Sunday, July 5, 2009

Does imposed institutional reform work?

A very interesting article about the consequences of French imposed institutional reforms in Europe and, most importantly, if it worked? The authors show that it did work in fine-tuning institutions that later contributed a lot in economic growth of the European countries.

The French institutional reform intervention in European:

After 1792, French armies invaded and reformed the institutions of many European countries. The package of reforms the French imposed on areas they conquered included the civil code, the abolition of guilds and the remnants of feudalism, the introduction of equality before the law, and the undermining of aristocratic privilege. […]They were imposed “Big Bang” style from the outside. And, institutions such as the civil code were self-consciously designed and were not necessarily “appropriate” for the lands on which they were imposed. If externally-imposed and “Big Bang” reform is generally costly or if designed institutions like the civil code create major distortions, the reforms should have had negative effects on nineteenth-century Europe.

French intervention in Europe worked:

In particular, our results are strongest for the later part of the nineteenth century, which we see as evidence for the fact that French-induced reforms created an environment favourable to the Industrial Revolution, which reached Continental Europe precisely in those decades. French reforms involve no effort to be “appropriate” to local conditions and were imposed from the outside “Big Bang” style. Nevertheless, they appear to have spurred significantly faster economic growth in the second half of the nineteenth century, once the process of industrialisation throughout Europe was underway.

Why did the intervention work?

[…] success may have been due to the fact that the reforms it imposed were much more radical than is typically the case. Many reforms fail because they are de facto reversed shortly after the implementation. The French, instead, reformed simultaneously several aspects of economic, social and political institutions of the “ancient regime” of Europe, thereby significantly weakening the powers of local elites and making a return to the status quo ante largely impossible. Even when some pre-revolution elites returned to power after 1815, there was a permanent change in the political equilibrium. This scope and radicalism of the French reforms are common with the post-war reform experiences in Germany and Japan and stand in contrast with many other reform experiences.

It would be interesting to contrast the French (reform) intervention in Europe and the current reform programs imposed on developing countries by the aid and development agencies. The way French “Big Bang” reforms worked in Europe (after 1850) and the way institutional reforms are imposed upon developing countries right now are very different in methodology, intent and interest!

The reason why French intervention worked is that the institutional reforms were “radical” that shattered power centers with vested interests that were constraining growth. The French Revolution “destroyed (the institutional underpinnings of) the power of oligarchies and elites opposed to economic change; combined with the arrival of new economic and industrial opportunities in the second half of the 19th century, this helped pave the way for future economic growth.” One interesting finding is that evolved institutions are not inherently superior to those ‘designed’.