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Limited Access Orders in the Developing World: A new approach

to the problem of development

Douglass C. North, John Joseph Wallis, Steven Webb and Barry R. Weingast

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Political Economy and Development – neo-traditional

• FACT: Countries with Successful development have competitive democracy and market capitalism==>Underdevelopment and Poverty are the

result of deviations from these institutions

• Policy prescription: Do whatever possible from the agendas for competitive democracy and market capitalism.– Recognize that ALL is not possible in near

term

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Summary of an Alternate Framework• Control of violence is a primary motive, along with

consumption and wealth• Three distinct social orders—each with a Logic• Primative order• Limited access order-- the political system manipulates

the economic system to create rents that motivate control of violence.– European feudalism, empires of Rome, Ottoman, China– One-party state after over-throw of old regimes in Russia (USSR),

China, post-colonial Africa, South Asia, and Latin America

• Open access order-- political, economic, and other forms of competition sustain order -- modern– since 1800: Western Europe, English settler colonies, Japan, …– Countries become OAOs only under special conditions, including

those to control violence.

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Two Development Problems

• Most poverty reduction occurs within limited access orders = first development problem

• The second type of development occurs when societies make the transition from limited to open access social orders.

• Typical development policy is intended to implement open access.– Little attention to making LAOs as such work better– No attention to the reasons for attractiveness of LAOs

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Logic of the Limited Access Order• The limited access order emerges as a solution

to endemic violence– Reducing violence is more important to most

people than having freedom or more wealth– LAO = Default option -- Main order for most of

recorded history and most of today’s world

• The limited access order political system creates economic rents through limited access and then uses the rents to sustain order.– Having an organization with support from the ruler is

the most critical privilege, the means to support other claims

– Limiting access to organizations—political, military, economic, religious

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Variation: Limited Access Orders

1) Fragile limited access orders: Only a dominant coalition; fragile; limited institutions; personal relations dominate.

2) Basic limited access orders: – the state has a stable organization, with a potentially

durable institutional structure of suborganizations– but limited or no elite organizations outside state

3) Mature limited access order: Stable perpetual state, and support for public and private elite organizations.

• Progress is stepwise credible commitments build on each other and thus take time– Progress is not certain– Reverses do happen

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Open Access Orders – and the Transition

• Open access orders sustain open entry to political and economic organizations.

• Built around effective competition in both political and economic systems.

• All citizens have the ability to form contractual organizations.

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Doorstep and Transition• Some limited access orders move to positions in which

transition to open access can be sustained.• We call these the Doorstep Conditions

– Rule of law for elites– Perpetuity for both organizations and states– Consolidated, political control of organizations

with violence potential (military, police, etc)• The conditions:

– Create the possibility of impersonal exchange among elites.

– Facilitate expansion of the elite who can participate.

• All three are necessary for transition, although not sufficient

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What does this framework imply for the development problems facing

the WB?• Three sets of research questions:

– How do societies evolve within social orders, particularly within limited access orders?

– How to make the transition from one order to another?

– How this relates to the specifics of the modern world and the development issues facing the World Bank?

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Limited Access Orders in a world dominated by OAOs

• Do LAOs today have advantages to catch up in development to OAOs?– Well-established OAO institutional forms

more rapid institutional development is sometimes possible

• On several dimensions our framework suggests disadvantages as well– The world political order–survival of the unfit– Technology– Multinational firms

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OAO technology for LAOs

• Development vs. Economic Growth – Development = improving institutions

• Importing OAO technology for growth– elites get more consumption and power

internationally – without improving their LAO institutions

• LAO elites may control entry of technology and access to it• More rents and domestic power for elite

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Multinational Firms coming to LAOs• How does the presence of multinational firms

backed with sanctions from OAOs affect the incentives of LAO elites to create better domestic institutions?• Model for development? Or a substitute?

• Banks and other financial services• Guarantee of property rights

• Joint ventures give international backing to property rights of elites, reducing incentive for domestic institutions for property rights.

• Dual economies and the informal sector• space for non-elite economic activity Non-threatening

to the elites

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Next research questions• The transition to OAO is an important problem,

but not the only problem the World Bank and development agencies should address.

• Implications of the framework for how to get limited access orders to perform better.– Does this strengthen the position of elites?– Does this help the poor?– Does this increase or decrease the chance of

eventual transition of OAO?

• Next research steps;– Case studies to understand experience beyond North

Atlantic region