THE WALL STREET JOURNAL. The Chinese Menu (for Development) Douglass s. North. Wall Street Journal. (Eastern edition). New York, N.Y_ Aor T. 2005- pg A.14 Abstract (Summary) Two Implications are clear. First, there are many paths to development. The key is creating an institutional structure derived from your particular cultural institutions that provide the proper incentives -- not slavishly imitating Western institutions. Second, the world is constantly changing in fundamental ways. The basics of economic theory are essential elements of every economy, but the problems countries face today are set in new and novel frameworks of beliefs, Institutions, technologies, and radically lower Information costs than ever before. The secret of success is the creation of adaptively efficient institutions -- Institutions that readily adapt to changing circumstances. Just how do we create such an Institutional framework? Institutions are the way we structure human interaction - political, social and economic -- and are the incentive framework of a society. They are made up of formal rules (constitutions, laws and rules), Informal constraints (norms, conventions and codes of conduct), and their enforcement characteristics. Together they define the way the game is played, whether as a society or an athletic game. Let me illustrate from professional football. There are formal rules defining the way the game is supposed to be played; Informal norms - such as not deliberately injuring the quarterback of the opposing team; and enforcement characteristic - umpires, referees - designed to see that the game is played according to the intentions underlying the rules. But enforcement is always imperfect and it frequently pays for a team to violate rules. Therefore, the way a game is actually played is a function of the underlying intentions embodied in the rules, the strength of informal codes of conduct, the perception of the umpires, and the severity of punishment for violating rules. I is the same way with societies. Poorly performing societies have rules that do not provide the proper incentives, lack effective informal norms that would encourage productivity, and or have poor enforcement. Underlying institutions are belief systems that provide our understanding of the world around us and, therefore, the incentives that we face. Creating institutions that will perform effectively is, thus, a dificult task. Effective performance entails the creation of open-access societies .- the essential requirement for the dynamic market that Adam Smith envisioned. Let me illustrate from the contrasting histories of North and South America Full Text Copyright (c) 2005, Dow Jones & Company Inc. Reproduced with permission of copyright owner. Further reproduction or distribution is prohibited without permission. In the years since the end of World War II, we, and other developed nations, have devoted Immense amounts of resources to the development of poor countries. The result has not been a success story. This is puzzling since during that time we have learned a great deal about the process of economic and political change: not only the underlying source of economic growth -- productivity increase -- but also the factors that make for such increase. And in the past several decades, as economists have become aware of the role of institutions in providing the correct incentives for coonomic growth, we have incorporated an understanding of the significance of well-specified and -enforced property rights as key structural requirements in that process. Despite our increased understanding, the record at promoting development is not impressive, largely because we fail to see the importance of open-access political systems as well as open-access competive markets. Yes, the world has gotten richer, the percentage of the world's population subsisting on less than a dollar a day has fallen, and there have been a few spectacular success stories, most particularly China. But sub-Saharan Africa remains a part of the world where per capita Income has absolutely fallen, Latin America continues to have stop-and-go development, and the efforts at promoting development by the World Bank have been, to put it politely, nothing to brag about. Yet none of the standard models of coonomic and political theory can explain China. After a disastrous era of promoting collective organization, in which approximately 30 milion people died of starvation, China gradually fumbled its way out of the coonomic disaster it had created by Instituting the Household Responsibility System which provided peasants with incentives to produce more. This system in tum led to the TVEs (town-village enterprises) and sequential development built on their cultural background. But China still does not have well- specified property rights, town-village enterprises hardly resembled the standard film of coonomics, and it remains to this day a communist dictatorship.imitating Western insatutions. Seoond, the world is constantly changing in fundamental ways. The basics of conomic theory are essential elements of every economy, but the problems countries face today are set in new and novel frameworks of beliefs, Institutions, technologies, and radicaly lower information costs than ever before. The secret of success is the creation of adaptively efficient institutions -- Institutions that readily adapt to changing circumstances. Just how do we create such an Institutional framework? Institutions are the way we structure human interaction - political, social and economic -- and are the incentive framework of a society. They are made up of formal rules (constitutions, laws and rules), Informal constraints norms, conventions id codes of conduct), and their enforcer ent characteristics. Together they define the way the game is played, whether as a society or an athletic game. Let me illustrate from professional football. There are formal rules defining the way the game is supposed to be played; Informal noms - such as not deliberately Injuring the quarterback of the opposing team; and enforcement characteristic -- umpires, referees - designed to see that the game is played according to the Intentions underlying the rules. But enforcement is always imperfect and it frequently pays for a team to violate rules. Therefore, the way a game is actually played is a function of the underlying intentions embodied in the rules, the strength of informal codes of conduct, the perception of the umpires, and the severity of punishment for violating rules. I is the same way with societies. Poorly performing societies have rules that do not provide the proper incentives, lack effective informal norms that would encourage productivity, andfor have poor enforcement. Underlying institutions are belief systems that provide our understanding of the world around us and, therefore, the incentives that we face. Creating institutions that will perform effectively is, thus, a dificult task. Effective performance entails the creation of open-access societies .- the essential requirement for the dynamic market that Adam Smith envisioned. Let me illustrate from the contrasting histories of North and South America North America was settled by British colonists bringing with them the property-rights structure that had evolved by that time in the home country. Because the British did not regard the colonies as critical to their own development, they were allowed a large measure of self-goverment. In the context of relative political and economic freedom with a setting of endless resource opportunities, the result was the gradual evolution of an open-hooess society in the decades following independence. Latin America, In contrast, was settled by the Spanish (and Portuguese] to exploit the discovery and extraction of treasure. The resultant institutional structure was one of monopoly and political control from Madrid and Lisbon. Independence in the 15th century led to efforts to follow the lead of the United States and constitutions were written with that objective. The results, however, were radicaly different. With no heritage of self- goverment (political and coonomic), the result was a half-century of civil wars to attempt to fill the vacuum left by Iberian rule. It also was the creation of political and coonomic institutions dominated by personal exchange that led to political instability and economic monopolies that persist in much of that continent to this day, with adverse consequences for dynamic economic growth. The perpetuation of open-access societies like the United States In a world of continuous novel change raises a fundamental institutional dilemma at the heart of the issue of economic development and of successful dynamic change. By uncertainty, we mean that we do not know what is going to happen in the future, and that condition characterizes the world we have been creating. How can our minds make sense of new and novel conditions that are continually occurring? The answer that in fact has proven successful in the case of the United States and other open-access societies is the creation of an institutional structure that maximizes trials and eliminates errors and, therefore, maximizes the potential for achieving a successful outcome -- a condition first prescribed by Friedrich Hayek many years ago and still the prescription for an adaptively efficient sodety. Such an institutional structure is derived from an underlying belief system that recognizes the tentative nature of our understanding of the world around us. What about China? China partially opened competitive access to its coonomic markets. But China is barely halfway there. The society is still dominated by a political dictatorship and, as a result, personal exchange rather than Impersonal rules dominate the economy. How will China evolve? It could continue to evolve open- access economic markets built on impersonal rules and gradually dissolve the barriers to open political markets ...Or the political dictatorship could perceive the evolving open-access society as a threat to the existing vested interests, and halt the course of the past decades Mr. North, a Nobel laureate in Economics In 1983, is the author, most recently, of "Understanding the Process of Economic Change," published in January by the Princeton University Press. He is a professor at Washington University, 81. Louis, and the Bartlett Burnap Senior Fellow at Stanford's Hoover Institution.conditions that are continualy occurring? The answer that In fact has proven successful in the case of the United States and other open-access societies is the creation of an institutional structure that maximizes trials and eliminates errors and, therefore, maximizes the potential for achieving a successful outcome -- a condition first prescribed by Friedrich Hayek many years ago and still the prescription for an adaptively efficient society. Such an institutional structure is derived from an underlying belief system that recognizes the tentative nature of our understanding of the world around us. What about China? China partially opened competitive access to its coonomio markets. But China is barely halfway there. The society is still dominated by a political dictatorship and, as a result, personal exchange rather than Impersonal rules dominate the economy. How will China evolve? It could continue to evolve open- 20456 economic markets built on impersonal rules and gradually dissolve the barriers to open political markets ....Or the polioal dictatorship could perceive the evolving open-access society as a threat to the costing vested interests, and halt the course of the past decades. Mr. North, a Nobel laureate in Economics In 1983, is the author, most recently, of "Understanding the Process of Economic Change," published in January by the Princeton University Press. He is a professor at Washington University, 81. Louis, and the Bartlett Burnap Senior Fellow at Stanford's Hoover Institution. (8ce related letters: "Letters to the Editor: When Culture and Emerging Capitalism Clash" - WSJ April 20, 2005)