Institutional evolution and economic development in Iran and Turkey

Abstract

Iran and Turkey historically had outwardly similar politoconomic experiences. Particularly after World War I there were both similar institutional reform programs on the two countries’ agendas and convergence in their economic growth and development levels. However, this convergence came to a standstill with their picking of totally diverse economic institutions in 1980s. This study attempts to provide an analysis of this diverse transformation of economic institutions in Iran and Turkey in light of the new approach proposed – The Clash of Paths (CoP). We assume that institutions are not typically chosen for the general benefit of society, but are rather imposed by groups with political power. We propose that the establishment, reformation and transformation of economic institutional structures in different countries are endogenous to two important determinants: (i) diverse political institutional structures that determine formal constraints on political power relations; (ii) diverse societal ‘mental models’ that create informal constraints on cognitive and relational patterns. The ‘formal’ and the ‘informal’ constraints evolve in interaction with external institutional paths that a country's path clashes with. In this study we also construct a simple bargaining game to integrate macro aspects of institutional evolution drawn under CoP to a micro-level explanation of the emergence and change of institutions. The micro-level analysis suggests that institutional evolution is very much connected to politically powerful groups’ decisions to reach or reject a consensus, which is something that is built or destroyed on the basis of actors’ projected utilities. Actors’ decisions in turn are dependent on their ability to solve the collective action and resource mobilization problems in order for their commitments or threats to be credible.

Keywords:

• Iran
• Turkey
• institutional evolution
• the Clash of Paths
• bargaining game
• political power

JEL Codes:

• D7
• F4
• N3
• N4
• N5
• P4

Notes

1. For Botswana's case see Acemoglu, Johnson, and Robinson (2003).

2. We assume that power is generally fixed, with the exception of periods in which power sources expand (these are usually related to economic might). That is, if a group or class in society increases its domination, this usually happens at the expense of other group(s) or class(es).

3. There also big landowners with similar objectives as their Iranian counterparts, however, they are clustered only in a few regions of the country, particularly the Eastern part.

4. In the mid-nineteenth century the term ‘Sick man of Europe' was used as a nickname to describe the Ottoman Empire at a time of experiencing economic difficulty and/or impoverishment.

5. Sarrafs were local entrepreneurs (Floor, 2009), whereas the Galata Bankers usually belonged to non-Muslim communities and had extensive communications with the European financial institutions (Pamuk, 2007a).

6. By ‘clientelistic relations’ we mean ‘cross-cutting patron-client resource flows’. For details see Khan and Jomo (2000).

7. During 1926–1932 interval, the revenue from oil ranged between £310,000 and £1,530,000, with great fluctuations in spite of the continuous rise in the output from 4.556 to 6.446 thousand long tons (33.715 to 47.700 thousand barrels) during the same period. For instance there was a tremendous fall from £1,400,000 in 1926 to £500,000 in 1927 as well another plunge from £1,290,000 in 1930 to £310,000 in 1931. Thus, the 1933 Oil Agreement was an attempt to end these dramatic fluctuations in oil revenues via ensuring that changes in the market price, and/or the company's tax obligations to the British government could not be used as reasons for dramatic declines in the revenues paid to the Iranian government. This was done through changing the form of revenue payments from 16% of the company's annual net profits to 4 shillings per barrel produced. However, the agreement also extended the concessionary period from 27 to 60 years (Katouzian, 1981).

8. In December 1957, nine army officers were arrested for plotting against the government.

9. This was a consortium made up of a number of British companies (with a 40% share), French and Dutch companies (with a 20% share) and American companies (with a 40% share). It was set-up to produce and market Iranian oil for 25 years, and pay 50% of the net proceeds to the Iranian government. Although far from ideal, this was a real improvement and would be useful in the Shah's objective maximization process.

10. For interest groups and developments in associational life in Turkey, see Bianchi (1984).

11. OYAK was defined as a ‘financially and administratively autonomous legal person subject to the verdicts of private law’. Paradoxically, however, article 37 reads that ‘all assets, earnings and accounts of the foundation are to be treated as state property, and any party causing damage to OYAK property will be treated as having damaged the state property’. OYAK also enjoyed all kind of tax exemptions (corporation tax, turnover tax, income tax, stamp tax … ) at the level of the Foundation (not at the level of affiliated companies) (‘OYAK Law’, Article 35). OYAK Law is available at www.oyak.com.tr.

12. The conceptual polity scheme examines concomitant qualities of democratic and autocratic authority in governing institutions. It envisions a spectrum of governing authority that spans from fully institutionalized autocracies to fully institutionalized democracies. The competition between democratic and autocratic authority systems is reflected in a focus on transitions from one mode of authority to another in particular countries and in the concomitant problem of ‘incomplete transitions' and the appearance of incoherent polities, or anocracies, in which odd combinations of democratic and autocratic authority patterns are observed. The polity score captures a regime's authority spectrum on a 21-point scale ranging from −10 (hereditary monarchy) to +10 (consolidated democracy). The polity scores are converted to regime categories in line with a three-part categorization of −10 to −6 for autocracies, −5 to +5 for anocracies and +6 to +10 for democracies. There are also special polity scores of −66, −77 and −88 for the cases of foreign interruption, of interregnum or anarchy, and of transition, respectively. For more details on the POLITY2 dataset, see http://www.systemicpeace.org/polity/polity4.html.