nabli and De Kleine, 1998). Without appropriate institutional changes, notablythe development of market institutions and the protection of property rights,the region will forego the windows of opportunities offered by globalization.Moreover, the past weak growth performance of many MENA countries is largelyattributed to its low level of productivity, lack of internationalcompetitiveness and its reliance on traditional factor-based sources ofcompetitive advantage (Bisat et al., 1997). The region is also characterized bya high level of social and political instability that can be detrimental to thefunctioning of market economies.
There has been an obvious effort made by developing countriestoward undertaking substantial institutional reform notably through improvingtheir governance structure. The record of the MENA countries on institutionalquality as proxied by their scores on country risk indicators published bycredit ranking institutions, have improved over the last decade or so (ERF,1996). However, much remains to be done. Several institutional aspects arestill lagging behind even by developing countriesâ?? standards. Individualstudies show, for instance, that many countries in the region provide theweakest institutional support for investment and private sector development.This creates the need for analyzing the institutional setup and pinpointing theinstitutional impediments for the development of the MENA region from both thetheoretical and practical perspectives.