Institutions that foster and retard economic development


GURU talked to NES Assistant Professor of Economics Sultan Mehmood about his research on state capacity, institution building and changing deeply rooted social norms. 


 - How did you come to be interested in development economics, why did you decide to pursue this particular field out of the huge area of economics? 

 - Indeed, economics is a very big field, and you may be interested in many things – why mergers and acquisitions happen, why investments are made and many more. The reason I am not doing that and doing something else is because I think that there is a more fundamental question to be asked: why some countries are rich and others are poor, and whether we can make poor countries better off or not. Why are some countries autocratic and others not? In other words, as I write in my research statement, “how can we ignite the flames of development and establish the rule of law in societies”. If you put this question to a development economist he will most probably answer that you have to build institutions and state capacity to promote economic development. 

I found this answer unsatisfactory because I think we need more specific answers. I often imagine myself, sitting in front of a deputy minister or even  the prime minister and think, how can I answer her specific questions. Should we strength the courts of law or should we build roads?

Thus in my research I tried to concentrate on studying specific policies that help build institutions that are conducive for economic development. I am trying to approach it in various ways. First of all, just to define terms: what is state capacity? We may define it as the capacity of the state to effectively deliver public goods, like education, health care, etc. So, the question how to build state capacity means exactly – how to foster economic development. This is my first point. Secondly, I am trying to find ways how to do that effectively. For example, in one of my papers I am exploring how we can change the constitution to improve the rule of law and what particular changes we have to make. 


 - The separation of powers and the independence of the judiciary are very important questions. In your paper you oppose two points of view – that of Montesquieu and of the Federalists. Why? 

 - If we take a look at all constitutions in the world we will see that 70 percent of them formalize some form of appointment of judges to the superior courts by the president of the country. This seems to be quite contrary to the very idea of the separation of powers and the independence of the judiciary. So in this paper, called “The Impact of Presidential Appointment of Judges: Montesquieu or the Federalists?” I show that when you remove the  presidential appointment of judges from the constitution, this leads to the improvement in the quality of the judicial decisions, the rule of law and the economic development. The title of the paper is easily explained: the Federalists who wrote the US constitution had argued that presidential appointment of judges is a good thing especially if the president can hire the judge but not fire him. This will be enough to secure the separation of powers and the independence of the judiciary. On the other hand, the famous French philosopher Montesquieu who formalized the concept of separation of powers was defending the idea that the judiciary should be completely independent from the government and thus was against the appointment of judges by the president. He believed that this would subvert the rule of law. So in this paper I tried to decide who was right in this argument. I used the natural experiment: when the actual constitution was changed from what can be described as Federalist policy to a  Montesquieuan policy. My focus was on Pakistan because that country had a unique episode of a sudden change from the presidential appointment of judges to a different system where all judges were appointed by other judges, their colleagues and the president had absolutely nothing to do with the appointment process. That was quite a big shock to the system which really increased the independence of the judiciary. What is interesting about it is that not only judges appointed by their colleagues felt much more independent but even those judges that were appointed by the president in the first place started feeling much more independent. This is not self-evident. I discovered that as a result of the reform, the number of pro-government rulings fell, the delay in courts also fell, the quality of legal decisions as evaluated by legal experts increased. But there are still no convincing results concerning the effect on economic development, whether it improves or not, although the social implications were clearly beneficial. There is still a lot of work to be done in this area. 


 - What about the informal institutions? 

 - Institutions are not just the courts. Institutions do not need to be of brick and mortar. They can also be about informal norms and rules that concern human behavior. 

So, in a different paper I argue that changing the formal institutions, such as the constitution, to change the judiciary is not the only way to enhance rule of law. There are other factors that hold back economic development, in particular, informal institutions, like social norms. Such social norms as gift exchanges between the government and the judiciary are also detrimental to the rule of law and, quite likely, retard economic development. 

According to my research, when the government gives gifts to judges, the rulings in favor of the government suddenly increase, and the quality of the judiciary decisions deteriorate as measured by case delay, case reversals in the higher courts, etc. Together with my co-author, Bakhtawar Ali, we documented large gifts in the form of expensive real estate from the government to the judiciary, and large favors in the form of pro-government rulings from the judiciary to the government. Our estimates suggest that, cumulatively, the allocation of houses costs the government about 0.02% of GDP but allows it to expropriate additional land worth 0.05% of GDP every year. The results are consistent with qualitative evidence from many developing countries and suggest that under such gift exchange, rule of law deteriorates. 

Thus, not only formal institutions are important but informal institutions are also very important. For example, the constitution does not say that you should give gifts to judges but existing norms of patronage can create new institutions that facilitate gift-exchange and undermine the rule of law and development trajectories of societies. 


 - Further to natural experiments you have conducted field experiments with training programs for Deputy Ministers. Did you have any positive results? 

 - These were natural experiments where I look at policy changes or history to try to figure out what we can learn from them. I have also recently started employing the tool of field experiments. 

I use field experiments to understand how can we make an effective state? A state that can provide public goods for its citizens. The idea of field experiment is borrowed from medicine. In medicine you test the effectiveness of a certain drug, let's say aspirin, by giving it to one group of people to treat headache, and you give placebo to another group of people, then you compare the results and then you evaluate the effect. In social sciences, in a similar way, you give something to one group and a placebo to another group and compare the results. This is what I have done with several groups of government officials in Pakistan. Thus, instead of evaluating the reforms that have already occurred, I was trying to evaluate whether public officials could perform better in their jobs. Here the question was not so much how to understand state capacity but rather how to build state capacity. We designed training for bureaucrats that would make them more efficient in their jobs. We trained government officials in Pakistan in soft and hard skills. To be more specific, we trained one group in establishing causal evidence in econometrics and the other, placebo group, in ways to improve your mental well-being and other self-help techniques that did not have much effect on their efficiency on the job. We found that after the training the first group became more responsive to evidence and more likely to choose policies for which there was some quantitative evidence. We believe that this really improved their efficiency in their jobs because being unresponsive to evidence can stop many good economic policies from being implemented. So, first, it is not only incentives that can improve the performance of government officials and second, the skills are not immutable, they can be improved, so there is a propensity for growth in the skills. What is important, these were high-level, elite bureaucrats, like advisors to the prime minister, so there were high stakes involved. 


 - Another field experiment was intended for a very different audience: public school teachers?

 - I also worked with mid-level to low-level bureaucrats who are no less important, indeed, even super-important: these are public school teachers. Our results were partly described in our article “Transmitting gender attitudes in school: Experimental evidence from Pakistan” published in VoxDev.

We randomly assigned teachers to a 'visual narrative' – a live screening of the movie Bol, roughly three hours long, set in contemporary Pakistan and dealing with the issue of women’s rights. This was followed by an hour-long self-reflection workshop on the gender-related themes touched upon in the movie.  In another prong of treatment, we augmented this visual narrative with a semester-long gender studies curriculum which the teachers then taught in class for four months. This was termed the ‘joint visual narrative & gender-rights curriculum’. 

We found that progressive gender norms can be fostered, that they can be transmitted from teachers to students and improve classroom achievement through better cooperation among the sexes. In particular, we found that teachers who were teaching gender norms in class internalized these norms and were more successful in transmitting these norms to students than teachers who just watched the movie. We also demonstrated that social norms can be transmitted not only within the family, from parents to children (vertical transmission) or among peers (horizontal transmission) but also through teachers. But such transmission does not come for free. We found that teachers who watched the movie and also taught the progressive gender rights agenda, were also more stressed. This was proved by medical tests that discovered higher level of cortisol – the stress hormone – in their blood than in the control group. This was evident even 12 months after they have taught the progressive gender rights agenda. That was the cost of trying to transform the existing social norms. Therefore rights revolutions are rare because it is not easy to give up traditional norms. 


 - How long it takes to change the social norms in a traditional society?

 - There are no known studies to answer this question for certain. This means that there is still so much to do. There have been theories that these norms are almost impossible to change because they are formed by history. New research demonstrates that progressive social norms can be transmitted and thus traditional norms are amenable to change. The next step in this field is to determine how these new norms take root in the society and what is the timeline of their diffusion and also how to optimally speed up the diffusion. These are some questions for the future which I hope to answer as well. These are the principal areas of research both for me and other researchers in the field. 


 - What would be your advice  for future researchers? What particular areas can be most interesting, from your standpoint? 

 - There are so many questions that are still unanswered. For example, we know that when serfdom was abolished in Russia it had a positive effect on economic development. And at the same time there is another known effect: when slavery was abolished in the US the effect on the economy was actually negative. So why the difference? I think this is a very intriguing question, at least to me. There is also a related, but a more fundamental question: why was slavery abolished if it was not economically inefficient? Probably it had something to do with social norms which had changed? Why did this happen? These are interesting and important questions. But my advice to students and future researchers into this area is this: get yourself involved in the field, conduct field experiments or dig deep in data and try to understand exactly what are the bottlenecks that are preventing people from having better transactions and more effectively coordinating themselves. 

A good illustration of the evolution of social norms is a short story “Mumu” by a Russian writer Turgenev. There is a theory that after the story was published, the abolition of serfdom in Russia became inevitable because keeping the serfdom sounded impossible for civilized people – and most of the Russian elite certainly wanted to belong to civilized society. There is an interesting parallel. When I started my PhD one of the key questions I was interested in was exactly why slavery was abolished. I believe that a famous book “Uncle Tom's Cabin” by Harriet Beecher Stowe played a very important role in changing the contemporary people's social norms over time. I discovered that the number of abolition clubs was relatively higher in places where the book was published as a newspaper series. And then someone told me about Turgenev's story – I did not know anything about it before. But when I did a bit of research I thought that it could have an even greater effect on social norms in Russia, because in Russia elite cared about being civilized. I would be interested in digging deeper into this, to get more data to confirm the hypothesis. Many people think it is all about the economy but it's much more than that and the answers are not as simple. So this is one more area for future research.