Over the recent past, the area of institutional economics has increasingly gained momentum. Two of its main contributors, Douglass North and Ronald Coase recently won the Noble Prize in Economics. Many factors may be presented to explain the long eclipse of institutions from the field and the recent resurgence of interest in the subject.

Mainstream neoclassical economic theory has consistently discarded institutions and institutional change from the analysis and pushed them in the background by assuming that they are exogenous. Economic factors are the main fundamentals in explaining economic development. In this context, economic development is seen as a universal process whereby development stages are dependent on quantitative economic factors such as capital, labor, land, and more recently, human capital. This view has obviously misrepresented reality and failed to explain growth differentials among countries in time and space. The lack of empirical evidence with regard to the â??convergence hypothesisâ?‌ lends support to this claim. A country might accumulate a substantial amount of physical and human capital but be locked into a low level of development if its institutional set-up is not right.

With regards to the rationale explaining the renewed interest in institutional factors, the answer is multidimensional. The first explanation lies in the recent cognizance made by international financial institutions such as the World Bank, and by policy makers alike, or the fact that macroeconomic discipline and conventional economic reform packages are not enough to put developing countries on a sustainable development path. More fundamental changes are needed. The notion of governance which has appeared more frequently in recent literature illustrates the new perception of the type of the needed changes. Governance may be defined as â??the manner in which power is exercised in the management of a countryâ??s economic and social resources for developmentâ?‌ (Williams 1996: 157). Better governance requires reforming several aspects: notably improving the efficiency and operation of the government apparatus and increasing its accountability; enhancing the legal framework by improving the efficiency and credibility of the court system; clarifying property rights; clearing law texts from incoherence and inconsistency; and enforcing the rule of law; guaranteeing transparency and the easy dissemination of information; and harnessing participation of civil society.

Other important reasons for the revival of interest in institutions, are the success stories of some East Asian countries and the demise of communism in Eastern Europe. Present problems notwithstanding, the spectacular growth rates enjoyed by many East Asian over the last two decades or so, have been attributed to a great extent, to the presence of enabling institutions. Decentralized, politically pressure-proof, and high quality bureaucracy; commitment to shared growth; transparency; accountability and participatory polity, are among the factors presented in explaining the success of these countries. In the opposite camp, Eastern European countries are often portrayed as instances of institutional failure with respect to the latter factors.

The third explanation for the recently rekindled interest in institutions stems from the recent changes in the world economy brought about by globalization that has made very apparent the cost of non-reform. The pace of the changes entailed by globalization compels national governments to react by changing the rules of the game, i.e., reforming their institutions. The fight for survival and against the risk of marginalization in an increasingly competitive and integrated world, requires the creation of market-friendly institutions; a stable economic environment; a higher degree of preparedness to adjust to external shocks; proper regulations that influence market outcomes that are not socially optimal; the provision of public goods such as property rights and basic social services; and the protection of the vulnerable and the environment.

Institutions and institutional reforms are of paramount importance for the Middle East and North Africa (MENA) region on several grounds. The process of its integration in the world economy is slow in comparison with high performing developing countries (Nabli and De Kleine, 1998). Without appropriate institutional changes, notably the development of market institutions and the protection of property rights, the region will forego the windows of opportunities offered by globalization. Moreover, the past weak growth performance of many MENA countries is largely attributed to its low level of productivity, lack of international competitiveness and its reliance on traditional factor-based sources of competitive advantage (Bisat et al., 1997). The region is also characterized by a high level of social and political instability that can be detrimental to the functioning of market economies.

There has been an obvious effort made by developing countries toward undertaking substantial institutional reform notably through improving their governance structure. The record of the MENA countries on institutional quality as proxied by their scores on country risk indicators published by credit ranking institutions, have improved over the last decade or so (ERF, 1996). However, much remains to be done. Several institutional aspects are still lagging behind even by developing countriesâ?? standards. Individual studies show, for instance, that many countries in the region provide the weakest institutional support for investment and private sector development. This creates the need for analyzing the institutional setup and pinpointing the institutional impediments for the development of the MENA region from both the theoretical and practical perspectives.

Overview of Chapters

In a conceptual chapter, Gautam Bose focuses on issues related to institutions and institutional change. He defines institutions as the structure of rules governing inter-action among individuals in a society and the non-market arrangements designed to reduce transactions costs. Such arrangements can either can transcend the market or supplant it. He then outlined the institutional aspects involved in the different stages of transactions and how these aspects affect transaction costs.

Bose proposes alternative tools to analyze institutional structures and institutional change and argues that some of the tools are not sufficient to capture many institutional features prevalent in the MENA region. Moreover, he argues that social norms, moral convictions and socially nurtured morality play a role in governing behavior. He stresses the importance of these elements and their relevance for the issues of institutional design and institutional change, since in the MENA region the norms, conventions, and moral convictions, are frequently responsible for the establishment of institutional traps that hinder progress.

Abdel-Hameed Bashirâ??s chapter tackles the conceptual issues of the effects of property rights on resource allocation and economic performance. He uses a formal model to show that investment will increase if the rent generated from the efficient use of the property exceeds the enforcement costs of property rights. These costs are high if property rights are poorly defined and contracts are not enforced. When property rights are ill-defined, assets are not put to their best use. This results in a reduction of economic activity, wasteful practices, over-utilization of resources, and increased political and social instability, as illustrated by the author in the case of land tenure in Sudan.

Bashir asserts that poor assignment of property rights is exacerbated by excessive political control, outright involvement of the state in ownership, and the discretionary bureaucratic allocation of resources. This results in corruption and misallocation of resources that can be detrimental to development. The author highlights the importance of property rights institutions in reducing transaction costs and misuse of assets. Although this represents a major step toward appropriate institutional reform, he stresses the importance of coupling the creation of property rights institutions with the elimination of inefficiencies resulting from political control and non-enforceability of contracts. This involves improving the functioning of legal institutions, downsizing bureaucracy, reducing the control rights of bureaucrats, and privatizing.

Motivated by the somewhat ambiguous relationship between socio-political instability (SPI) and growth, Campos et al. tackle the relationship between SPI and growth in the MENA region. The authors argue that the relationship between SPI and economic growth does not have to be negative. They also provide explanations as to why SPI could induce government to be developmental rather than predatory, especially under competitive political conditions.

Camposâ?? team then use regression based on pooled cross-section and time series data on twenty-one MENA countries. The aim is to determine the effects of SPI and its interaction with institutional and resource endowment variables, on growth via three linking variables: namely, military expenditures, freedom from distortions and the investment rate as a share of GDP. They conclude that SPI does not affect growth in the region in any significant way.

The objective of chapter presented by Ibrahim Elbadawi, is to explain the recent evolution of private investment in the Arab world focusing on the role of institutions and governance, while accounting for the other determinants of investment. The chapter also attempts to assess the potential for reforming Arab countries engaged in the reformation process to replicate the initial success of the high performing East Asian countries by analyzing the institutional foundation of success in the latter countries, and then pinpoints its relevance for the Arab countries.

Elbadawi provides yet additional evidence on the importance of institutional factors, notably the quality of bureaucracy, government credibility, rule of law and political stability â?? in affecting private sector investment. He argues that the other determinants of investment also matter, such as macro-policy environment, macroeconomic instability, external shocks, human capital and regional spillover effects. However, the score for the Arab countries with respect to investment-friendly institutions is striking, since they provide, as a group, the worst institutional support to investment, relative to any region in the world.

Improving governance requires eliciting participation and involvement of civil society and responding to the concern of the â??majorityâ?‌. It is argued that nothing works better than the election ballot. Murat Sertel and Remzi Sanver raise an important issue, in this regard, related to the design of electoral systems with a view of the actual situation in the MENA region and with a particular focus on Turkey. After posing certain ethical axioms and optimality criteria that should be fulfilled by electoral systems, the authors compare four social-choice rules, namely: plurality, plurality with a runoff, Bordaâ??s method and majoritarian compromise.

When elections involve more than two choices and a single alternative has to be chosen for each possible preference profile, Sertel and Sanver show that some electoral systems fail to be immune to imposed solutions. Imposed solutions occur when a candidate is elected although he is considered as an undesirable candidate by a majority of voters. They argue that among the electoral systems under consideration, the majoritarian compromise fulfills many of the axioms and optimality criteria involved. The authors conclude that the relevance of the underlying comparative analysis between the different electoral systems for the MENA region resides in the fact that the countries of the region are in their formative stages of public choice mechanisms, and in that it helps that such an analysis also helps clarify the merits of political competition which represents an important safeguard against extremism.

Hadi Esfahaniâ??s chapter relates fiscal performance to factors affecting budgeting procedures i.e., the rules and regulations that constrain the ways in which budgets are formulated, approved, and implemented. The author recognizes the importance of the interaction of two types of factors: (a) factors restricting the bargaining options among the interest groups involved, and (b) factors related to the institutional, political and economic characteristics of the country.

After examining the different components of the two types of factors, Esfahani discusses the relationships between the two by analyzing the impact on the different characteristics of budget procedures of the relevant institutional, political and economic country characteristics. For instance, he concludes that countries subject to frequent economic shocks, should adopt more ex-post flexibility in meeting the budget targets. In contrast, he argues that for countries with low administrative capability, ex-post flexibility is less useful. He goes on to say that the marginal payoffs from ex-ante targets, budget segmentation and hierarchical procedures are likely to rise. In addition, countries exhibiting high political instability should stick to ex-ante budgetary targets and information about the various parts of the budget should be made transparent. In the last part of the chapter, the author outlines the blueprints for an empirical implementation of a study which would test for the efficiency of budgeting procedures based on the two types of factors outlined above.

The chapter presented by Ossama Salem applies a Willamsonian institutional approach to the case of infrastructure privatization in two studies: piped water supply in Sharm El-Sheikh, Egypt, and solid water management in Soussa, Tunisia. In both cases, the author shows how the incentives of all the parties involved in the ex-ante and ex-post phases of the privatization process have been affected by formal and informal institutional constraints, which in turn affect the overall outcome of privatization.

Although the two cases are not strictly comparable, Salem argues that two important institutional features matter to a great extent in affecting the privatization outcome. The first has to do with the nature of the state: reactive in the case of Sharm El-Sheikh, in their response to the private sector initiative, and proactive in the case of Soussa that resulted in a fairly competitive bidding process. The second institutional feature is related to the governance structure and the accountability of local governments. The author points out that while the local government at Sharm El-Sheikh relies exclusively on grants provided by the central government, the municipality of Soussa depends on a mix of grants and loans. The two institutional arrangements have different impacts on incentive structures and hence a direct bearing on privatization outcome.

In the chapter by Nabil Chaherli et al., a multi-market model is developed to analyze the impact of market liberalization in the context of structural adjustment on the low rainfall areas (LRAs) of the West Asia and North Africa (WANA) countries. After giving an account of the main features of reform in the agriculture sector of the countries, notably, their institutional aspects, the authors use the model to assess the impact of these reforms on the feed-live-stock sector of the WANA countries.

Using three policy scenarios with varying degree of price subsidy changes in the cereal and livestock sectors, the authors funds that market liberalization has generally negative effects on income, production and consumption. The negative effect is less pronounced in Tunisia than Jordan, the two countries under study, because of higher possibilities and existence of alternative sources of income in the former.

In the final chapter, Atta El-Batahani shows how reform and historical evolution of the Gezira scheme in Sudan â?? one of the largest irrigated ventures in Africa â?? was affected by socio-economic and political factors. He argues that politics has interacted with many institutional factors, such as conflicts between interest groups as well as, cultural values and the organization of the community within the scheme. This interaction has affected the efficiency with which the scheme operated over the different periods considered in the study.

Areas for Future Research

In light of the challenges facing the countries of the MENA region in reforming their institutions, authors have been very insightful in showing in various ways and the various contexts in which institutions affect growth and development. However, it is only natural that research on institutions in the MENA region should go beyond proving that they matter. Research should be directed to the question of how institutions evolve over time and under what circumstances they can become an obstacle to development. Moreover, a more normative and prescriptive stance in research is needed in order to increase its policy relevance for the policy makers in the region.

Many issues debated in the workshop deserve further research in their own rights. This research needs to move toward more specific areas. Previous studies have been conducted using cross-country studies. These studies can provide, at best, general results that are not very useful for more specific contexts. More sector-specific, comparable and in-depth case studies are needed.

Specific areas of future research on institutions and institutional change in the MENA region can be tackled from one or more of the following perspectives: functional, sector (or market-specific), and policy-specific. A functional classification of the subjects can be adopted to address, for instance, issues related to the role of the government and its institutions such as bureaucratic efficiency, regulation, accountability, civil service reform, decentralization, relation between central and local government, institutional aspects of budget allocation, and the relation between public and private sectors.

Institutions and institutional reform can also be looked at from a sector or market-specific perspective. Institutional economics has proved useful for many sectors such as agriculture, banking and finance, infrastructure, environment, etc. Institutional economics is also useful in the analysis of certain markets, in particular, the insurance market. Moreover, it can provide a solid framework to understand the working of incomplete markets. Issues and concepts of regulation and competition, entry and exit rules, property rights, contract enforcement, forms of ownership, organizational structure, transportation costs, collective actions, and interest groups, are very useful in this context.
The third way to tackle institutional issues is through their link to policy. This approach amounts to identifying the aspects of institutional environment that need to be reformed for policies to be more effective. A very important research area in this regard is the identification of the appropriate institutional policies. For instance, some of the institutional aspects of trade, (e.g. customs administration and procedures, trade-related monopolies, etc.); fiscal issues (such as tax collection, political economy of budget allocation, etc.); and investment policies (licensing, legal restrictions on ownership, investment laws, etc.) need to be studied more carefully.

Among the important issues that also need investigating in the context of the MENA region are: the issue of institutional design under different policy regimesimprovement of governance structure, institutional determinants of the reaction of governments to external and internal threats, the role and appropriate size of the state under more liberalized and market-oriented economies, and the institutional setup for a better public-private sectors relationship.

Since globalization, multilateral and regional trade agreements have become one of the most important factors shaping the future of national economies, it becomes very relevant to understand their institutional implications for the different sectors and facets of the MENA economies whether on corporate organization, public-private relations, role of the state, and so forth.

A great deal of work needs to be done as well on the methodological front. There is a gap between the theoretical models of institutions and their empirical validation. This is partly due to the inadequacy of the indicators measuring their theoretical counterparts. In addition, most of the available measures of institutions are scattered and are not available for all the countries and for all the periods. Therefore, there is an obvious need to improve existing institutional indicators of the region.

Modeling institutional change and explaining the many instances of institutional traps in the region also need further investigation. It is argued that many analytical tools from mathematics, management, game theory, decision theory, behavioral and organizational theories, may be adapted to understand institutions and institutional change. This task can be tackled better if economists join forces with researchers from other relevant fields towards a multidisciplinary approach.