Douglass North, Killing Us Softly with His Song

Alba is professor of economics at the De La Salle University and the spokesperson of Action for Economic Reforms (www.aer.ph) and Fight the Philippine Mafia movement. This article was published in 2 parts in the Opinion Section, Yellow Pad Column of BusinessWorld. Part 1 was published on March 10,2008 at pages S1/4 – S1/5 and Part 2 on March 17 at page S1/4.

Strumming my pain with his fingers,
Singing my life with his words,
Killing me softly with his song,
Killing me softly with his song,
Telling my whole life with his words,
Killing me softly with his song …

A version of the story goes: Lori Lieberman, the original singer (not Roberta Flack) was so moved by then-unknown Don McLean’s rendition of “Empty Chairs” that she wrote the poem, “Killing me softly with his blues.” Her poem in turn inspired Charles Fox and Norman Gimbel to compose “Killing me softly with his song” for her.

What does this anecdote have to do with 1993 Nobel laureate for economics, Douglass North? I don’t know if it’s just me, but reading his two latest papers, “A framework for interpreting recorded human history” (co-written with John Joseph Wallis and Barry R. Weingast [National Bureau of Economic Research working paper w12795]) and “Limited access orders in the developing world: A new approach to the problems of development” (co-written with John Joseph Wallis, Steven B. Webb, and Barry R. Weingast [World Bank Policy Research Working Paper 4359]), I kept hearing the song’s refrain over and over.

Professor North’s new framework may be described thus (though in no way does the following do justice to the articles): Throughout history, human societies have been organized to solve the problem of violence. Surprisingly, there have only been three forms of social orders: the primitive one of the hunters-gatherers, the limited access order (LAO) of almost all states over the last 10 millennia, and the open access order (OAO) of the two dozen or so states that, by a fortuitous series of events, were able to transition out of the LAO.

Where there is no state, violence is endemic: Some individuals or groups specialize in violence, and everyone must be prepared to defend his person, his possessions, or his rights, by force of arms if need be. The possibility of a LAO arises when the gains from peace to the violence specialists become sufficiently large as to make mutual commitments not to wage violence credible. Once an arrangement for peaceful, albeit alert, coexistence is in place, each violence specialist can move to exploit rents by assigning favored individuals exclusive rights to trade, production, education, and even worship. In time, an elite class is formed, which has complete control over the political, economic, educational, religious, and military affairs of the society.

Thus, in a LAO, the threat of violence is contained by the formation of an elite coalition that (a) manipulates the political system to limit entry and access (by non-elites) to activities that generate rents and (b) allocates the rents among elites to induce support for the political system. The interlocking nature of politics and the economy in a LAO makes it a very stable system, so much so that North and his co-authors refer to it as the natural state.

There are three types of LAOs. The fragile LAO can hardly keep itself together in the face of internal and/or external strife. Examples are Afghanistan, Iraq, and Somalia. The basic LAO has the state as the only durable organization in the society, so that all elite organizations are, in effect, extensions of the state. Burma, Cuba, North Korea, and many Arab states belong to this category. The mature LAO supports an array of nongovernmental organizations, but these have to be sanctioned by the state to limit entry and to ensure that rents are consistent with the preservation of the dominant coalition. Most Latin American countries, India, and the Philippines, are mature LAOs.

The last social order, the OAO, is characterized by open access and entry (by citizens) to political and economic organizations, fostering competition for rents both in politics and in the economy. Since the sources for rents now come from technological and institutional innovations (rather than restrictions on entry and access), the competition for rents propels markets and the political system toward efficient outcomes. Countries in North America and Western Europe as well as Japan, are OAOs.

Because the logic of the social order remains the same, movement by a state over the LAO spectrum (i.e., to and from the fragile, basic, and mature LAO) is easier than its transiting out of mature LAO status to OAO status, which involves transforming the internal logic of its social order. North and his co-authors posit that the transition process has two parts: First, a mature LAO evolves institutional arrangements that allow impersonal exchanges between elites to take place. These doorstep conditions consist of (1) a rule of law for elites, (2) perpetually-lived organizations (or organizations whose existence as legal entities does not depend on who their members are, so that in principle they can live forever), and (3) political control of the military. Second, the elite class finds it in its interest to expand the scope of impersonal exchanges so that access and entry restrictions are lifted marginally (to be eventually inclusive of all citizens).

How the transition process can be effected, however, is still not well understood. North et al. can only offer three logic requirements of such a transformation: First, at the start of the transition process, the institutions, organizations, and behavior of individuals must be consistent with the existence of the natural state. Second, during the transition process, changes in institutions, organizations, and individual behavior can only be the intended or unintended consequences of actions that are presumed to be consistent with elite interests. Third, the transition effects reinforcing changes in institutions and individual behavior that are consistent with the political and economic systems at each step.

What relevance does this development framework have for the Philippines, particularly during the crises-plagued regime of Gloria Arroyo?

First, the Northian framework helps us to understand why it has been extremely difficult to nudge the country out of its LAO status. This is because the interlocked political and economic systems that allow the elite class to generate and allocate rents and in turn induce support for the natural state, make for a highly stable social order.

Second, the framework cautions that the Filipino people must be vigilant about falling further back from the doorstep conditions. On the current crisis, it tells us that the military must not be allowed to express support for any faction, much less influence the outcome, as this weakens the political control of the military and blurs what ought to be very strict conditions under which the state’s monopoly on violence can be unleashed.

The Northian framework also advises that over the medium term we must seek to establish a rule of law that is impersonal, fair and impartial, swift, and transparent, that respects property rights, and that strictly enforces contracts.

And while on the subject of the rule of law, it is worthwhile to remind ourselves (a) of North’s definition of institutions, which is that they are not merely the formal forms, such as the Constitution, but also the informal constraints, such as norms and beliefs, and (b) of North’s earlier analysis that institutional change occurs as a result of incremental modifications in informal constraints caused by the rent-maximizing activities of political and economic organizations. By these lights, the insistence by some segments of the intelligentsia for Gloria Arroyo’s continued stay in office until 2010 turns a blind eye to the informal constraints. Perhaps more damning, the tepid response of many Filipinos in the face of stonewalling by the executive branch of government on the Hello Garci tapes, the NBN-ZTE broadband contract, the North and South Rail projects, and the Chinese loans for Spratly oil exploration deal represents an erosion of the rule of law and the weakening of institutions in that it relaxes the informal constraints or the norms and beliefs about the accountability of public officials and the transparency of government actions. Indeed, the blasé attitude of  a significant proportion of the population vis-à-vis the mafia-fication of the executive branch—seen in the payoffs to congressmen and local government officials to win their support in the impeachment complaints against the president as well as in the financial advances to and abduction of Jun Lozada, which involved many government offices and functionaries—can only mean that the bargaining power of the people on governance has declined to an all-time low and, conversely, that the bargaining power of Malacañang has shot up to an all-time high. Pity the people, for as the French philosopher, economist, and futurist Bertrand de Jouvenel wrote, “A society of sheep must in time beget a government of wolves.”

Finally, the Northian framework distinguishes between two types of economic growth: one that is not promotive of and another that brings about economic development. In a LAO, the first type occurs when the dominant coalition in the elite class finds new ways to increase their rents, e.g., by importing new technology, by benefiting from inflows of foreign direct investments (perhaps made the sweeter by astronomical illegal commissions), or by smuggling, which do not induce the opening up of access and entry to economic and political activities and organizations for the ordinary citizens (non-inclusive growth, in other words). Arguably, given the increasing trends of hunger and poverty incidence that have accompanied the growth rates of GDP in the last few years, this type of non-development-inducing growth has been what the country has experienced during the Arroyo regime. No wonder then that only members of her dominant coalition are crowing about the growth of the economy.

Is it just me, or isn’t North killing us all softly with his new song?

No comments yet.