Institutional Bottlenecks: What Can Be Done?

Abstract

Institutional bottlenecks refer to path-dependent institutional arrangements which contribute to economic stagnation. In his research, Timur Kuran identifies several historical institutional bottlenecks which contributed to economic decline and underdevelopment of the Middle East. We use Kuran’s research as springboard to ask: what can be done about institutional bottlenecks? To answer this question we draw on the work of F.A. Hayek who emphasized the centrality of institutions for social order and the limits on human reason in constructing a preferable state of affairs. We conclude that focus must be on the meta-rules through which the process of institutional evolution takes place. While we cannot know the specific outcomes of this evolutionary process ex ante, we can establish constraints to guide it. Reforms, therefore, should be focused on removing barriers to discovery instead of on selecting specific predefined end states.