Institutions: Top Down or Bottom Up?: Design and Reform of Institutions in Ldcs and Transition Economies
Institutions: Top Down or Bottom Up?: Design and Reform of Institutions in Ldcs and Transition Economies
http://www.aeaweb.org/articles.php?doi=10.1257/aer.98.2.95
By William Easterly*
A large research program in economics has (the view of most Enlightenment intellectuals
established a persuasive link between institu- like Rousseau and Condorcet). The bottom up
tions and economic development. But what does view sees institutions instead as emerging spon-
this imply for development policymaking? Can taneously from the social norms, customs, tra-
a political leader or aid agency seeking to pro- ditions, beliefs, and values of individuals within
mote development readily change institutions? a society, with the written law only formalizing
This article starts off wildly general, and then what is already mainly shaped by the attitudes
moves to specifics. of individuals (the view of the leading critic
of the top-down French Revolution, Edmund
I. The Intellectual History of Burke).
the World, Part I The two worldviews have very different
implications for institutional change. In the top
Every once in a while, it is worthwhile for down view, the political leadership can start
economists to look up from the details of their with a blank slate, tearing up the old laws and
specialized research projects to the broader making new laws at any time (as was attempted
worldview that their research results fit or do in the French Revolution). The bottom up view
not fit. Nowhere is this truer than in the field sees current institutions as heavily constrained
of institutional economics, which can hardly by previous institutions. Institutional change in
avoid the big picture as it seeks to understand the bottom up view is always gradual, evolution-
the determinants of institutions and make policy ary rather than revolutionary.
recommendations about changing them. The two views also have very different
Two contrasting worldviews coexist in insti- implications for the role of economists or other
tutional economics, which go all the way back “experts.” In the top down view, there is a heavy
to the eighteenth-century Enlightenment. Let us burden on economists to determine the optimal
label these views “top down” versus “bottom up.” institutions to recommend to political leaders,
The top down view of institutions sees them as using theory and empirics to design new insti-
determined by laws written by political leaders tutions from scratch. In the bottom up view,
there is a much more specialized role for econo-
†
mists, who at best can recommend desirable
Discussant: Karla Hoff, World Bank. incremental changes, subject to the constraint
This session is dedicated to the memory of John that institutional reforms cannot attempt “too
McMillan, who passed away on March 13, 2007, after many much” without disrupting the functioning of the
years of brave struggle against cancer. He was one of the
foremost researchers on institutions and markets in less- economy by much more than is justified by the
developed countries and transition economies, and he was a benefits of the “desirable change.”
lucid expositor of these issues for professional and general In the top down view, economists recommend
readers alike. He was to have been one of the authors in this institutions through pure reason. In the bottom
session. The economics profession will miss his insights up view, economists express reluctance to make
and his personality. An obituary is posted at http://www.
gsb.stanford.edu/news/headlines/obit_mcmillan.shtml. drastic changes to institutions whose rationale
they cannot fully comprehend, showing respect
* Department of Economics, New York University, and
Visiting Fellow, The Brookings Institution, 1775 Massa- for the historical evolution that has somehow
chusetts Avenue, NW, Washington DC 20036 (e-mail: yielded today’s institutions. This is not to advo-
William.Easterly@NYU.edu). cate the extreme view that “what is, is right,”
95
96 AEA PAPERS AND PROCEEDINGS MAY 2008
only the more modest view that “what is, is for Isaiah Berlin, Friedrich Hayek, P. T. Bauer,
a reason.” The reason a particular institution has and Thomas Sowell. Another economist who
emerged (even if it is a bad reason) will certainly enriched our view of the shortcomings of the
affect the consequences of attempts to change top down approach is the late John McMillan, to
that institution. whose memory this session is dedicated.
Even if the bottom up economists can think
of NO reason why a particular institution exists, II. Institutional Economics and
they are still cautious about changing existing Development Policy
institutions abruptly (assuming such institu-
tions are not too obviously destructive) with Economists have provided partial insights
the knowledge that there is SOME reason, not into how institutions can emerge spontaneously
yet understood and perhaps never to be under- from the bottom up, albeit not a general theory.
stood, for their existence. As Richard Dawkins Avinash Dixit (2004) summarized a number of
said about the analogous exercise in evolution- models of bottom up institutions that are feasible
ary biology of trying to understand the rationale even in a lawless society (the mafia being a clas-
for the anatomy of each species, “evolution is sic example, but not the only one). Avner Greif’s
smarter than you are.” pioneering research (summarized in Greif
The top down view also tends to go together 2006) suggested how networks of merchants
with the view that there is one globally unique best can enforce contracts in the absence of any for-
set of institutions, toward which all societies are mal institutions. Marcel Fafchamps (2004) has
hopefully thought to be “developing.” The devel- demonstrated the pervasive importance of such
opment economist acts as a cross-country com- networks in Africa.
municator of the institutions of the “advanced” Dixit’s (2004) insights on institutional change
society to the less informed in the “backward” are an example of how useful insights from
society. The bottom up view of institutions is partial models can be, even without a compre-
more open to the possibility that societies evolve hensive theory of institutions. Suppose contract
different institutions even in the long run. enforcement depends in part on an informal
This absurdly grand and brief tour of intellec- system where one does not cheat one’s busi-
tual history has painted these two worldviews ness partners for fear of losing one’s reputation
as opposing extremes, which is a caricature and opportunity to do repeat business with the
—most views lie somewhere in between. The network of business partners. When an alterna-
top down view is seldom advocated explicitly, tive formal system is introduced alongside the
but is implicit in the traditional analysis in aid informal network all at once, this allows oppor-
agencies that sees institutions as something the tunistic individuals to cheat their partners in the
central government must create to make pos- informal network, then exit the network for the
sible the functioning of a market economy. The new system. The old network can break down
aid agencies’ agenda for “second generation” more rapidly than the new system starts func-
institutional reforms (following the “first gener- tioning, leading to a net decline in contracts
ation” of policy reforms) is an example of such a executed and economic activity. This is a nice
top down view. Nor is the most extreme bottom cautionary tale for the proponents of abrupt top-
up view tenable, or we would not need formal down changes to institutions.
states and laws at all, whereas in fact they are Aid policy shows little awareness of such sub-
ubiquitous. tleties. One of the most notorious failures of top
Yet the apparent effectiveness of top down for- down reform was “shock therapy” in the former
mal institutions in rich societies may still depend Soviet Union, an attempt to shift instantaneously
on these institutions having evolved from the to the institutions of capitalism from those of
bottom up. If so, then attempting to introduce Communism. The drop in output was one of the
formal institutions into poor societies where worst on record, in contrast to the rapid growth
bottom up factors are lacking will not replicate of China that followed a more gradualist, evolu-
the institutional successes of rich countries. tionary approach to changing from Communism
The top down view is thrown into sharpest to capitalism.
relief by the criticisms of its opponents, a long The increased emphasis on fighting cor-
list including Edmund Burke, Karl Popper, ruption in poor nations beginning about the
VOL. 98 NO. 2 Institutions: Top Down or Bottom Up? 97
mid-1990s in the aid agencies has yet to show In Africa, there has been a long historical
discernible payoff in lessening corruption (or evolution of customary rights to land, which are
redirecting aid to corruption-free channels). The often quite complex in giving different parts of
share of aid going to corrupt countries actually the “bundle of rights” implied by land ownership
increased in the late 1990s and early twenty- to different parties at different times during the
first century, to 80 percent (where “corrupt” harvest cycle. Issuing a land title to yet another
is defined as a score of 2 or less on the ICRG party can increase rather than decrease uncer-
index that goes from 0—most corrupt—to 6— tainty about who has what rights to the land.
least corrupt). The share of aid going to cor- Indeed, a number of empirical studies show
rupt countries increased not because of chang- little effect of land titles on the incentive to invest.
ing composition of aid recipients, but because In Kenya, an ambitious plan to introduce land
the same aid recipients became more corrupt titles was introduced even before independence
(William Easterly and Tobias Pfutze, forthcom- (the Swynnerton Plan of 1954). However, much
ing). Similarly, there is little sign of payoff to aid subsequent research showed little constructive
agencies’ efforts at about the same time to pro- effect of land titling. For example, Shem E.
mote democracy from the top down. Only about Migot-Adholla and Frank Place (1998) showed a
20 percent of aid goes to countries classified by weak effect of land titles in Kenya on perceived
Freedom House as “free,” a proportion that has land rights of farmers, credit use, and land yields
not changed over time despite much rhetoric to (a measure of investment in the land).
the contrary. The anthropologist Parker Shipton (1988)
looked at the consequences of land titling for the
III. Land Titles in Africa Luo tribe in western Kenya in the early 1980s.
The traditional system among the Luo was a
Finally, to get as concrete as possible, let us complicated maze of swapping plots between
examine one very specific kind of top down kin and seasonal exchanges of land for labor
institutional reform—the attempt to introduce and livestock. Each household’s claims to land
land titles to resolve uncertainty over property included many plots of different soils and ter-
rights in land in Africa. rains, on which many different crops grew, not
The theme of land titles improving incentives a bad system with which to diversify risk in an
is an old one in Africa. For example, a colonial uncertain climate. The traditional land patrons
research commission in 1938 concluded about (weg lowo) would often give temporary land
land registration: “all discussions on the subject rights to clients (jodak).
agree as to the value of giving security to the Land titling brought new uncertainties into
occupier of land . … legal security against attack this complex system. Would the government
or disturbance can most effectively be guaranteed give the titles to the weg lowo or to the jodak?
by registration (Lord Hailey 1938, 868, 876).” The system inclined toward the latter, foster-
The World Bank in 2003 expressed pretty ing bitter conflict between the two groups.
much the same viewpoint, as if very little had Sometimes the former weg lowo would wind up
changed in 65 years: “{Land} arrangements as the jodak of his former jodak. Other times,
found in many countries are often not optimal claimants would not bother with adjudication,
from either an economic or a social perspec- as the costs exceeded the value of the property.
tive. For example, in Africa, the vast majority of Although land sales increased after formal reg-
the land area is operated under customary ten- istration, neither the buyers nor sellers wanted
ure arrangements that, until very recently, were the high fees or red tape to register sales. The
not even recognized by the state and therefore system of formal titles thus gradually lost cor-
remained outside the realm of the law” (xviii). respondence with whom the locals knew owned
Despite decades of attempts to register land the land.
titles, during both the colonial and indepen- Moreover, land titling may have increased
dence eras, today only about 1 percent of land rather than decreased the scope for the kind of
in Africa is registered under the formal system opportunistic behavior that institutions are sup-
(Commission for Africa 2005, 231). Clearly, posed to prevent. Sellers who pledged their land
something about the top down registration of as collateral for a loan would fail to inform the
land titles is not working. buyer of this claim on the land. Banks found it
98 AEA PAPERS AND PROCEEDINGS MAY 2008
politically difficult to auction off the collateral constrain investments in increased land produc-
land after default, since land owned by kin of tivity. Jean-Philippe Platteau 1996 also argued
the defaulter surrounded it. Some sellers sold to that there is little evidence of any benefit of for-
several buyers at once, using different elders as mal land rights compared to indigenous systems.
witnesses. Lorenzo Cotulla (2007) and Karol Boudreaux
In an illustrative anecdote from Shipton, and Paul Dragos Alicia (2007) provide more
Ocholla Ogweng of Kanyamkago got a loan of recent statements of this same view, albeit with
30,000 Kenyan shillings from Barclay’s Bank some variations and cautionary notes that indig-
in 1979. To raise collateral, he asked the help enous evolution is not a panacea for optimal
of his wife’s father, Ogwok Nyayal. Mr. Nyayal outcomes.
arranged with his sister’s husband, Mr. Alloyce After all this research and experience, the
Ohero, to pledge his land as collateral for Mr. aid donors today remain stuck on some kind
Ogweng’s loan. Alloyce Ohero then sold part of idealized comprehensive (top down) govern-
of his land to two strangers, without inform- ment reform that would somehow make formal
ing them of the Barclay’s Bank lien, and they registration of land titles “optimal.” The United
settled on the land. Mr. Ohero died in 1981 and Nations Millennium Project (2005) said, for
Mr. Ogweng defaulted on his loan. The two example: “The rule of law involves security in
sons of Alloyce Ohero expected to inherit the private property and tenure rights . … upholding
unsold part of his land, equally unaware of the the rule of law requires institutions for govern-
Barclay’s Bank claim. By 1982, a court broker ment accountability. … this requires a well func-
prepared to auction off all of Mr. Ohero’s former tioning and adequately paid civil service and
land on behalf of Barclay’s, to the consternation judiciary, proper information technology (for
of everyone involved. The two strangers blamed registration of property . … )” (31, 111). Here, the
Mr. Ohero’s sons, who blamed their uncle Ogwok donors’ answer is more computers to register
Nyayal, who blamed Alloyce Ohero, who if he formal land titles!
were alive would blame Ocholla Ogweng. The World Bank (2003) Land Policies for
Other studies throughout Africa bear out the Growth and Poverty Reduction concedes many
picture of ineffective land titling. A study of land of the problems with government land regis-
titles in Burkina Faso (Anne-Sophie Brasselle, tration discussed above, but still concludes the
Frederic Gaspart, and Jean-Philippe Platteau answer is even more intensive and comprehen-
2002) found no effect of land titles on incentives sive top-down government planning:
to invest in the land. Kathryn Firmin-Sellers
and Patrick Sellers (1999) found that a land The establishment of a land policy frame-
titling program in Cameroon was not success- work to guide the sequencing of specific
ful in consolidating individual property rights, interventions in the sector can have multi-
although it had some other benefits. Hanan G. ple benefits in generating consensus, help-
Jacoby and Bart Minten (2007) found no effect ing to prioritize actions, and (by ensuring
of land titles on plot-specific investment in rice participation in the implementation and
monitoring of these interventions) avoid-
fields in Madagascar. Klaus Deininger and ing costly errors. Given the long-term
Songqing Jin (2006) have recently summarized nature of interventions in the area of
the literature on land titles in Africa as show- land policy … integration into the broader
ing little or no effect of titles on investment or development strategy is particularly rel-
access to credit, although they found evidence evant to provide a basis for relating land
that a more general measure of “tenure secu- policy to other interventions (179).
rity” in Ethiopia (not dependent on titles, which
did not exist) fostered land investments.
Shem E. Migot-Adholla et al. (1991) long IV. Conclusion
ago presented evidence that indigenous prop-
erty systems in Africa, far from being static, Is the bottom up view of institutions hopelessly
have themselves spontaneously evolved toward pessimistic? It certainly undermines the naïve
more individualized land rights in response to optimism implied by aid agency recommenda-
increased population pressure. They argued tions that institutions can be rapidly changed
therefore that the indigenous systems do not from the top by political leaders. Even without a
VOL. 98 NO. 2 Institutions: Top Down or Bottom Up? 99
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