2. Cause or co-emergence?

Chang challenges the view that institutions cause growth. He contends that causality runs the other way: from growth to institutions. Development thus comes first and produces good institutions in its wake. But, it seems most plausible to assume that institutions and economic growth appear together. A country does not need all institutions of a developed nation before it can begin to develop. Chang mentions democracy, modern bureaucracy, intellectual property rights, limited liability, bankruptcy law, banking, a central bank and securities regulation as institutions featuring developed economies. No country that starts development has a stock exchange with many listed companies. Countries build those institutions while they develop.

History shows that regions develop when people can move and found organizations that aim to improve the lives of their members (Brouwer, Reference Brouwer2008: chapter 3). We can think of the granting of city-rights in feudal times and freedom of incorporation in the modern period. New organizations offered opportunities for individual ascent. Dynamic differs from static competition that assumes that firms are all alike and labor is valued according to fixed group membership.

3. Are liberalized institutions better for economic development?

Chang questions the superiority of liberal(ized) institutions. He argues that more freedom does not promote growth. Unlimited freedom would allow people to set up banks at will and employers to abuse (child) labor (Chang, Reference Chang2011: 7). Chang interprets (economic) freedom here as the absence of rules. However, institutional economists do not assume that rules are absent; they focus on what rules are most conducive to growth. Market economies should stop routes to riches that derive from the use of violence, the abuse of power and the violation of property rights, if they want to promote growth. A market without rules and a judiciary to apply them would result in either dictatorship or anarchy.

We can distinguish between organization-specific and general rules that apply nationwide. The difference between the two sets of rules is that people can avoid private rules by not entering or leaving an organization, which does not apply to national laws. Violating the rules also has different consequences. Private organizations cannot punish people apart from ousting them, while states can incarcerate people or take their lives. Organizational control is thus more limited than state control in market economies where the rule of law applies.

Chang also puts doubts on the thesis that stronger protection of private property promotes growth. He argues that communal property rights might further growth as in open source software (ibid.: 8). But, voluntary cooperation without payment constitutes an organizational form that is not inconsistent with markets. In the same vein, states can assume ownership of firms, if markets fail. Utilities and banks are cases in point. State ownership that is not based on expropriation of private property can coexist with private ownership. A related question involves whether the state should do what the private sector can also do. We can think here of housing. Singapore has large state ownership of houses, while developing rapidly. But, the Singaporean state also protects private property rights fiercely. I do not think this is a contradiction as Chang assumes (ibid.: 8).

Chang argues that strong protection of property rights actually harms growth. Shareholders pursue short-term profits and patents can harm technological progress. We cannot dogmatically assert that all existing institutions are perfect, since there is always room for improvement. But, institutions such as equity capital and patents have proven their worth during hundreds of years.

Chang also challenges the view that more liberalized Anglo-Saxon institutions are superior to continental institutions. This refers to the distinction between common and civil law legal systems. Common law is more flexible than civil law and can be more easily applied to new situations. But, more important than either common or civil law is the role of the state in preventing civil war, corruption and the rise of criminal organizations such as drug cartels and gangs that destroy private property and curb freedom of movement. Chang rightfully remarks that the quality of institutions should be considered apart from their enforcement (ibid.: 8). We can argue that a strong state with less than optimal institutions is to be preferred to a weak state with superior institutions. But, a strong state should renounce central planning of the economy.

4. The evidence

Chang finds the evidence from cross-section econometric studies unconvincing and presents some counter-examples to the alleged positive relationship between good institutions and economic growth. Economic growth fell dramatically in countries in Sub-Saharan Africa and Latin America, which faithfully reformed their economies under pressure from Western-dominated agencies in the last three decades. But, these countries grew much faster in the 1960s and 1970s, when they put restrictions on business and finance and firms and banks were nationalized. They grew four times faster during the Golden Age of Capitalism (1950–1980) than before and after that period (ibid.: 12). These countries came under control of the International Monetary Fund (IMF) and the World Bank, when they defaulted on the huge debts that they had accumulated during the boom years. Their growth showed characteristics of a bubble. The same applies to the decline of Western economies after the financial crisis of 2007 and 2008.

5. Voluntarism versus fatalism

Chang raises the interesting question of whether nations can easily revamp their institutions to promote growth. He states that institutions could be changed, but only at a cost. For instance, costs of implementing an intellectual property rights regime might be prohibitively high and exceed its benefits, if developing nations need to build a bureaucracy to implement these laws (ibid.: 10).

Some, however, argue that institutions are inherent to a certain culture and can hardly be changed. This fatalist school differs from voluntarism that proclaims that institutions can easily be remodeled. Chang takes a position in between these two opposite views. He argues that notions of rationality and efficiency are molded by tradition and are, therefore, path dependent (ibid.: 17). Moreover, revamping institutions overnight will cause damage, since it makes traditional ways of doing things obsolete, while people want to stick to the known and proven.

But, Chang also argues that development is not culture specific; all cultures embody elements that are conducive to innovation. Confucianism promoted growth in China in some periods of her history. Islam also knew periods of cultural and economic bloom. The same applies to Christendom. However, all these cultures also knew periods of stagnation and decline. Economic growth is thus not precluded by ingrained cultural traits, but depends on the installation of institutions conducive to growth. Most importantly, it requires a permeable power structure that allows newcomers to appropriate surpluses created by innovation.

Chang agrees with the argument that cultures can change. He locates such change in the different ways that people of a certain culture were perceived by others. During the 19th century Britons and Americans described German and Japanese people as lazy and dull, but these people were regarded the work bees of the world shortly after (ibid.: 21). The way that people are perceived is thus essential to economic development. Investors fund people and ideas that they expect to create value by superseding the past. Institutions that are conducive to such appreciation of human capital contribute to growth, while institutions that depreciate people cause (civil) war and economic decline.