Douglas North remains an influential institutional economist and his work on institutional economics can help us understand economic development and long-run growth. North was awarded the Nobel Prize in 1993, which he shared with William Fogel. He died in 2015.
He was one of the founders of New Institutional Economics. North’s institutional insights come from economic history. Just when economic history was thought dead, North brought it back to life. Economic history and institutional economics are in vogue again.
North saw institutions as a product of beliefs and values. And, over time, they shape the way the economic world works. History shapes the present and the present moves incrementally into the future – unless something radical happens that uproots all of history and the existing edifice of beliefs and values.
North was not only interested in formal rules and institutions but also intrigued by how informal rules shape institutions and path dependence.
Society operates within the sphere of the rules of the game. These rules put beliefs and values into action. But the rules of the game can always be subject to the perturbations of change – how they work is also shaped or bent by the interests of key actors within an economy.
These changes can vary from being incremental to being an overhaul of the whole system. In entrenched systems, change is incremental and, in systems that are not tightly entangled between different power brokers, one powerful group can easily subvert the other, changing the rules of the game rapidly or shaping the rules so that they are favourable to that specific group.
Where rules are constantly undermined and shaped by a single individual or small clique of powerful elites, the system of rules creates instability and a lack of continuity. And, even where a semblance of rules is maintained, they suffer a regularity of rigging by powerful individuals or elites. This is a common occurrence in failed or weak States, where the semblance of what is a nation depends on who can monopolise State power and where power outside the State is either weak or nonexistent.
For North, institutions are a set of constraints that configure access to, and the flow of, incentives. Political power shapes institutions, and institutions, in turn, generate a plethora of organised groups that try to shape politics and the flow of incentives.
Institutions that balance out the flow of incentives in which economic rents are not appropriated by a few are a function of the enforcement capabilities of both government and civic organisations. Ideally, in nonmonopolisitic economies where there is open competition, firms often regulate one another’s behaviour through a competitive process.
The robustness of civil society, including the presence of strong unions, can hold both government and firms to account with the enforcement of institutions that curtail rent-seeking being a reinforcement through both competitive politics and active agency within civil society.
North distinguishes between ‘limited- access societies’ and ‘open-access societies’ – in the former, the elites tend to increase benefits to themselves and, in the latter, the power of the elites is more constrained, partly through dynamic politics, vibrant entrepreneurship, strong unions and an active citizenry.
In open-access States, enforcement agencies are not compromised through the actions of corrupt, self-serving officials or capture by strong vested interests outside government. Vested interests are not only economic agents such as large firms or business lobbies; they can also be organised labour and powerful civic organisations like religious or other organised groups that shape public choice-making and the flow of benefits from public or private spend.
The flow of incentives in the framework North presents provides a handy way of understanding how different forms of State capture can manifest in the South African context – both in the immediate aftermath of the post-1994 period and the pernicious State capture that took place during the Zuma era.
State capture can take place through legitimate or illegitimate channels. In the former case, legitimate vested interests seek to influence outcomes within the rules of the game. Rent-seeking is pursued through lobbying, the funding of political parties and vested interests shaping laws and rights of access, besides other means.
In this model, some parts of the State bends to the influence exerted on them, while other parts are not swayed by this influence and continue to do the right thing. State capture is not a form of systematic piracy but rather seeking to bend the rules, to have the ears of the powerful and to always seek to direct rents towards vested interests.
In the South African case, following the transition, new elites conformed to the prevailing rules of the game because there were sufficient legal channels for them to exercise influence so that outcomes benefited them. Black empowerment deals are a good example of how economic privilege for elites was embedded in the legalities of how empowerment targets were set and had to be met. Individuals with access to political and business elites benefited the most from the first wave of empowerment deals in South Africa.
In the Zuma era, formal rules prevailed but were compromised in that State capture involved creating a different set of rules behind the formal system through ambiguity, stealth and the use of the infrastructure of the State to determine channels of rents. Often, this process of channelling and access was mediated through middlemen who brokered access and contracts. North would call this piracy and, in our case, daylight robbery, in which the rule of law at times stood still in total suspense amid unfolding daily scenes of corruption.