Tesis doctoral (draft 1) [PDF]

David Soto Oñate

DOCTORAL DISSERTATION

Institutional Performance, Historical Experiences and Cultural Legacies: Contributions from New Institutional Economics

Supervised by: Ph.D. Gonzalo Caballero Miguez

2017 “International Mention”

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Tables and figures ............................................................................................................ ix Resumen .......................................................................................................................... xi Preface ........................................................................................................................... xxi Introduction ...................................................................................................................... 1 PART I Theoretical basis of New Institutional Economics ............................................ 5 Chapter 1 The New Institutional (and Organizational) Economics ................................. 7 1.1. Introduction ............................................................................................................ 7 1.2. Original Institutional Economics ......................................................................... 10 1.2.1. The Instrumental Value Theory .................................................................... 12 1.3. New Institutional Economics: The emergence of a new theoretical corpus ........ 16 1.4. Institutions and economic development .............................................................. 22 1.4.1. Geography ..................................................................................................... 23 1.4.2. Institutions ..................................................................................................... 23 1.4.3. Culture ........................................................................................................... 24 1.4.4. Lessons on the fundamental causes of development ..................................... 26 1.5. Institutional change in the NIE ............................................................................ 26 1.6. Two recent advances in Political Economy of Institutions .................................. 29 1.7. The NIE and the OIE: current differences and similarities.................................. 32 1.7.1. The role of power and predatory activities in NIE ........................................ 33 1.7.2. Culture in the research agenda of the New Institutionalism ......................... 34 1.7.3. Evolutionary logics and institutional change in North’s work ...................... 35 1.8. Conclusion ........................................................................................................... 36 Chapter 2 New horizons for the NIE: pre-rational formation, culture and cooperation . 39 2.1. Introduction .......................................................................................................... 39 2.2. Social and cultural embeddedness ....................................................................... 41 2.3. Preferences, values and habits ............................................................................. 45

2.4. Beliefs .................................................................................................................. 48 2.4.1. Shared mental models ................................................................................... 48 2.4.2. Ideology and legitimacy ................................................................................ 49 2.4.3. Social roles and identity ................................................................................ 51 2.5. Conclusion ........................................................................................................... 55 Chapter 3 Culture, institutions and economic and political performance ...................... 57 3.1. Introduction .......................................................................................................... 57 3.2. Culture and institutions ........................................................................................ 58 3.2.1. The role of culture in the design and evolution of formal institutions .......... 59 3.2.2. The role of institutions in shaping culture ..................................................... 60 3.3. Coherence: a culture for the open access social order ......................................... 62 3.3.1. Culture and political performance within the OAO: the political culture of democracy ............................................................................................................... 64 3.3.2. Culture and economic performance within the OAO: social capital ............ 67 3.4. Conclusion ........................................................................................................... 70 PART II Empirical Case Studies on Institutions and their Context .............................. 73 Chapter 4 The Cultural Legacy of Political Institutions: The Case of the Spanish Regions ........................................................................................................................... 75 4.1. Introduction .......................................................................................................... 75 4.2. Political culture, institutions and long-term persistence: A literature review ...... 76 4.2.1 Political culture and political culture of participation .................................... 76 4.2.2. The role of historical institutions in the origins of political culture disparities ................................................................................................................................. 78 4.2.3. Reverse causality and other background determinants ................................. 79 4.2.4. The mechanisms for long-term persistence ................................................... 80 4.3. The case of Spain ................................................................................................. 80 4.3.1. The regional distribution of political culture of participation in Spain ......... 83 4.3.2. The regional political trajectories .................................................................. 85 4.3.3. On the exogeneity of early political institutions ........................................... 92 4.4. Empirical analysis ................................................................................................ 93 4.4.1. Historical political institutions and political culture ..................................... 93 4.4.2. On the unification assumption: The persistence of the historical private law ................................................................................................................................. 97

4.5. Discussion and concluding remarks .................................................................... 99 Appendix I. Maps of Spanish autonomous communities and provinces .................. 102 Appendix II. Assessment of constraints on the executive ........................................ 103 Appendix III. Variables’ description, aggregation, source and main descriptive statistics ..................................................................................................................... 104 Chapter 5 The role of coherence between institutions and culture for economic and political performance: The case of the Spanish regions ............................................... 105 5.1. Introduction ........................................................................................................ 105 5.2. Participation and cooperation for Open Access Social Orders .......................... 106 5.3. Economic and political performance in the Spanish Regions ........................... 109 5.3.1. Regional economic performance in Spain .................................................. 109 5.3.2. Regional political performance in Spain ..................................................... 111 5.4. Empirical analysis .............................................................................................. 112 5.4.1 Outline .......................................................................................................... 112 5.4.2. OLS estimates ............................................................................................. 115 5.4.3. Two Stage Least Square estimates .............................................................. 117 5.4.4. Continuity of historical private law ............................................................. 120 5.5. Conclusion ......................................................................................................... 121 Appendix I. Indicators on the quality of the public provision of healthcare services .................................................................................................................................. 123 Appendix II. Epilogue ............................................................................................... 124 A5.1. Culture and social structure ......................................................................... 124 A5.2. The Reconquest, culture and the factor of persistence ................................ 127 A5.3. Two complementary works ......................................................................... 128 Chapter 6 International rules, governance diversity and institutional performance: The case of the regime of liability and compensation for oil pollution damage ................. 131 6.1. Introduction ........................................................................................................ 131 6.2. Social cost, transaction costs and institutions .................................................... 133 6.3. The international rules: 1992 CLC and 1992 FC ............................................... 134 6.4. The international regime in practice: The 10 major spills within the 1992 CLC/FC regime ......................................................................................................... 136 6.4.1. Prestige (Spain), 2002 ................................................................................. 136 6.4.2. Erika (France), 1999 .................................................................................... 140 6.4.3. Hebei Spirit (Republic of Korea), 2007 ...................................................... 141

6.4.4. Natuna Sea (Indonesia, Malaysia and Singapur), 2000 .............................. 141 6.4.5. Nakhodka (Japan), 1997 .............................................................................. 142 6.4.6. Baltic Carrier (Denmark), 2001 .................................................................. 143 6.4.7. Solar 1 (Philippines), 2006 .......................................................................... 144 6.4.8. Volgoneft 139 (Russian Federation and Ukraine), 2007 ............................ 145 6.4.9. Slops (Greece), 2000 ................................................................................... 146 6.4.10. JS Amazing (Nigeria), 2009 ...................................................................... 147 6.5. Limitations of the international regime.............................................................. 148 6.5.1. Limitation of liability or financial caps ....................................................... 148 6.5.2. The channeling of liability to the owner of the ship ................................... 150 6.5.3. Reduced conception of damage and the measurement of the environmental cost ........................................................................................................................ 151 6.5.4. A long process and strict admissibility criteria for compensation .............. 152 6.5.5. Non-monetary sanctions: The potential role of criminal law ...................... 153 6.5.6. Heterogeneity of institutional performance across countries ...................... 153 6.6. Institutional Change: the evolution of the International Regime ....................... 157 6.6.1. Disasters as engines of institutional change ................................................ 157 6.6.2. Geopolitics, conflicting interests and distribution of power ....................... 159 6.6.3. Culture ......................................................................................................... 160 6.7. Discussion and conclusion ................................................................................. 161 PART III Conclusion ................................................................................................... 165 References .................................................................................................................... 179

Tables and figures Figures Figure 4.1. Regionally distinctive effects of political institutions on political culture .. 81 Figure 4.2. Geographical distribution of the Participation Index .................................. 85 Figure 4.3. Local-level inclusiveness in the High Middle Ages: Presence of custombased law at municipal level ........................................................................................... 89 Figure 4.4. State-level inclusiveness in the Modern Age: Constraints on the executive, 1600–1850 ...................................................................................................................... 91 Figure 4.5. Critical zones: historical variables’ effect isolated from the effect of civil codes ............................................................................................................................... 98 Figure 4.6. Map of Spanish autonomous communities ................................................ 102 Figure 4.7. Map of Spanish provinces .......................................................................... 102 Figure 5.1. Geographical distribution of Log GDP per capita 1998-2008 ................... 109 Figure 5.2. Provincial GDP per capita in 1930 and 2000 (in Pesetas of 1995) ............ 110 Figure 5.3. Part-Coop Index and income...................................................................... 110 Figure 5.4. Part-Coop Index and political performance ............................................... 111 Figure 6.1. Worldwide Governance Indicators on government effectiveness, regulatory quality, rule of law and control of corruption ............................................................... 156

Tables Table 4.1. Participation measures and historical political variables: Coefficients of linear correlation ....................................................................................................................... 93 Table 4.2. The impact of political institutions on political culture of participation: controlling for geographic factors .................................................................................. 94 Table 4.3. The impact of political institutions on political culture of participation: controlling for current economic development, education and inequality ..................... 95 Table 4.4. The impact of political institutions on political culture of participation: the role of proximity ............................................................................................................. 96 Table 4.5. On the unification assumptions: The persistence of the historical private law ........................................................................................................................................ 98 Table 4.6. Constraints on the executive in the Spanish regions in 1600, 1700, 1750, 1800 and 1850 .............................................................................................................. 103 Table 4.7. Variables’ description, level of aggregation, source and main descriptive statistics ........................................................................................................................ 104 Table 5.1. Correlations matrix among Participation and Cooperation indicators ........ 108 Table 5.2. Correlation matrix among Part-Coop Index, historical institutions, and economic and political performance............................................................................. 113 Table 5.3. OLS regressions: Part-Coop Index and economic performance in presence of historical and geographical controls ............................................................................. 116

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Table 5.4. OLS regressions: Part-Coop Index and political performance in presence of historical and geographical controls ............................................................................. 117 Table 5.5. Culture and Economic Performance: Two-Stage Least Square Regressions ...................................................................................................................................... 118 Table 5.6. Culture and Political Performance: Two-Stage Least Square Regressions . 119 Table 5.7. The robustness of results before the persistence of the historical private law ...................................................................................................................................... 121 Table 5.8. Components of the index for the quality of the public provision of healthcare services ......................................................................................................................... 123 Table 6.1. 10 major disasters within the 1992 CLC/FC system ................................... 137 Table 6.2. Worldwide Governance Indicators: heterogeneity in governance .............. 154 Table 6.3. Limitation of Liability for shipowners and the Fund in the International Regime .......................................................................................................................... 159

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Resumen

El nuevo institucionalismo ha conseguido desplazar consensos tradicionales bien arraigados en economía. Algunos autores han llegado a calificarlo como la nueva mainstream en lo que se refiere al desarrollo económico. Con el tiempo, el desarrollo se ha tendido a ver más como una transformación organizativa que como una simple acumulación de recursos materiales y cognitivos (Hoff & Stiglitz 2001). Hoy es impensable abordar la problemática del desarrollo económico sin atender a la estructura institucional de la sociedad. Lo que empezó con un estudio exhaustivo del desarrollo económico, terminó por interesarse por todo el contexto político y social que lo rodea. En la economía institucional reciente se suceden los estudios analíticos sobre el problema de la violencia, la transición hacia órdenes sociales de acceso abierto, el rendimiento democrático, la extensión de los derechos civiles, políticos y sociales, la estructura social o los sistemas culturales. La Nueva Economía Institucional (NIE, por sus siglas en inglés) tal vez sea el programa de investigación más representativa de este “giro institucional” que está dando la economía en su conjunto y que aspira a hacer más porosas las fronteras tradicionales de las ciencias sociales. La NIE supuso un progreso sustancial con respecto a la economía convencional en nuestro entendimiento sobre el proceso de desarrollo de las naciones. La acción económica transcurre en un contexto institucional. Este configura un sistema de incentivos para la interacción humana, afectando a multitud de dimensiones de la maquinaria económica y que en términos agregados condiciona sustancialmente la operativa material y las posibilidades de acumulación de factores. Esto llevó a los institucionalistas a dedicar sendos esfuerzos teóricos y empíricos al proceso de configuración del entramado institucional, pues ahí está la clave del cambio institucional y, por ende, la causa fundamental que limita las posibilidades de desarrollo de las naciones. En este sentido, cobra especial importancia el sistema político. Pero la organización no sólo está hecha de instituciones formales, también consiste en creencias y preferencias de raíz cultural: imaginarios colectivos, hipótesis sobre el funcionamiento del mundo, consideraciones normativas sobre cómo deberían ser las relaciones y la organización en su conjunto, sistemas de valores, actitudes, costumbres, etc. Por otro lado, también existe un sistema social con distintos roles y niveles de status, redes sociales y clubes excluyentes y una distribución material de recursos que conceden poder. A la comprensión de las instituciones

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formales y su proceso de cambio se añade el imperativo de tratar los factores de la estructura social y el sistema cultural de las economías. Instituciones, cultura y estructura social están en continua interacción, coevolucionan juntos y el encaje que encuentran entre ellas supone un elemento fundamental para el rendimiento de la sociedad. El sujeto institucionalista debe ser epistemológicamente insertado en su contexto institucional, pero también en su ambiente social y cultural. Esta contextualización tiene una importancia trascendental tanto para el desempeño de los mecanismos del mercado como para la vida organizada. Factores ampliamente compartidos dentro de una comunidad todavía poco entendidos como la ideología, la legitimidad, el civismo o la identidad tienen un impacto trascendental sobre la vida económica, y el diseño, cambio y funcionamiento institucional. Este trabajo da cuenta del progreso que supone este giro institucionalista para el estudio del desarrollo económico. Presenta los avances recientes de la economía institucional y algunos de los desafíos que todavía le quedan por afrontar, especialmente en lo que se refiere a la inserción del fenómeno económico e institucional en su contexto social y cultural. Trata de plantear de manera convincente que, aunque su potencial analítico es enorme, todavía quedan zonas demasiado oscuras y que para profundizar en ellas habrá de relajar algunas de las asunciones básicas que también heredó de la economía convencional. Habrá de emprender reformas teóricas para abordar entre otras cosas la construcción del sujeto, la identidad, la ideología o la cultura. Para contrastar las formulaciones teóricas con la realidad del fenómeno se realizan tres estudios de caso. Éstos muestran la importancia de comprender el rol del contexto social y cultural de las instituciones para su desempeño y la relación dialéctica que mantienen. La investigación empírica del fenómeno institucional se vuelve más compleja que la de otros objetos de estudio. Se debe a su complicación para observar el desempeño de las instituciones y sus interacciones con otros factores y la dificultad de realizar experimentos controlados. Otras ciencias son capaces de recrear con más facilidad ambientes en laboratorios para aislar los efectos que necesitan analizar. Los llamados experimentos históricos o naturales hacen las veces de laboratorios donde los institucionalistas pueden hacer investigación en condiciones cuasi experimentales. Estos requieren encontrar eventos históricos en los que el fenómeno de interés es observable en aislamiento del efecto de otras variables contextuales. Más concretamente consisten en comprar diferentes sistemas que son similares en muchos aspectos pero que difieren solo con respecto a los factores cuya influencia se desea estudiar (Diamond & Robinson 2010). El conocimiento histórico es quien nos provee de estos experimentos naturales y donde los institucionalistas empíricos han de rebuscar para desenmarañar las complejas relaciones de causalidad que vinculan las instituciones, el entorno sociocultural y el desempeño económico y político. La aceptación de estos cuasi-experimentos requiere de una intensa labor en la

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descripción de las asunciones que permiten considerar el fenómeno como aislado de otros factores potencialmente explicativos. Aunque los capítulos 4 y 5 son intensivos en técnicas cuantitativas, el esfuerzo de narración histórica para cumplir objetivos analíticos se vuelve casi el sustento fundamental del estudio. Este trabajo se compone de seis capítulos agrupados en dos partes. La Parte I, Bases teóricas de la Nueva Economía Institucional, presenta las bases teóricas de la NIE, las soluciones que aportó al problema del desarrollo económico y algunos de los desafíos que quedan por resolver. Consta de tres capítulos. El primer capítulo comienza presentando los fundamentos teóricos de la Nueva Economía Institucional y qué la distingue de la escuela institucionalista original y de la economía convencional ortodoxa. También dedica parte de su contenido a los nuevos avances en forma de narrativas integrales para explicar el cambio institucional histórico que lleva a los países a desarrollarse económicamente. Finalmente plantea algunos de los movimientos de la NIE que la aproxima a los postulados de la economía institucional original recuperando su interés por cuestiones como la distribución de poder o la cultura. Por otro lado, a pesar de los progresos, todavía la NIE presenta algunas limitaciones que le impiden llegar a un nivel más profundo en aspectos cruciales para la fenomenología institucional como la legitimidad, la identidad o la ideología, la endogeneidad de las preferencias y otros elementos pre-racionales del individuo que sí son tratados por otras ciencias sociales. El segundo capítulo explora algunas de las limitaciones de la economía convencional que la NIE resuelve parcialmente. Se refiere a elementos humanos, estructurales y culturales que se tercian fundamentales tanto para el funcionamiento de los mecanismos de mercado como para solucionar los problemas recurrentes de la acción colectiva. Se plantea la necesidad de revisar la limitada concepción tradicional de la conducta humana y la formación pre-racional de elementos fundamentales para la conducta, como los valores, la identidad o la ideología. Más allá de la antigua visión del limitado homo oeconomicus, basada en una racionalidad instrumental y perfecta, presenta un ser humano cuya conducta responde a una racionalidad basada en valores e imperativos identitarios o a hábitos sin mediación racional. Por otro lado, sus modelos mentales son incompletos y posee tanto creencias positivas sobre cómo funciona el mundo como un sistema de consideraciones normativas sobre cómo debería ser. Son creencias asépticas sobre las consecuencias de decisiones concretas pero también un universo de significados que se compone de identidades, sentimientos, nociones del bien y del mal y profundas aspiraciones humanas. Éstos afectan de manera determinante al diseño, el cambio y el funcionamiento institucional. Los órdenes sociales o reformas de éstos que desafíen las ideologías pueden enfrentarse a la falta de legitimidad, derivando en problemas de cumplimiento (en forma de fraude fiscal, por ejemplo) o desobediencia deliberada (huelgas,

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boicots) y enfrentamiento violento (protestas, revoluciones). Por tanto, a parte de todos los grandes avances impulsados por la NIE, es preciso incorporar al estudio institucional nuevas lógicas distintas a las de la racionalidad instrumental e investigar la formación y evolución de los rasgos pre-racionales que además en una parte sustancial son compartidos por una comunidad o un grupo de ésta. Una microeconomía que admite generalidades grupales nos redirige necesariamente a ciertos grados de análisis holista y nos lleva a interesarnos por los sistemas culturales, su reproducción y su evolución. Por tanto, para el estudio institucional se tornan fundamentales los mecanismos dialécticos que unen al ambiente institucional formal con la cultura y aquellos que permiten la evolución y la reproducción de la cultura autónomamente en el largo plazo. El tercer capítulo revisa precisamente la literatura teórica y empírica en economía política sobre la interacción entre la cultura y las instituciones formales, cómo se condicionan mutuamente en su evolución y cómo su encaje es fundamental para el desempeño institucional. El capítulo menciona una serie de orientaciones culturales que favorecen el rendimiento de los órdenes sociales de acceso abierto—concepto formulado por North, Wallis y Weingast (2009)—cuando impulsan dos elementos clave: la cooperación y la participación. Se refiere a la cooperación en su sentido más amplio: cooperación con las normas comunes tanto en estructuras de gobernanza con objetivos unificados como en la competición organizada con objetivos confrontados (valores y creencias que promueven el civismo y la integridad y que disuaden del oportunismo, tendencia al asociacionismo, confianza generalizada, facilidad para toma de decisiones colectivas, etc.). Por otro lado, se señala la importancia del espíritu participativo, la iniciativa individual o la autonomía de los miembros de una sociedad para llevar a cabo proyectos de emprendimiento social en cualquiera de sus formas (empresas, iniciativas legislativas, protestas, partidos políticos, ONGs, etc.) o participar activamente en cualquiera de los procesos u organizaciones (votaciones, contratos, fiscalización de élites, contactos con representantes públicos, etc.). Por otro lado, estudiar la relación entre las instituciones y la cultura es fundamental para la comprender la trayectoria coevolutiva que siguen ambas en la historia de las organizaciones sociales. Esta relación, aunque está visiblemente retroalimentada, ha sido generalmente analizada como impactos puntuales o prolongados unidireccionales. Este capítulo cubre ambas direcciones. Los trabajos que se centran en la primera dirección estudian fundamentalmente el papel de la cultura en el diseño inicial de las instituciones y en cómo pueden atrapar su evolución en un largo path-dependence. Por otro lado, el efecto de las instituciones sobre la cultura se suele estudiar como impactos de experiencias políticas o económicas que pueden configurar conjuntos de rasgos culturales que son capaces de persistir en el largo plazo incluso cuando las circunstancias institucionales que los originaron han desaparecido. Un ejemplo de este último fenómeno es estudiado en el capítulo 4.

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La parte II, Casos de estudio empíricos sobre instituciones y su contexto, presenta tres estudios de caso que permiten explorar las capacidades de la NIE y ayudan a revelar algunos senderos para seguir desarrollando su marco teórico. Se plantean cuestiones como la relación dialéctica entre las instituciones formales y la cultura o la importancia de la coherencia entre las instituciones y su contexto para su buen rendimiento. Los capítulos 4 y 5 están conectados. En un primer momento, el capítulo 4 plantea cómo las instituciones históricas son capaces de dejar un legado cultural altamente persistente. En concreto, defiende que las experiencias políticas inclusivas en la historia de algunas regiones españolas pudieron haber permitido o impulsado el desarrollo de ciertos rasgos culturales relacionados con la capacidad cooperativa y el ánimo participativo. Se comprueba que aquellas regiones españolas con experiencias políticas más inclusivas en sus trayectorias históricas presentan en la actualidad una mayor extensión de estos rasgos culturales entre su población. Explicamos la posibilidad de establecer una relación causal entre las instituciones históricas inclusivas y estos rasgos culturales y aplicamos controles correspondientes a otros factores importantes como la economía, la desigualdad, el capital humano o la geografía. Adicionalmente, se encuentran evidencias de que aquellas instituciones inclusivas estructuralmente más próximas al grueso de la población pudieron haber sido más capaces de dar lugar a estos rasgos que las más alejadas. El capítulo 5 trata de mostrar la importancia de la coherencia entre la estructura institucional formal y el sistema cultural para el rendimiento práctico de la economía y la política. Específicamente, estudiamos para las regiones españolas el efecto comparado de aquellos rasgos culturales del capítulo 4 para el funcionamiento del sistema institucional de acceso abierto. La revolución liberal española y la subsecuente evolución institucional progresiva hacia el acceso abierto desencadenaron una transformación en la distribución económica regional. Aquellas regiones con mayor presencia de estos rasgos culturales pasaron a convertirse en las más ricas y aquellas con menor presencia en las más pobres. Por otro lado, se puede apreciar también un mejor rendimiento de las primeras en términos de corrupción y provisión de bienes públicos, que son los indicadores que se utilizan para aproximar el rendimiento político. El capítulo 6 hace un análisis institucional del régimen internacional de indemnización y compensación en casos de contaminación por vertidos de petróleo. Éste ejercicio empírico sirve para ilustrar un caso básico de externalidad negativa y una estructura institucional que emerge para establecer una distribución de derechos de propiedad, una asignación de responsabilidades civiles y asegurar su cumplimiento. Esta estructura de gobernanza nace como consecuencia de los costes de transacción que impiden un resultado Pareto-óptimo al estilo pre-coaseano (Coase 1960). Esta estructura de gobernanza prevé una distribución de los derechos de propiedad concretos, una operativa de medición y compensación de daños y unos mecanismos de

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cumplimiento. En el análisis veremos que los países presentan un éxito desigual en su aplicación, que el sistema muestra actualmente serias limitaciones en su desempeño global y que enfrenta problemas para evolucionar. Específicamente muestra: a) Una serie de limitaciones del sistema y las críticas más recurrentes que ha recibido a lo largo de su vigencia. El sistema se enfrenta en la actualidad a una crisis como régimen internacional: Estados Unidos rechaza su entrada y la UE amenaza con crear su propio sistema. Existen fuerzas que empujan para la evolución del sistema hacia una mayor cobertura de las indemnizaciones y otras que intentan resistir el cambio. El capítulo ofrece una reflexión sobre el diseño y el cambio institucional basado fundamentalmente en el cambio cultural y el equilibrio de poder entre países con intereses distintos. b) Una de las cuestiones más interesantes que ofrece este caso es la exposición de las diferencias de desempeño que presenta este sistema internacional en función del país en el que opera. En algunos países el sistema de responsabilidad y compensación encuentra unos problemas enormes para garantizar su aplicación y objetivos: problemas de cumplimiento (monitorización, cuantificación, ejecución…), capacidad para reaccionar y hacer frente al daño, capacidad para responder con un sistema de financiamiento para adelantar las indemnizaciones a los damnificados por el desastre, problemas derivados de la debilidad del estado, la corrupción o el riesgo moral entre las reclamaciones, etc.

Se pone de manifiesto que un análisis que ignora el resto del contexto institucional, social y cultural da lugar a una comprensión muy limitada o confusa de la operatividad de las propias instituciones y de las causas fundamentales del desarrollo económico de las naciones y las regiones. Más allá, las relaciones dialécticas que las instituciones llevan a cabo con su propio ambiente son complejas y bidireccionales y todavía son poco comprendidas. Esta tesis doctoral contribuye en varias direcciones al programa de investigación del análisis institucional contemporáneo. Intentó asistir a la NIE en su empresa de comprender el cambio y el funcionamiento institucional. También se incorporó a la discusión sobre el capital social y la cultura política. Algunas de las conclusiones clave contenidas en este trabajo deben ser remarcadas.

1. La importancia crucial del ambiente institucional, cultural y social de una institución para su funcionamiento práctico Con respecto al desempeño económico y político, comprendimos que el diseño institucional puede no ser suficiente. Su coherencia con el contexto tiene un rol determinante para su supervivencia y funcionamiento. Si partimos del orden social de acceso abierto como sistema

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político y económico deseable, deberemos preguntarnos qué tipo de sistema sociocultural (valores, creencias, distribución de recursos, etc.) es compatible con él para hacerlo funcionar a pleno rendimiento. Los datos parecen sugerir que en un sistema donde la confianza, la coordinación (horizontal y vertical) y el emprendimiento son tan importantes, la capacidad cooperativa y el espíritu participativo se vuelven fundamentales.

2. Las propias instituciones pueden dejar un legado cultural de rasgos culturales relevantes para el desempeño económico y político. Para promover los valores y creencias que sustentan y hacen rendir adecuadamente los sistemas institucionales, deberemos entender la manera en la que se crean y se mantienen. Se descubre que las instituciones formales pueden ser una poderosa fuente de transformación cultural. Por ejemplo, las instituciones otorgan derechos e imponen obligaciones y prohibiciones que dejan una impronta en las concepciones culturales del bien y del mal y de las legítimas aspiraciones de los ciudadanos o grupos concretos; fuerzan conductas que pueden adquirir el rango de costumbres y tradiciones; prescriben por extensión cómo debe ser la topología informal de las relaciones entre actores; y la distribución de roles y status puede afectar a la consolidación de identidades grupales. Debemos entender cómo las instituciones afectan a los diferentes componentes del sistema cultural. La huella de los sistemas políticos sobre la cultura puede perdurar en el muy largo plazo. En este trabajo, los resultados han sugerido por tanto que el sistema democrático no sólo es de interés debido a su habilidad para redistribuir poder y generar políticas e instituciones más pluralistas, inclusivas y legítimas, sino que también cumple un papel destacado en el desarrollo de rasgos culturales deseables. Ya sea debido a sus procesos internos o a sus principios subyacentes, la democracia puede promover mayores niveles de participación y cooperación social. El estamento municipal parece haber sido un espacio relevante para la impresión de estos rasgos en la cultura local, sin embargo el proceso por el cual esto ha ocurrido no ha quedado resuelto del todo.

3. La cultura pudo ser el eslabón perdido entre las experiencias históricas y el actual desempeño político y económico. Importantes trabajos empíricos recientes han estado apuntando a la cultura como conexión entre eventos históricos y algunos fenómenos sociales de la actualidad. Se argumenta que la cultura es capaz de ser la portadora del factor de persistencia y que podría estar detrás tanto de la dependencia de la senda institucional como de los fenómenos actuales. A la luz de los resultados de los capítulos 4 y 5, se señaló como conveniente revisar algunos trabajos previos

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sobre la dependencia de la senda institucional y su rol en el desarrollo económico, como por ejemplo, Acemoglu, Johnson y Robinson (2001). El tipo de colonización puede afectar a la cultura, ya sea por imponer unas nuevas instituciones formales, por transformar la estructura social o por establecer nuevos mitos fundacionales, valores, actitudes o distribución cultural de roles y responsabilidades. Estos rasgos culturales pueden ser altamente persistentes y son poderosos conductores del comportamiento humano.

4. El ambiente institucional, cultural y social es también clave para el diseño, la evolución y la supervivencia de las instituciones No solo el funcionamiento institucional se ve afectado por el contexto en el las instituciones están ubicadas, sino que también ellas mismas son susceptibles de verse transformadas por él. Esta idea tan básica está ya presente desde la concepción temprana de la NIE. Una buena ilustración de esto quedó clara en el capítulo 6. Una tradición común en el derecho marítimo permitió un establecimiento relativamente ágil del régimen internacional de responsabilidad y compensación sobre daños por vertidos de petróleo. Por otro lado, la creciente conciencia medioambiental está impulsando que el sistema institucional evolucione para imponer mayores penalizaciones a los vertidos. En cambio, los diversos intereses nacionales y la balanza internacional de poder están obstaculizando la capacidad del sistema para progresar en esta dirección. Las dificultades para articular un texto de consenso están evitando la entrada de otras naciones, como Estados Unidos y China, e incluso amenazando la supervivencia del régimen. En este sentido, y extendiendo las consideraciones del capítulo 5, las ciencias sociales harían bien en retomar las preocupaciones originales del programa de investigación de la cultura política. Tras la Segunda Guerra Mundial, su investigación estuvo principalmente dirigida hacia por qué democracias aparentemente bien consolidadas colapsaron dando lugar a regímenes autoritarios. Debemos investigar el papel que cumplen estos y otros rasgos culturales no sólo en el funcionamiento de las instituciones, sino también en la adopción y estabilidad de las instituciones democráticas, las instituciones económicas de mercado y el sistema de bienestar. La historia nos ha enseñado que no debemos dar por garantizadas ningunas de ellas.

5. Las mismas instituciones internacionales pueden obtener distintos funcionamientos nacionales Con respecto al funcionamiento práctico de las instituciones internacionales, la gobernanza a nivel nacional se reveló fundamental. Las diferentes capacidades de las naciones para hacer cumplir las disposiciones de los convenios produjeron una efectividad irregular a través de las

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naciones. Las posibles soluciones podrían pasar por mejorar las capacidades institucionales de los países más débiles en este sentido, ayudándoles a equiparse con las herramientas necesarias, o incorporar al sistema unos mecanismos conjuntos de ejecución a nivel internacional.

La NIE sigue profundizando en la creación de un cosmos de pensamiento multidisciplinar para el análisis de los fenómenos económicos y organizativos en general. Aunque el progreso ha sido espectacular, la vertiente cultural de este corpus teórico todavía está por construirse. La economía de la cultura está en su infancia y la NIE, por su posición privilegiada, debería tomar también un lugar preponderante en el liderazgo de su desarrollo. Adicionalmente, a la apertura de la NIE a factores pre-racionales del sujeto institucionalista se deben incorporar a la agenda otros factores relevantes también poco comprendidos como son la estructura social o biología. El campo fértil que tiene la NIE por delante es desde luego inmenso pero excitante y es previsible que siga dando buenos frutos a medida que vaya incorporando nuevas herramientas teóricas a su marco intelectual. Seguirá pues contribuyendo a un mejor entendimiento de la organización humana y ayudando a construir soluciones a los enormes desafíos que enfrentamos como civilización.

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Preface

The present work is the result of years of cognitive and emotional effort. I say it with affection to those who are intended to pursue a doctoral project. Emotional management is not a minor issue. Surround yourself with people as good as those around me. My first and foremost acknowledgement goes to those who assisted me emotionally, even without knowing it. This dissertation has been elaborated during the period in which I was a doctoral student at the University of Vigo. All my work benefited from useful comments and fruitful debates that helped me to see more clearly the concepts that I was handling, if not to radically transform my opinion. I am grateful for insightful comments on my work to the participants at the III International Conference on Political Economy and Institutions in Baiona (2014), the Ronald Coase Institute Workshop on Institutional Analysis 2014 held in Manila, the 19th Annual Conference of the International Society of New Institutional Economics at Harvard University (2015), and the XXIII Encuentros de Economía Pública at the University of Vigo (2016). I am also extremely grateful to Marcos Álvarez, Alicia Pérez, Coral del Río, Olga Alonso Villar, Juan Surís, Carlos Iglesias Malvido, Blanca Martínez and María Jesús Facal for diligently responding to my requests for advice in their offices and providing comments on preliminary drafts and seminars at the University of Vigo. I am deeply obliged to Xosé Carlos Arias, Dolores Garza Gil, Carlos Hervés, Eduardo Giménez, José María Martín Moreno and Carlos Gradín, for unconditionally helping me in critical moments of my academic life. I would also like to thank the Department of Applied Economics at the University of Vigo, and the research group ERENEA for trusting me, and ECOBAS for supporting me from the very moment in which it was founded. I am also grateful to the Xunta de Galicia and the FEDER funds for financing my contract as a predoctoral researcher during three of these five years. Although I do it whenever I have the opportunity, I want to express again my affectionate appreciation and gratitude to the Ronald Coase Institute and, very xxi

especially, to Mary Shirley, Lee Benham, Alexandra Benham, Darin Hargis and Philip Keefer. I will never forget the patience and affection with which John V. Nye treated me during my three-month research visit to the George Mason University. Though I wish it had been longer, it was extremely useful for clarifying and consolidating my knowledge on institutional analysis. Thank you, John, for being such a role model as a professor and a scientist. Of course, I send my most sincere and affectionate thanks to Gonzalo Caballero, who was my supervisor and guide during all this time. I also dedicate this work to the welfare system of my country and to those who support it. Thanks to them I had access to a high standing education. Under some other social system, I would not be materially one of those called to receive it. I hope my work from now on can make up for what I owe them. A substantial part of the credit for this work must go to my friends and family. Without them, none of this would have been possible. All errors and inaccuracies are, of course, my own.

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Introduction

Economic Institutionalism has managed to displace a well-stablished traditional consensus, even becoming the new mainstream or part of it in development economics. Development is increasingly seen more as an organizational transformation than as the simple accumulation of material and cognitive resources. Today it is unthinkable to address the problem of economic development without accounting for the institutional structure of society. What began as an exhaustive study of economic development ended up deepening the entire social context that surrounds it. Recent institutional economics has published analytical studies on the problem of violence, the transition to democracy, the extension of civil rights, the social structure or the importance of the cultural systems. The New Institutional Economics (NIE) is probably the most representative research program in this “institutional turn” that economics is experiencing and aspires to make the traditional frontiers of the social science more porous. This work accounts for the breakthrough that this institutionalist turn brought about in the study of economic development. It presents the recent advances of institutional economics and some of the challenges that still have to face, especially with regards to the embeddedness of the economic and institutional phenomena in their social and cultural context. It will try to convincingly pose that although its analytical potential is enormous, there are still too dark areas that need to be addressed. To deepen them, the NIE will have to relax some of the basic assumptions that inherited from conventional neoclassical economics. It will have to undertake theoretical reforms to address, among other things, the individual’s identity, ideology or culture. To contrast the theoretical assertions with the practical reality, three case studies are carried out. The empirical investigation of the institutional phenomenon involves more complexity than that of other objects of study. This is due to the complication to observe its performance and interactions with other factors and the difficulty of conducting controlled experiments. Other sciences are able to recreate laboratory 1

environments to isolate the effects to be analyzed. The so-called historical or natural experiments serve as laboratories where institutionalist can conduct research in quasiexperimental conditions. These require finding historical events in which the phenomenon of interest is observable in isolation from the effect of other background variables. They consist of “comparing … different systems that are similar in many respects but that differ with respect to the factors whose influence one wishes to study” (Diamond & Robinson 2010, p.2). Historical knowledge makes possible these “experiments”, with which institutionalists attempt to unravel the complex casual relations that link institutions with other social and non-social factors. The acceptance of these quasi-experiments requires an intense work in the description of the assumptions that allow considering the phenomenon as isolated from other potentially explanatory factors. Although quantitative techniques—descriptive statistics or OLS and 2SLS estimation—are applied in Chapters 4 and 5, the effort of historical grounding to meet analytical purposes becomes the fundamental basis of the research. This work is divided into two main parts. Part I, Theoretical basis of New Institutional Economics, presents the theoretical basis of the NIE, the contributions that it provided to the problem of economic development and some of the challenges to be addressed in the future. It consists of three chapters. The first chapter begins presenting the key aspects that differentiate the NIE of both conventional economics and the original institutional economics (OIE). It also covers different frameworks to study economic development and institutional change. Finally, it explains some of the theoretical movements that approach the NIE to some of the positions of the original institutional economics. The second chapter explores some of the limitations of conventional economics that NIE partially solves. It also defends the necessity of revisiting the conception of human conduct and the formation of pre-rational elements such as values, identity or ideology. As these elements may be widely shared within a community, culture becomes of fundamental importance for aggregate economic performance. The third chapter reviews some empirical literature on the interaction between culture and formal institutions, how they condition each other’s evolution and how their fit may dramatically affect society’s performance.

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Part II, Empirical case studies on institutions and their context, presents three case studies which permit to explore the explanatory potentiality of NIE and help to reveal some pathways to further develop its theoretical framework. The chapters address the dialectic relation between formal institutions and culture and the importance of coherence between a given institution and its institutional, social or cultural context for its practical functioning. Chapters 4 and 5 are connected. Initially, chapter 4 discusses how historical institutions are capable of leaving a highly persistent cultural legacy. Specifically, it argues that inclusive political experiences in the history of some Spanish regions may have allowed or impelled the development of certain cultural traits related to cooperative capacity and participatory spirit—frequently classified under the concepts of social capital or civic culture. Regional disparities in the extension of these cultural traits are observable today and those regions which experienced more inclusive institutions in their historical trajectories exhibit today a higher level of these traits. The chapter delves into Spanish history and uses quantitative methods to investigate the causality link. The analysis shows positive results even when controlled for other potential determinants such as the economic prosperity, inequality, human capital or geographic factors. Additionally, the chapter further investigates whether inclusive institutions that are structurally more proximate to the bulk of the population were more able to leave this cultural legacy than those more structurally distant. Chapter 5 defends the importance of coherence between the formal institutional structure and the cultural system for economic and political performance. Specifically it studies for the Spanish regions the comparative effect of those cultural traits presented in Chapter 4 for the practical performance of the open-access institutional system— roughly explained, democracy and market economy. It shows that those regions with a higher presence of these cultural traits exhibit today a better economic and political development and analyzes whether the mechanism that connects the historical events in the regions to current political and economic performance may be cultural. A two-stage least square model, with historical institutions instrumenting the cultural traits, is built obtaining successful results. Chapter 6 carries out an institutionalist analysis of the international regime of liability and compensation for oil pollution damage. It is a basic case of negative externality and 3

of how a governance structure emerges to define property rights and enforce them. This governance structure is built as a consequence of market failures and the derived transaction costs which prevent a Pareto efficient outcome as in the Coase theorem. The international regime provides for a distribution of property rights and enforcement mechanisms, with a system of measurement and compensation of damages. The analysis shows that the system currently contains important limitations, that it faces problems to evolve and that its application achieves an unequal success across countries. This dissertation ends with a concluding chapter that attempts to digest the content of this research and extract some lessons for policy design and future research.

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PART I Theoretical basis of New Institutional Economics

Chapter 1 The New Institutional (and Organizational) Economics

1.1. Introduction What has been identified with the works of Thorstein Veblen, John R. Commons, Wesley C. Mitchell and Clarence E. Ayres as “original institutional economics” emerged at the end of the nineteenth century and flourished during the interwar period of the twentieth century. At that time, it was the dominant economic thought not only in the academy, but also in the realm of economic policymaking. For instance, Mitchell was one of the founders of the National Bureau for Economic Research, and Roosevelt’s New Deal was designed “to a great extent by institutionalists who were the students of Commons and Veblen”(Bush & Tool 2003, p.11). Original institutionalism had thus been strongly implanted in the North American academy prior the WWII, before declining in subsequent years. Nevertheless, according to Malcolm Rutherford (2001, p.186), “for a period from the late 1940s through to about 1970, institutions became almost a prohibited subject within the mainstream of economics”. In any case, institutionalisms did not disappear absolutely, as several variants of institutionalism have continued to arise out of mainstream economics right down to the present time. In parallel with the diverse developments from original institutionalism, in the last four decades institutions have returned to the main research agenda in social sciences, giving rise to a variety of new institutional approaches. This has generated an ongoing research effort at both the theoretical and applied levels on the role and nature of institutions and the process of institutional change. The leading role in this process has been played by the research program of new institutional economics (NIE), whose theoretical body was built upon Ronald Coase’s notion of transaction costs (1937; 1960) and North’s vision of institutions (1990), opening up to the study of the relationships between institutional change and economic performance (Alston et al. 1996; Caballero & Kingston 2005). Recent contributions have led to substantial progress on how institutions should be 7

understood and analyzed, particularly via the surpassing of the weak points of the previous rational-choice institutionalism. In this way, the research program on institutional change has occupied a growing role in the research agenda of economics (Kingston & Caballero 2009). This chapter provides a brief overview on institutional economics from the original and the new institutional economics standpoints. Since new institutional economics emerged from orthodox neoclassical economics and the original tradition relies on alternative theoretical foundations, important differences existed at the beginnings of the life of new institutional economics. In recent years, however, there have emerged several NIE contributions that approached both traditions (Greif 2006; Groenewegen et al. 1995; Hodgson 1998; North 2005; Caballero & Soto-Oñate 2015). The New Institutional Economics (NIE) studies the institutions, how they interact with the organizational arrangements and how they are linked to the outcomes of the economic, political and social game. The Nobel laureate Douglass C. North defined institutions as “the rules of the game in a society or, more formally, are the humanly devised constraints that shape human interaction” (North 1990b, p.3). This conception of institutions embrace formal devises, such as constitutions or laws, but also informal, such as traditions or social norms. Institutions configure a system of incentives within which the actors make decisions. In this sense, they structure human conduct in its relations with the social realm. According to Avner Greif, “[t]he organization of a society -its economic, legal, political, social, and moral enforcement institutions, together with its social constructs and information transmission and coordination mechanisms-profoundly affects its economic performance and growth. It determines the cost of various feasible actions as well as wealth distribution” (Greif 1994, p.913). This institutional framework determinately affects thus the economic development of nations. Another fundamental element for the NIE is the organization or organism (Williamson 2002). Organizations include political—political parties, parliaments, regulatory commissions, etc.—, economic—firms, labor unions, cooperatives, etc.—or social bodies—NGOs, clubs, etc. They are groups of individuals linked by a common identity and oriented towards certain objectives. What kind of organizations emerge and how they evolve “are fundamentally influenced by the institutional framework” (North 1990b, p.5). The increasing recognition of the organizational thought within the NIE has 8

been materialized in the recent change of name of the Society for New Institutional Economics (SNIE), which has turned to Society for Institutional & Organizational Economics (SIOE). The NIE grew from and within conventional economics, but, without abandoning the basis of Marshallian economics, developed important theoretical reforms driven by its own critique of the orthodox economics. The criticism made by the authors inspired the development of new categories that shift the focus of the analysis. The transaction was placed as the starting point and other fundamental concepts were introduced, such as transaction costs, governance structures, institutions or enforcement mechanisms. This institutional turn in economics meant a shift from the neoclassical economics. Economic development is no longer seen as a simple process of capital accumulation, but rather as a “process of organizational change”(Hoff & Stiglitz 2001, p.389). This leads institutionalists to concern about institutional design, transformation and persistence over time. They begin to pay much more attention to the political process, the distribution of power, the conflicting interests and the rest of the social variables that may favor or hinder institutional change towards a more economically-enhancing setting. Institutional change shapes the way societies evolve over time, which make it “the key to understanding historical change”(North 1990b, p.3). This chapter proceeds as follows. Next section briefly reviews the foundations of original institutional economics, its conception of institutions and their change over time. Section 3 explains the NIE’s criticism to orthodox economics and presents its theoretical body. Section 4 reveals the importance of institutions for development. In Section 5, institutional change is placed as a fundamental element to understand economic development. Section 6 presents recent integrative theoretical proposals to explain in institutional terms the social organization and its process of change. Section 7 focuses on the recent advances of the NIE that meant an approach to original institutionalism. The final section concludes the chapter with some reflections on the current limitations of the NIE and its challenges for the future.

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1.2. Original Institutional Economics1 At the end of nineteenth and early twentieth centuries, several North American economists –including Veblen, Commons, Mitchell, and Ayres– propelled the paradigm of economic institutionalism, which was an alternative to neoclassical economics. The term “institutional economics” was coined by Walton H. Hamilton (1919) in his article “The Institutional Approach to Economic Theory”. He formulated some aspects that represent institutional thought to this day. He structured these aspects as five summary points, positing that economic theory (i) should unify economic science, (ii) should be relevant to the modern problem of control, (iii) must be concerned with matters of process, (iv) must be based upon an acceptable theory of human behavior, and (v) has institutions as its proper subject matter. This “original” institutional economics did not limit human behavior as the homo economicus model did, but assumed a broader approach to the psychological nature of the individual. While the marginal revolution was based on methodological individualism –the importance of efficiency and the study of exchange, original institutionalism assumed a holistic method of analysis. In this way, an economy was analyzed as an open and dynamic system in which the emphasis was not on the notion of equilibrium, but on that of process. Habits, institutions, and coercive relationships were indicated as the key elements underlying economic performance, and a behavioral and collective approach that is distant from formalism was assumed, additionally rejecting the criterion of individual wellbeing (Rutherford 1994; Caballero & SotoOñate 2015)2. Original institutionalism did not represent a single unified body of thought, methodology, or research program. We can distinguish at least two relevant research programs. The first research program is associated with the works of Veblen and Ayres, who provided the foundations for the instrumental value theory—discussed below—and the fundamental dichotomy between the business aspects and the industrial aspects of the economy. The second program is associated with the works of Commons, who concentrated on law, property rights, and organizations, including their evolution and

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Some of the arguments contained in this section have been previously published in Caballero & SotoOñate (2015). 2 Ayres (1918, 1944), Commons (1897, 1924, 1934), Mitchell (1910, 1913), or Veblen (1899, 1914, 1919) are representative of the approach of original institutionalism.

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impact on legal and economic power, economic transactions, and distribution of income (Rutherford 1994). The first research program of original institutionalism can especially be traced to the seminal work of Veblen. Veblen was aware of the need to treat economics as an evolutionary science –as opposed to the ahistorical formulations of the orthodox neoclassical school– and proposed to see the economy as a process of “cumulative causation”. He claimed that “an evolutionary economics must be the theory of a process of cultural growth as determined by the economic interest, a theory of a cumulative sequence of economic institutions stated in terms of the process itself … The economic interest goes with men through life, and it goes with the race throughout its process of cultural development” (Veblen 1898, p.393). Thus, Veblen rejected the neoclassical formulation of the homo oeconomicus, “who oscillates like a homogeneous globule of desire of happiness under the impulse of stimuli that shift him about the area, but leave him intact. He has neither antecedent nor consequence” (Veblen 1898, p.389). He considered instead that “the economic life history of the individual is a cumulative process of adaptation of means to ends that cumulatively change as the process goes on, both the agent and his environment being at any point the outcome of the past process” (Veblen 1898, p.391). From an institutional perspective, individuals are at once both products and producers of culture (Tool 1986, p.6). As Geoffrey M. Hodgson puts it, “most institutions are temporally prior to the individuals that relate to them. We are all born into and socialized within a world of institutions. Recognizing this, institutionalists focus on the specific features of specific institutions, rather than building a general and ahistorical model of the individual agent” (Hodgson 1998, p.172). This institutional tradition considered the economic action to be to a great extent habitbased. Hodgson defined habit as “a largely non-deliberative and self-actuating propensity to engage in a previously adopted pattern of behavior” (Hodgson 1998, p.178). For this reason, habit was broadly considered an important concept for understanding the nature of institutions. Veblen (Veblen 1919, p.239) considered institutions as “settled habits of thought common to the generality of men”. Wesley C. Mitchell (Mitchell 1924, p.373) claimed that institution is “merely a convenient term for the more important among the widely prevalent, highly standardized social habits”. Walton Hamilton (Hamilton 1932, p.84) saw an institution as “a way of thought or

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action of some prevalence and permanence, which is embedded in the habits of a group or the custom of a people”3. Regarding the second research program in original institutionalism, John R. Commons’s theory of institutions was built on notions, such as transactions, organizations, and working rules. It focuses on the evolution of customs and practices on the part of individuals, and concedes a key role to legislatures and courts when studying the set of working rules changing over time 4 . According to Hodgson (2003, p.91), Commons argued that economic phenomena were the result of artificial selection and not natural selection, although he could not explain the causal mechanisms behind artificial selection. In artificial selection, humans manipulate the criteria or environment of selection, but it has been argued that artificial selection is not an alternative to natural selection because “the dispositions, aims, and criteria that the human uses in selecting specimens for artificial selection are also the products of processes of cognitive and cultural evolution” (Hodgson 2002, p.267). In contrast with Veblen, Commons did not consider technological advance so important, and he focused on the resolution of conflicts of interest. “In the most general of terms, the artificial selection occurs as the outcome of a continuing process of conflict resolution” (Rutherford 1994, p.103).

1.2.1. The Instrumental Value Theory5 Most original institutionalists regard instrumental value theory as the best developed theory of institutional change. This theory has been developed in the seminal works of Clarence E. Ayres (1944), J. Fagg Foster (1981), Marc R. Tool (1986), and Paul D. Bush (1987). Ayres introduced the so-called instrumental value theory, an adaptation of the instrumentalist philosophy of the pragmatist John Dewey to Veblenian ideas, and this theory implied relevant contributions on institutions and institutional change. Foster (1981, p.908) considered an institution as a set of socially “prescribed patterns of correlated behavior”. Later, Bush (1987) analytically decomposed this definition and developed it further. The expression “socially prescribed” reflects the institutionalist’s 3

For a comprehensive review of the original institutionalists’ conception of institutions, see W.C. Neale (1987). 4 In this sense, some works have criticized Commons for failing to give sufficient emphasis to extralegal institutions, extralegal self-organization, or spontaneous orders that do not involve legal rules (Hodgson 2003b). 5 Some of the arguments contained in this section have been previously published in Caballero & SotoOñate (2015).

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view of human nature: “While it is entirely possible for human behavior to exhibit random characteristics, institutionalists argue that all behavior within a community is ultimately subject to social prescriptions or proscriptions. … Throughout one’s life, the process of habit formation is the mechanism by which socially prescribed behavior is internalized. While some habits may be learned only through conscious effort, most habit formation is probably unconscious” (Bush 1987, p.1077). Bush remarks two issues about the term “patterns of correlated behavior”: (i) behavior within an institution is not random, but purposeful and correlated; and (ii) “values” function as the “correlators” of behavior within and among patterns of behavior. Values are the standards of judgment by which behavior is correlated. A philosophy of value is thus crucial since all institutional change must entail, as Bush (1987) claimed, a change in the value structure of the institution. This is another important point of disagreement with orthodox economics: As the value system has a central role in the structure and change of institutions, the study of institutions is “inherently normative” for original economic institutionalism (Bush 1987). As noted above, the original institutional approach to the study of the value system relies ultimately on the works of Veblen and Dewey, but specifically on the integration and refinement that Ayres made of the formers’ thought. Veblen distinguished between the invidious and non-invidious aspects of culture: “The non-invidious cultural factors contain within them the dynamic technological/social forces that give rise to institutional change. The invidious cultural factors, on the other hand, retard those technological innovations and institutional changes that are perceived to threaten existing patterns of status power. … The non-invidious practices of the community auger for institutional change, whereas the invidious practices of the community tend to defend the status quo” (Bush & Tool 2003, p.18). Ayres realized that this so-called “Veblen’s dichotomy” “implied a conception of valuation that bore a remarkable resemblance to John Dewey’s theory of ‘instrumental’ valuation”(Bush & Tool 2003, p.19) 6. According to Tool (1977, p.43) “the locus of social value for Ayres is the social process, more particularly, the ‘technological continuum’ of that process”. This technological continuum is based on Dewey’s (1938) continuum of inquiry, and it is related to the process of increasing factual knowledge 6

See Hickerson (1987) for a deeper overview of instrumental valuation in original institutional economics.

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(Rutherford 1981). It is a continuum in the sense that past knowledge or technology is incorporated into the technological process to develop further technology. This is completely consistent with the evolutionary view of human history. Values must be consistent with the instrumental logic of this technological continuum: “When we judge a thing to be good or bad, or an action to be right or wrong, what we mean is that, in our opinion, the thing or act in question will, or will not, serve to advance the life process insofar as we can envision it”(Ayres 1961, p.113). Nowadays, “instrumental” and “ceremonial” are more common words to designate the non-invidious and invidious cultural factors, respectively, and make reference specifically to social values. As Bush put it, “instrumental values correlate behavior by providing the standards of judgment by which tools and skills are employed in the application of evidentially warranted knowledge to the problem-solving processes of the community”. On the other hand, “ceremonial values correlate behavior within the institution by providing the standards of judgment for invidious distinctions, which prescribe status, differential privileges, and master-servant relationships, and warrant the exercise of power by one social class over another” (Bush 1987, p.1079). Ayres (1944) considered that “social progress occurs when a society is able to increase its reliance on instrumentally warranted patterns of behavior in its problem-solving processes (Bush & Tool 2003, p.23). Therefore, “progressive institutional change” implies the substitution of instrumentally warranted patterns of behavior for ceremonially warranted patterns of behavior (Bush 1987). Tool (1979, p.293) defined social progress as the change that “provides for the continuity of human life and the non-invidious re-creation of community through the instrumental use of knowledge”. By recreation of community he meant “reconstituting the structural fabric of that social order by utilizing effectively the stock of human wisdom” (Tool 1977, p.842). This theory considers the “technological dynamic” as the basic evolutionary force for social change. In Bush’s (1987, p.1080) analytical language, “[t]he problem-solving processes of the community, being dependent on the processes of inquiry and technological change, are inherently dynamic, requiring changes in habits of thought and behavior. As new patterns of behavior are required to accommodate the absorption and diffusion of new technology, instrumentally warranted patterns of behavior must change accordingly; and this requires changes in the instrumental values that correlate such behavior”. 14

It is important to point out, however, that this institutional theoretical tradition did not consider social evolution to be necessarily a force of progress. Institutional change can also be “regressive”. This occurs when the ceremonial dominance increases—i.e., when there is a displacement of instrumentally warranted values by ceremonially warranted values. Veblen (Veblen 1914, p.25) recalled the many episodes in history of “triumph of imbecile institutions over life and culture”—episodes, when the direction of institutional change hindered or blocked the technological continuum. Another feature of this institutionalist thought is that the evolutionary process is discretionary: “Socially prescribed behavior arises from social choices and the critical history of any culture is the story of how these choices evolved in the life experience of the community. … [I]nstitutional change is discretionary precisely because all social prescriptions are the outcomes of conscious choices made at some point in the life history of the culture” (Bush 1987, p.1077). In this institutional tradition, any definition of social progress or categorization of institutions brings an implicit idea of value. In the concept of progress expressed by Tool (1979), this is particularly evident. All these authors, from Veblen to Tool, developed the political implications that come derived from their criteria of social value and advocated the adequacy of the democratic ideal for the continuum of progress. Bush (Bush 1987, p.1108) considers that the contributions of Tool imply that “[t]he social value that emerges in this theory of institutional change has the greatest potential for successful application within a democracy polity. Those habits of thought that make instrumental valuing possible are most likely to be nurtured in a system of democratic self-government”. Tool (Tool 1986, pp.25–26) proposed three reasons why democratic self-governance has the greatest potential to lead to social progress: (i) democracy “encourages the development of distinctively human potentialities for creative and reflective use of the mind”; (ii) it “engenders an experimental approach to social change”; and (iii) “self-rule generates consequences that must be endured, a democratic public becomes increasingly self-conscious about the character of the value theory it employs”. Since then, outstanding contributions have further developed this theoretical tradition, permitting a deeper logical treatment of institutional change. In this sense, it is noteworthy to mention the attempt by Wolfram Elsner (2012) to bridge Bush’s (1987) analytical proposal of institutional change and evolutionary-institutionally interpreted 15

game theory. That paper formally modelized the dynamics of institutional change, opening up a promising field for cross-fertilization between both areas. Other contributions that deserve attention are the “social fabric matrix” approach (Hayden 1982, 2006) and the institutional dynamics (Radzicki 1988), both highly technical approaches for institutional and policy analysis.

1.3. New Institutional Economics: The emergence of a new theoretical corpus Here the research program of the NIE is presented through some of its most important authors, their critiques to neoclassical economics and their reform proposals. The analytical framework of NIE is a modification of neoclassical theory that conserves the basic assumptions of scarcity and competition and relevant elements of the approach of microeconomic theory, but relaxes the assumption of perfect rationality and adds the dimension of time (North 1994a). During its beginnings, it assumed methodological individualism, was centered in efficiency matters, and emerged from a model of exchange (Toboso 1997). NIE arose as an attempt to extend neoclassical theory toward the explanation of factors traditionally taken as exogenous in the economic mainstream, not as an attempt to replace the standard theory—which was the case of traditional economic institutionalism (Rutherford 2001). In fact, the new institutional economics did not consider original institutionalism to be its precursor (Coase 1984). In the NIE’s early critique of orthodox economics, which helps to stablish its foundations, we can find the necessity to transform the notion of the individual —they no longer assume those perfectly rational individuals with complete information—and to shift the focus to transactions, though without fully abandoning methodological individualism and rational choice. In the first place, the real scenario claimed by the NIE does not have zero transaction costs. Transaction costs derive from the actors’ incomplete and asymmetric information, the positive externalities of group production, and market power (Miller 1992). These ubiquitous factors form a system in which some actors may find incentives for opportunism and its counterparts the need to protect themselves against it. Transaction costs are the costs of measuring and enforcing agreements (North 1990a, p.362). They materialize in a wide variety of forms and can be classified as ex ante costs, those 16

derived by the establishment of the contract—information searching, bargaining, designing the agreement, etc.—, and ex post, those generated by the enforcement of the agreement (Eggertsson 1990). Their incidence for the practical performance of the market could be formulated as friction in physics. In The Nature of the Firm, Ronald Coase (1937) wondered why firms exist in a specialized market economy. If, in the neoclassical world, the price mechanism is sufficient to efficiently coordinate production and allocate resources, what is then the need for such a hierarchical organizational structure like the firm? With the tacit assumption of zero transaction costs, there exists no need for this type of organization. When Coase introduces the notion of positive transaction costs—i.e. that the use of the market mechanism is expensive—this organization finds its rationale. Companies emerge as a way to mitigate transaction costs, as an economizing organization. The structure of transaction costs in the environment will determine in the coasean world both the existence and the scope or size of the company. If firms were treated by orthodoxy as opaque boxes that transform inputs into outputs with accordance to the laws of technology—like a production function—, after this turn, firms are considered as governance structures and are susceptible of being analyzed as economizing organizations that manage transactions. In Coase’s words, “If the costs of making an exchange are greater than the gains which that exchange would bring, that exchange would not take place and the greater production that would flow from specialisation would not be realised. In this way, transaction costs affect not only contractual arrangements but also what goods and services are produced. Not to include transaction costs in the theory leaves many aspects of the working of the economic system unexplained, including the emergence of the firm, but much else besides” (Coase 1992, p.716). Following the same logic of The Nature of the Firm (Coase 1937), Coase faced the case of externalities with The Problem of Social Cost (Coase 1960). The dominant discourse in economics about social cost revolved around the Pigouvian conclusion, which stated that the action of the State was necessary to prevent that the action of some actors could harm others. In turn, Coase argued that in a world with zero transaction costs, actors would come to agreements that would led to Paretian efficiency regardless of the initial allocation of property rights and court judgments. In this scenario, the Pigou solution is unnecessary. However, the existence of positive transaction costs gives meaning to the 17

Pigouvian thesis and makes the distribution of property rights, the legal system and the actions of governments relevant to efficiency and well-being. What are actually exchanged in the markets are not physical entities but property rights, and it is the legal systems which establish them. To Coase (1992), “it makes little sense for economists to discuss the process of exchange without specifying the institutional setting within which the trading takes place since this affects the incentives to produce and the costs of transacting”. With these two articles, Coase claimed the importance for the economic system of what he came to call the “institutional structure of production” (Coase 1992). As argued above, if previously—orthodox—economics had been understood as a science of choice7, the NIE focused since its beginnings on the transaction as the unit of analysis. Oliver Williamson (2002) recommends considering economics not only as a science of choice but also as a science of contract, especially when facing the organizational reality. To the extent that economics is a science of contract, it becomes more interested both in its design and establishment and in its governance once established. Precisely because of the previous warnings—asymmetric information, market power, opportunism, etc.—, it follows that all contracts are inevitably incomplete. The contracting parties will be forced to adapt to unforeseen disturbances in the original contract and this requires governance structures. By governance structure he refers to the institutional framework within which the integrity of the transaction is decided. The wide taxonomy of transactions with different attributes and associated costs, along with the fact that the different governance structures also have different competencies, virtues and costs, require for transactions to be aligned with appropriate governance structures (Williamson 2002). To do this, it is necessary to know the critical dimensions of transactions that are associated with the distinctive costs and the economizing properties of the governance structures. He attempted to identify for each abstract description of a transaction the most economical governance structure and proposed three dimensions that are critical for characterizing transactions: uncertainty, the frequency with which transactions recur and the degree to which transaction-specific investments are involved (Williamson 1979). Williamson devoted much of his work to establishing the foundations of the NIE for governance structures and providing answers to why organizations emerge and decide

7

As posed in the Lionel Robbins’s (1932, p.16) definition, “[e]conomics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses”.

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to take charge of activities—integrating vertically—rather than commissioning them through the market mechanisms (Williamson 1975, 1985, 1996, 1971). To develop any coordinated activity, Williamson considers two main alternatives: markets and hierarchies. Later, he studied hybrid formulas and agencies as organizational forms to mitigate transaction costs. This opens the black box of the neoclassical firm and shows that companies have an internal structure, which must emerge for some reason and that reason has more to do with transaction costs than with technological issues. For the NIE, the firm is a governance structure. Institutions affect the levels and types of transaction costs and, therefore, the transactions that are carried out, the type of organizations, and, ultimately, the productive structure of a society. Insofar as institutions are fundamental elements, the NIE is inexorably interested in their formal design and, by extension, in the political system, within which they are shaped. Even a new distinctive research program called Transaction Cost Politics 8 , which studies the political transactions, the role of transaction costs and institutions and the governance structure that are established. Williamson (2000) acknowledged that we are still very ignorant about institutions and that we tend to focus on partial mechanisms rather than on general theories capable of dealing with all the social reality. He intends to extend the institutional analysis to the social organization and present a decomposition of four levels of social analysis: 1. Social embeddedness. It consists of informal institutions, values, beliefs, etc. Individuals, organizations, most formal institutions and their own social, political and economic operations are embedded in this sociocultural environment and are intensely conditioned by it. Its transformation is very slow and its origin and shape are rather spontaneous and do not necessarily respond to conscious deliberations: they are the result of historical experiences. Some components of this environment respond to functional criteria and others are strictly symbolic and ceremonial. 2. Formal institutional environment. It consists of property rights, constitutions, legal framework, judicial system, etc. Although they have a strong evolutionary

8

See Caballero and Soto-Oñate (2016) for a review of this research program.

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component they do respond more to human discretion, being consciously design and transformed. 3. Institutions of governance. This is what Williamson considers the game itself, where actors realize the exchanges and are obligated to recur to governance structures such as organizations and simpler contract relations to cope with transaction costs. It is a key level for Transaction Cost Economics. 4. Resource allocation and employment, where the price mechanism operates. This level is the realm of neoclassical economics and agency theory. While the first level has been more typical of social theory and the fourth level of the more orthodox neoclassical formal economics, the new institutional economics has dealt with the intermediate levels 2 and 3. As Williamson says, the first level is usually taken as given by the economists of the NIE, something that will change over the years. Elinor Ostrom, who shared the 2009 Nobel Prize in Economics with Williamson, made progress in analyzing governance and is particularly dedicated to the management of common-pool resources (Ostrom 1990). Much of her work deals with the overcoming of the tragedy of commons and other problems of collective action and demonstrates how local communities are able to manage the sustainability of the common resource more efficiently and consciously than markets or the state (Ostrom 2000a). She studies the conditions that make it possible. Along with her collaborators she develops theoretical tools to address the systematic analysis of multitude of social phenomena. The most known is the framework of Institutional Analysis and Development (AID), which integrates objects of study, categories and professionals from different traditions of social sciences. It focuses on the microdynamics of the institutional frameworks and devotes a substantial effort to formal modelling and the integration of contextual factors, such as social norms, legitimacy, trust among the actors, distribution of power, etc. Besides, she actively contributed to the development of the concept of social capital from its beginnings (Ostrom 1995, 2000b; Ostrom & Ahn 2003), which is, from her perspective, a complex of elements of fundamental transcendence for the performance of a community in the management of its pool resources. North devoted an important part of his work to the role of institutions in the historical development of modern capitalism in western economies. He considered that institutional change shapes the way societies evolve through time, and that a theory of institutional change was essential for further progress in social sciences and particularly 20

in economics (North 1990b). Until recent decades, mainstream economics has been focused on static situations, however, understanding the process of economic change requires the study of the dynamics of institutional change (North 2005). The study of economic change over time cannot be based on purely economic factors. It has been the historical outcome of demographic change, changes in the stock of knowledge in the human command over nature and institutional changes. Therefore, a theory of economic change must be able to address the demographic, technological and institutional changes. His work was mainly focused on the latter. The institutional structure in the northian sense provides a system of incentives for human behavior, favoring and penalizing certain actions. Institutions thus affect such apparently diverse phenomena as human motivation, uncertainty, transaction costs, the existence and size of organizations, the distribution of resources, the structure of production, and the aggregate economic performance. To North (1981), a theory of institutions must be based on three pillars: A theory of property rights, which defines the incentives of individuals and groups; a theory of the State, which specifies and enforces property rights; and a theory on ideology, which explains how specific perceptions of reality affect the way individuals respond to objective reality. One of the most important elements for economic development according to North is the proper definition and enforcement of property rights. He regrets the absence of the State in orthodox reasoning and proposes to reintroduce it as a determining factor for economic development. The State is not necessarily a benefactor that develops a public policy oriented to the collective good. In both the firm (Miller 1992, p.25) and the state (North 1990b) there is often a conflict between Pareto efficiency and the individual maximizing behavior of decision makers. A multitude of internal components and actors act with their own dynamics and agendas, generating a different outcome than the optimum. This is why concepts such as executive constraints and elite control mechanisms that reinforce the credibility of commitments are so crucial. He opposed the predatory state to the contractual state (North 1981), and later, along with his collaborators, defined the more sophisticated concepts of limited access and open access social order (North et al. 2009). The transition from one regime to another occupied much of the interest and work of North (North & Weingast 1989; North 1994b; North et al. 2009; North et al. 2013).

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In his work Structure and Change in Economic History (North 1981), he already pointed out the necessity for a theory of ideology and in subsequent works he devoted himself to demonstrate and reform the excessively restrictive conception that rational choice had of the individual (North 1990b, 2005; Denzau & North 1994). The northian individual may have incomplete and wrong mental models and is able of being driven by motivations other than self-interest—altruism, morality, group goals, etc. The NIE was able to displace part of the agenda of mainstream economics by proposing new theories to deal with human behavior, firms and organizations in general, the state or the economic structure of a society and its transformation over time. In doing this, it also created a space of understanding with the rest of social sciences, finding its main aperture in the concept of institution.

1.4. Institutions and economic development The origin of the wealth and poverty of nations is the object of study par excellence for political economy 9 . In dealing here with the question of the origin of economic disparities, we must depart from an idea that has already become a commonplace: the accumulation of technology and factors of production “are not causes of growth, they are growth” (North & Thomas 1973); or just immediate causes of growth (Acemoglu et al. 2005; Rodrik 2003b). The analysis of the origin must be directed to what have come to be described as the deep or fundamental causes of economic development. This debate tries to explain the countries’ entry into—and exit from—paths of accumulation of technology and factors of production. Acemoglu, Johnson and Robinson (2005) distinguished three main hypotheses about the fundamental causes: geography, institutions and culture. The latter two argue that international economic inequality can be explained in a large part by differences in elements of human organization, as opposed to the geographical hypothesis that places the origin in environmental variables. They are presented separately below.

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Malthus in a letter to Ricardo in 1817. Cited in Landes (1998).

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1.4.1. Geography The geographical hypothesis emphasizes “differences in geography, climate and ecology that determine both the preferences and the opportunity set of individual economic agents in different societies” (Acemoglu et al. 2005, p.399). Other interesting arguments can be found in the works of David S. Landes (1998) and Jared Diamond (1997), but perhaps the most handled empirical papers are those by Sachs and his collaborators (Sachs 2001; Gallup et al. 1999). They understand that natural endowments gave rise to a key original distribution that was replicated and accused by means of agglomeration dynamics (Krugman 1991) or a subsequent concentration of geopolitical power. However, institutionalists have found alternative explanations based on institutional factors.

1.4.2. Institutions According to this perspective, economists analyze societies focusing on the way in which they are organized. Some are better organized to uphold the rule of law, promote investment in mechanization, human capital, and better technologies, facilitate broad citizen participation in economic and political life, and support market transactions (Acemoglu et al. 2006). In this way, the institutional framework configures a more or less adequate incentive system for accumulation. It is understood that this institutional framework would evolve path-dependently; that is, dependent on its own trajectory, with past institutions conditioning the evolution of subsequent reforms. This is how history conditions the form of the institutional structure of a society and, with it, its economic development. This is fundamental to understand the enormous dependence of the current economies on their past and legitimates an explanation of the current global economic distribution based on historical origins and path-dependent trajectories. In order to illustrate this explanation, it would be useful to recall the work of Acemoglu, Johnson and Robinson (2001). Following previous empirical studies that also dealt with the purely geographical explanation (Hall & Jones 1999; Sokoloff & Engerman 2000), they analyzed the case of colonized countries. They argued that the different development patterns across these nations were related to the form in which their colonization process took place and the original institutions that were established. In their approach, the mode of colonization laid the foundations of an initial institutional construction that would condition its evolution for centuries. They use as a reference the 23

settler mortality, mainly due to malaria and yellow fever. Those places with a high mortality—tropical zones, closer to the equator—dissuaded the colonizers from the idea of settling and they mainly established themselves in places with lesser pathological threat—temperate zones. The settlers demanded to the metropolis similar—civil, economic, and political—institutions to those they enjoyed in their places of origin. These institutions were much more inclusive than those established in the colonies where there was no settlement of this type. Where there were no settlements, they sat extractive institutions. The main objective of the extractive states was to transfer resources from the colonies to the colonizers. Based upon this perspective of path dependence, it is understood that the current institutional framework is—in an uncertain part—conditioned by those initial institutions of the colonial period. Tropical diseases prevented the settlement of population from the metropolis that could demand the rights of their places of origin and prevent the establishment of extractive institutions. In this explanation, geographic factors play a merely circumstantial role. However, empirically, a certain conditioning of geography in the economic destiny cannot be ruled out. A broad empirical scientific production supports this institutional hypothesis (Knack & Keefer 1995; Mauro 1995; Djankov et al. 2006; Rodrik et al. 2004). However, this narrative has been fundamentally focused on formal institutions, leaving aside the informal ones and especially has tended to take as a measure of institutional inclusiveness the protection of private property or the risk of expropriation in the countries.

1.4.3. Culture However, formal institutions do not seem to be sufficient to fully explain political and economic performance; sometimes, not even their own persistence. Institutionalists themselves point out that informal institutions are of fundamental importance for economic destiny, but for operational reasons always end up focusing on formal institutions (North 1990b). When talking here about culture, I refer to informal institutions—social norms, traditions, etc.—plus something else: all the cultural beliefs, values, attitudes, etc.

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A recent and growing body of research dealing with the persistent cultural legacy of past political experiences questions the role of formal institutions as the persistence factor and as the only organizational element that effectively affects economic performance. These works suggest that the component of persistence from such a distant past is charged by the system of beliefs, values and attitudes imprinted in the culture of the society. In fact, culture is increasingly regarded as the missing link between historical institutions and current economic development (Guiso et al. 2011). This has been proposed empirically through natural experiments that study the effect of culture in cases where it can be seen isolated from the effect of formal institutions. A key work is the well-known Making Democracy Work (Putnam et al. 1993), which triggered an explosion of scientific research in all branches of the social sciences. It showed that unorthodox economic factors have led to the astonishing systematic differences between the northern and southern regions of Italy in terms of political and economic performance. These factors were popularized under the term social capital, which condense a series of social resources such as generalized interpersonal trust, generalized morality, ease of cooperation, civic values, orientation towards political affairs, horizontal networks, etc. It is argued in this and other works—for example, Guiso et al. (2008)—that these different levels of social capital are due to the radically different political histories that experienced the northern and southern regions in the Middle Ages. While the highly centralized, hierarchical and authoritarian system imposed after the Norman invasion prevailed in the south, free city-states survived in the north. In the latter, the common population had a greater capacity to influence political decisions. Although it did not enjoy the mechanisms that characterize today’s democratic systems, there were other forms of pressure and control of elites that allowed for a regime with a broader set of civil, political and economic rights. These different political experiences allowed the development of different cultural systems, whose trajectories transcended even after the Italian unification. The unification process integrated the regions under the same nation-state and the same formal institutional framework. It is understood that this broad set of social resources made the same political and economic institutions perform differently. Those regions with higher levels of social capital achieved better economic and political performance. Guido Tabellini (2010) deepened on this perspective and empirically applied it to the regions of five European countries that have experienced different historical political 25

systems but are now integrated under the same national institutional framework. He found that those regions that comparatively enjoyed better political institutions between 1600 and 1850—measured by the level of political and constitutional constraints on the executive—show higher levels of these positive cultural traits and are now achieving better economic and administrative performance. However, the informal components of the social organizations are not only cultural. These values, believes and attitudes are not detachable from the features of the material structure of society—social polarization, distribution of power, horizontality-verticality of the relations, etc. These resources that are included under the diffuse umbrella of social capital appear in comparatively more horizontal social structures (Putnam et al. 1993).

1.4.4. Lessons on the fundamental causes of development At least, three main lessons are worthy to remark: 1. Sustained economic development in the long run is closely linked to the way societies are organized. Although the power of human organization now surpasses the strength of a hypothetical geographical determinism, this does not mean that geographical factors do not have a direct effect on economic performance. 2. Both formal—legal framework and enforcement mechanisms—and informal— culture, distribution of de facto power— aspects of the social organization are crucial to understanding why societies enter, remain or leave the path of accumulation. 3. There is a powerful feedback relationship between these elements that makes it difficult to draw conclusions of causality. Chapter 3 will deal with the relationship between culture, institutions and economic and political development.

1.5. Institutional change in the NIE If we knew for sure what is fundamental to deepen the economic development of a country, would a transformation towards this new institutional scenario be feasible and simple?

In a pre-Coasean world—in the purest style of rational choice

institutionalism—a change in preferences or relative prices would promote an

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institutional change towards the most efficient solutions10 (North 1990b). However, that pattern is not empirically representative. North paid special attention to the cases of societies with low economic performance and wondered what made them persist with such poor performance in the long run. According to North, “there are two forces shaping the path of institutional change: increasing returns and imperfect markets characterized by significant transaction costs” (North 1990b, p.95). This gives rise to the phenomenon known as institutional path-dependence, that by which future institutional developments are conditioned by the arrangements of the past. This is how history conditions the evolution of institutional structures and can bind societies in paths of low economic performance. In this manner, the institutional framework not only determines the current economic results, but also delimits the set of opportunities that affect future situations. Consequently, NIE considers that the processes of institutional change are generally incremental due to increasing returns11. This is because change is heavily weighted in favor of transformations that are broadly consistent with the basic institutional framework. Nevertheless, NIE recognizes that there are cases in which discontinuous institutional changes determinately shifted the path of history (Caballero & Soto-Oñate 2015). In earlier work, North located the institutional framework at the center of the economic analysis, showing that institutions that encouraged stagnation or decline could persist, and that persistence sinks its roots in the human environment and in the ways in which individuals interpreted their environment. In his work Understanding the process of economic change (2005), he progressed further in the analysis of how humans understand and act in relation to social change. This work meant an extension of the NIE toward cognitive science by introducing culture and beliefs into the heart of the analysis of institutional change, thereby pointing out the relevance of context-dependent and historically-specific explanations. The distinction between formal and informal norms becomes crucial to study institutional persistence. Roland (2004) contrasts slow-moving institutions, identified fundamentally with what can be classified as culture, to the fast-moving institutions, which are the most superficial and formal institutions, much more malleable and 10

In this context, the term efficient is used to denote an institutional framework that favors economic development by optimizing the performance of the resources available to a society. 11 See Paul Pierson (2000) for an analytical explanation of path-dependence grounded in dynamics of increasing returns.

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volatile. As slow-moving institutions are part of the conditions of possibility for the survival of institutional innovations, they generally delay the transformation of the entire institutional fabric. It is similar to the perspective of other relevant authors, such as Alejandro Portes (2006), who presents the deepest components of society, such as values or power, as factors of persistence that determine path-dependence. The concrete configuration of the new institutional design can be materialized through an endogenous process, formed from within the system, or through the importation of successful solutions generated in other systems. The latter is the case of so-called institutional transplants—i.e. the insertion of institutional components that were developed in other contexts—and have been extensively addressed by the NIE. The position of the NIE is that the conclusions derived from positive institutional arrangements cannot be simply extrapolated from one economy to another. The potential conflict of imported institutions with the preexisting ones can bring about unforeseen outcomes (Berkowitz et al. 2003; Brousseau et al. 2011). Nations “often attempt to import social technologies through institutional transplants but such attempts frequently fail because of imperfect knowledge about the properties of the institutional matrix” (Eggertsson 2005). Institutional transplants need to take into account the coherence of the new element with the rest of the system. Chapter 3 will delve into institutional coherence, not only to prevent its collapse and ensure its survival, but also for its functionality and performance. Two main families of new institutional theories can be distinguished (Greif & Kingston 2011; Caballero & Soto-Oñate 2015): the “institutions-as-rules” approach and the “institutions-as-equilibria” approach. In the first of them, related to the Northian tradition (North 1990b), institutions are considered as rules imposed on individuals and the focus is on the strategic games among elites that aim to promote or block new rules. The “institutions-as-rules” approach assumes that rules are exogenously shaped by the hierarchical order, the enforcement of the rules is considered a distinct issue from the design and content of the rules themselves, and institutional change is about modifying the rules. The competition among actors for changing or preserving institutions becomes, therefore, a crucial point in this approach. According to the other one, more proximate to Masahiko Aoki (2001, 2007) and Avner Greif (1998, 2006), the aggregated expectations about others’ conduct may bring about 28

“institutionalized” regularities of behavior. In this way, an institution is “a system of rules, beliefs, norms, and organizations that together generate a regularity of (social) behavior” (Greif 2006). Under this approach, the study of institutional change focuses on the dynamics that shift an institutional equilibrium. This approach provides an analytical formulation in a game-theoretic fashion and conceives an institution as “spontaneously and/or endogenously shaped and sustained in the repeated operational plays of the game itself” (Aoki 2007, p.2). Greif and collaborators (Greif & Laitin 2004; Greif 2006) elaborated a theoretical framework that deepens in the understanding of institutional change by accounting for the relevant micro-mechanisms and introduced the concepts of quasi-parameters and institutional reinforcement: “If self-enforcing outcomes affect the values of one or more parameters supporting the observed equilibrium in a manner that would lead only to long-term behavioral change, these parameters are best reclassified as quasi-parameters”. An institution is reinforcing when “the behavior and processes it entails, through their impact on quasi-parameters, increase the range of parameters values (and thus situations) in which the institution is self-enforcing” (Greif 2006, p.160). Institutions that are self-enforcing in the short run can persist in the long run, but if they imply some changes in the quasi-parameters they can turn themselves into “self-destructing institutions” in the long run. The institutions-as-rules and the institutions-as-equilibria approaches are compatible. A good example of that is the work of Desiree Desierto and John Nye (2011), who used evolutionary-game dynamics to describe how formal rules become established as informal norms when an increasing number of individuals uphold them (Caballero & Soto-Oñate 2015).

1.6. Two recent advances in Political Economy of Institutions Substantial efforts have been devoted to describing the mechanisms by which political and economic institutional order affects economic performance and how all the elements interact to shape the evolutionary trajectory. Two recent proposals with an intense historical component are relevant in this matter. Acemoglu and Robinson (2011) distinguish inclusive institutions from extractive institutions—already introduced above—and describe their role in economic progress. By definition, economic institutions, to be considered inclusive, “must feature secure 29

private property, an unbiased system of law, and a provision of public services that provides a level playing field in which people can exchange and contract; it also must permit the entry of new businesses and allow people to choose their careers” (Acemoglu & Robinson 2011, pp.74–75). Regarding the role of the state in an inclusive system: “Secure property rights, the law, public services, and the freedom to contract and exchange all rely on the state, the institution with the coercive capacity to impose order, prevent theft and fraud, and enforce contracts between private parties. To function well, society also needs other public services: roads and a transport network so that goods can be transported; a public infrastructure so that economic activity can flourish; and some type of basic regulation to prevent fraud and malfeasance. Though many of these public services can be provided by markets and private citizens, the degree of coordination necessary to do so on a large scale often eludes all but a central authority. The state is thus inexorably intertwined with economic institutions, as the enforcer of law and order, private property, and contracts, and often as a key provider of public services. Inclusive economic institutions need and use the state” (Acemoglu & Robinson 2011, pp.75–76) For this reason, institutional economists must necessarily concern about political institutions. They argue that “[i]nclusive political institutions, vesting power broadly, would tend to uproot economic institutions that expropriate the resources of the many, erect entry barriers, and suppress the functioning of markets so that only a few benefit” (Acemoglu & Robinson 2011, p.81). In turn, “[e]xtractive political institutions concentrate power in the hands of a narrow elite and place few constraints on the exercise of this power. Economic institutions thus naturally accompany extractive political institutions. In fact, they must inherently depend on extractive political institutions for their survival” (Acemoglu & Robinson 2011, p.81). Somehow we have already advanced the dynamics of institutional change. These authors consider the transformation of political institutions towards inclusiveness as a necessary and sufficient condition for the solid and irreversible transformation of economic institutions towards inclusiveness. Regarding the debate on whether democracy is a precondition for economic development or vice versa, these authors question in a later article (Acemoglu & Robinson 2013) the theses that place economic development as a previous condition. The key to the joint dynamics of economic development and democracy experienced by the advanced economies during the last 30

500 years seems to have been originated in critical junctures that allowed the entry of nations into political-economic development paths and in which politics played a determinant role (Acemoglu et al. 2008). Violence and Social Orders by North, Wallis and Weingast (2009) is another important integral contribution about the political and economic institutional complex. The authors highlight the problem of violence for the development of countries. They recall that the least wealthy countries are economically underdeveloped not because of lower rates of growth but because of their volatility, due in part to periods of internal conflict that lead them to reverse what had reached during the expansive periods. These authors consider that entering into sustainable paths of economic growth requires solving the problem of violence and present two types of regimes or social orders that can achieve this, the Limited-Access and the Open-Access Social Orders. Their book is a conceptual framework to analytically address the transition from one to the other. The Limited Access Orders (LAOs) are social arrangements—simultaneously political and economic—in which open conflict is discouraged through the manipulation of economic interests by the political system in order to create rents. In this way, powerful groups and individuals find it in their interest to refrain from the use of violence. Therefore, they can help to solve the problem of violence if the conflicting elites manage to set up a system that everyone wants to sustain, thereby discouraging the reopening of the dispute. They are characterized by poor economic performance, a reduced number of organizations, personalistic positions and relations and privilegebased legislation and enforcement. The Open Access Social Order (OAO) is typical of advanced economies. It is characterized by allowing the participation of broad sectors of the citizenry in political decision-making and in economic life. Citizens are permitted to organize in companies, unions, political parties and other civil associations to participate in the economic, political and social spaces, thereby favoring the meso-structural flourishing that form the civil organizations. It is legally embodied in the freedom of association, the freedom of expression, the freedom of information, universal suffrage or the right to private property. States guarantee in their procedures a comparatively greater degree of impersonality, rule of law, equality before the law, separation of powers or transparency. These social orders may also have systems of social protection that guarantee equality of opportunity in the spaces left to competitive mechanisms, such as markets and 31

electoral processes. This competitive process in its healthier version favors the imposition of the best policy programs, technological advances and the most competitive products, companies and industries. In these terms, the impact of these open environments is direct on the economic and political development within a society. The authors are interested in the transition process by which societies move from LAOs to OAOs. According to them, this transition has two parts: one in which they meet what they call “doorstep conditions” and another in which the transition properly begins. They identify three doorstep conditions: a) rule of law for elites; b) support for perpetually lived organizations, including the state itself and elite organizations outside the state; and c) centralized and consolidated control of violence. These conditions are necessary but not sufficient for the transition. The proper transition occurs when the ruling elite coalition finds it in its interest to expand impersonal access to the citizenry. In a later book (North et al. 2013), the authors analyze the cases of some LAOs and their advances and retreats towards open access. Although the role of sociocultural components is explicitly considered to be of great relevance in this conceptual framework, its development is still poorly detailed and somewhat superficial. Chapter 3 will reflect on the sociocultural components of an open access regime for its survival and good functioning.

1.7. The NIE and the OIE: current differences and similarities12 While the OIE and the NIE had clear links13, the roots of the NIE are largely parallel to the development of the OIE and sink into the orthodoxy of marginalist economics and the logics of methodological individualism. However, the NIE has been incorporating during its evolution many elements that were present in the original institutionalism. Although not necessarily because of a direct import from the OIE framework, the NIE has increasingly included the role of power, coercion, violence, culture or the evolutionary logics to explain institutional change. 12

Some of the arguments contained in this section have been previously published in Caballero & SotoOñate (2015). 13 An important link between the original and the new institutionalism can be found in the legacy of John R. Commons in Oliver Williamson’s contributions. Williamson (2010) acknowledged that the “Commons triple” of “conflict, mutuality, and order” prefigures the concept of governance. In fact, Commons is considered the founder of transaction cost economics, and Oliver Williamson is seen as the rediscoverer of this research program (Dugger 1996). Both authors argued that transactions should be made the basic unit of analysis and focused on governance structure.

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Recent contributors to NIE, such as North (2005), Ostrom (2005) and Greif (2006), show that it has surpassed the reductionist approach of its beginnings in the 1980s and 1990s, and it has evolved toward a sharper institutional approach in a way that facilitates the dialogue among different institutional traditions. In 1990, William Dugger, close to the original institutional tradition, did not considered new institutional economics to be truly institutionalist and asserted that institutionalists shared some issues in their approaches. He argued that “(1) Institutionalists emphasize the role of power in the economy. (2) Institutionalists approach the study of the institutions of their own economies with the skepticism of reformers. (3) The institutionalist’s skepticism is focused through the Veblenian dichotomy of serviceable and predatory activities. (4) Institutionalists take an evolutionary approach to the study of social provisioning. (5) Institutionalists conceive of economies as evolving wholes. (6) Institutionalists, with some significant variations, … are instrumentalists” (Dugger 1990, p.424). However, in the last decades, NIE has evolved in such a way that has increasingly addressed these issues proposed by Dugger (Caballero & Soto-Oñate 2015). Some examples of the recent contributions of new institutionalism can be relevant at this point. The paragraphs that follow discuss NIE’s covering of the role of power, the predatory activities, the evolutionary approach, and the conception of “economies as evolving wholes” in NIE’s contributions, among others.

1.7.1. The role of power and predatory activities in NIE The balance of power and the predatory attitude of political elites over time has become a major concern for the agenda of NIE. At the 1990s, North (1990b) thought that institutions could be created to attend the interests of those who have enough bargaining power to elaborate and pass new rules. In 1992, Jack Knight stated that authors must direct their attention to “those factors influencing the capacity of strategic actors to determine the substantive content of institutional rules, and this introduces questions of the asymmetries of power in a community” (Knight 1992, p.41). Moreover, John Nye (1997) distinguished between the predatory or parasitic activities and the managerial and positive activities of government for social provisioning. It has been commonly accepted that, usually, “inefficient institutions and policies are chosen because they 33

serve the interests of politicians or social groups that hold political power at the expense of the rest”. Acemoglu and Robinson (2013, p.190) asserted that “economic policy should not just focus on removing market failures and correcting distortions but, particularly, when it will affect the distribution of income and rents in society in a direction that further strengthens already dominant groups, its implications for future political equilibria should be factored in”. For instance, Acemoglu and Robinson (2008) modelled the dynamics of institutional change taking into account the power asymmetries and the distributive consequences of the resulting institutional structure. They posed a scenario of captured democracy where elites have incentives to invest in de facto power in order to prevent or lead institutional reforms in economic matters. The distinction between inclusive and extractive institutions was widely popularized by Acemoglu and Robinson (2011). At micro-level, Ostrom (1995) demonstrated empirically that the balance of power among actors was crucial for institutional design and social enforcement mechanisms. Thus, the balance of power and predatory behavior by elites were also addressed by many authors within new institutionalism, especially in the last two decades. North, Wallis, and Weingast’s (2009) work on “violence and social orders” is also a representative contribution in this recent tradition of NIE.

1.7.2. Culture in the research agenda of the New Institutionalism The progressive correction of the overrepresentation of rational choice in the explanation of human behavior coincides with the increasing awareness of the relevance of cultural elements—which is a traditionally holistic concern. North is a good example of the evolution of NIE in this issue. As Rutherford (1995, p.446) posed it, “if one takes North’s various statements concerning the importance of mental models, ideologies, and culture seriously, then one must conclude that he is attempting to bridge the gap between the traditional neoclassical view of mankind as a rational chooser and the old institutionalist perspective of mankind as a cultural product”. North (2005, p.83) considered that “the key to building a foundation to understand the process of economic change is beliefs – both those held by individuals and shared beliefs that form belief systems. … The whole structure that makes up the foundation of human interaction is a construct of the human mind and has evolved over time in an incremental process; the culture of a society is the cumulative aggregate of the surviving beliefs and institutions”. But already at the beginnings of the 1990s, North (1990b, p.37) had stated 34

that “[c]ulture provides a language-based conceptual framework for encoding and interpreting the information that the senses are presenting to the brain”, and Denzau and North (1994), together, had emphasized share mental models and learning. It is also worth mentioning the incremental recognition that social capital receives for the analysis of social phenomena. Social capital, along with other similar concepts that have been developed over the years, such as social infrastructure (Sokoloff & Engerman 2000), civic capital (Guiso et al. 2011), democratic capital (Persson & Tabellini 2009), or the study of concrete cultural traits have helped to compensate for this overrepresentation of individual rational choice and has favored a shift towards holistic positions.

1.7.3. Evolutionary logics and institutional change in North’s work Scholars of different schools once assumed that institutions would evolve toward optimality (Alchian 1950; Demsetz 1967; Hayek 1973). Other authors, such as Leonid Hurwicz and Roger Myerson, adopted a more normative approach and viewed institutions as rules designed by an ideal and benevolent social planner (Brousseau et al. 2011). Even North contributions of the 1960s and 1970s (pre-NIE) assumed the efficiency view of institutions. During the last twenty five years, Northian work has deepened in those institutional views that are clearly distant from neoclassical economics, and this has implied a higher connection with evolutionary economics. His economic thought gradually changed, and his new institutional approach evolved in different stages. North (1981) compared different paths of institutional change in economic history and started to develop a theory of institutions in a world with positive transaction costs, rejecting the efficiency view. Later, North ( 1990b, 2005) delved into the concept of institutional pathdependence and highlighted the relevance of informal institutions in institutional change. Denzau and North (1994) incorporated the role of shared mental models and the possibility of a “punctuated equilibrium” in the process of institutional change. North (2005) developed to NIE’s theoretic framework a deeper explanation for societal change and the way humans understand and act upon their understanding of it, and delved further into the crucial role of uncertainty and culture.

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The evolution of North’s approach on institutional change reflects different influences (Caballero & Soto-Oñate 2015). For example, the Northian case of the “punctuated equilibrium” in institutional change is related to the contributions of Niles Eldredge and Stephen J. Gould (1993), who defended an evolutionary perspective in natural sciences. When North incorporated this concept into his theory, it approached the modern Darwinian evolutionary theory (Fiori 2002). Moreover, Michel Zouboulakis (2005) concluded that two remaining Veblenian characteristics of evolutionary economics are present in North’s (2005) theory, particularly the open-ended view of social evolution and the cumulative characteristic of the process of institutional change.

1.8. Conclusion To date, there are four Nobel laureates in economics related to the NIE: Ronald Coase, Douglass C. North, Oliver Williamson and Elinor Ostrom. Other award winners and leading scholars have spoken about the appropriateness of the institutional approach to understand the economic reality and the social phenomena in general. Recently, its theoretical and empirical soundness has generated movements in the main international development bodies towards the adoption of the institutionalist approach, assuming institutional reasoning in their new guidelines and policies14. There is still a long way to walk and much of it involves creating spaces of understanding and mutual enrichment with other institutional disciplines of the social sciences. In this chapter we have presented the two most important institutional approaches in economics: the NIE and the OIE. In spite of having progressed in parallel, the recent developments of the NIE have allowed for a more flexible framework and the incorporation to its agenda of issues traditionally assumed by the original institutionalism. However the differences between the NIE and the original tradition are still substantial. Not only because of their parallel trajectories and references but also because of deep factors, such as the instrumentalism of the OIE versus the positivist attitude of the NIE. On the other hand, the NIE is still more focused on the most superficial formal institutions and the OIE tends to focus on the deepest foundations of

14

Examples include reports, such as Burki and Perry (1998), Meier and Stiglitz (2001) or World Bank (2002), or the elaboration of indicators about institutional and governance performance, such as the Worldwide Governance Indicators, Actionable Governance Indicators, Doing Business, Justice Project o Rule of Law Indicators.

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culture, and this is fundamentally determined by the different conceptions about the individual and his/her behavior. Yet both streams of thinking are finding a pool of enriching understanding where the synergistic complementarity of their approaches makes institutionalism a fertile source of knowledge for the social sciences. On the other hand, despite the progress thus far, the NIE still presents some limitations that prevent it from reaching a deeper level in crucial factors for the institutional phenomenology, such as legitimacy, identity, ideology or the endogeneity of preferences. The following chapter will deal with this question.

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Chapter 2 New horizons for the NIE: pre-rational formation, culture and cooperation15

2.1. Introduction This chapter shows some of the NIE’s remarks on individual, structural, and cultural elements that are central to solving problems of collective action but are neglected by orthodox economics. Although these are often mentioned by institutional economics, they are still underdeveloped. We reveal the correctness of its remarks but also its still lack of preparation to treat them analytically. The chapter presents these challenges and provides some insights developed in other disciplines that could help the NIE to strengthen its approach. Previous chapter mentioned how market failures—e.g. market power, information asymmetries or production externalities—may generate transaction costs that give meaning to the existence of governance structures. In the absence of these failures and transaction costs we would obtain the first and second welfare theorems, but these are ubiquitous and, in their presence, governance structures emerge to elicit efficiency gains. However, the same problems that justify the existence of these governance structures also affect the life within the organization; there exist horizontal—derived from group production

externalities—as

well

as

vertical—affecting

the

principal-agent

relationship—organizational costs. The function of governance used to be seen as the merely management of the incentive system to promote efficiency, but now we are aware that this is only part of the story. There are logical limits to the ability of a system of incentives to mitigate the problems of collective action and other usually neglected elements play a decisive role in fostering cooperation. And, as Miller (1992) argues,

15

Some parts of this chapter were previously published in Caballero and Soto-Oñate (2013) and SotoOñate (2014).

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other social sciences, such as political science, anthropology, or sociology, have devoted much more effort to this issue than economics. Cooperation can be briefly defined as “voluntary deviations from self-interested behavior” (Miller 1992, p.13) for a collective purpose. In the presence of these failures, it is necessary to solve the problem of the free rider or, in other words, to achieve cooperation for collective purposes even when the individual self-interest would lead to opportunistic decisions that result in socially suboptimal outcomes. Often, forcing cooperation only through a system of external incentives is too costly or directly impossible. For this reason, Miller (1992), and other classic authors such as Barnard (1938), understands that there are other important managerial functions such as leadership and motivation in the promotion of loyalty, trust, ethics, etc. to align individual behaviors with the collective interests. Miller (1992) shows how organizations are able to create and follow their own social norms or even define their own corporate culture to solve problems of collective action. Moreover, for Meyer and Rowan (1977), DiMaggio and Powell (1983) and other authors of economic sociology, the culture of an entire society enters into the organizations themselves affecting their form and the procedures within it. The typology of the norms, values and beliefs that are widespread in a society can influence the cooperative capacity within the organizations it hosts. But also markets are actually institutions subject to social norms, values, and beliefs that highly condition their functioning and outcome. For instance, they may affect the kind of things that are susceptible of being exchanged, the limits of ownership over objects or the morality involved in the transactions. This is what has come to be called embeddedness (Polanyi 1957; Granovetter 1985). All competition in society takes place within a framework of cooperation that is embodied in a series of rules. Here cooperation takes the form of cooperation with such rules, compliance with the rules of the game. This compliance legitimizes the result and the distribution of rewards derived from it. Cooperation with norms depends on, on the one hand, a system of incentives —rewards, effective sanctions, etc.—, but also, on other hand, factors such as the legitimacy of the rules themselves, the morality of the actors to comply with them, or expectations about the compliance of others. But where do these phenomena occur if it is not in the process of instrumental rationality, by which 40

individuals maximize their utility function? These have to do with elements such as beliefs, values, ideology or identity and seem to be formed in a previous instance to that of instrumental rationality. Here we ask ourselves about the role of the community in the formation process of these elements and their capacity to conform and persist as a culture. Culture is regarded as a system of these elements extended in the generality of individuals in a community and with capacity to endure in the long term. We will therefore discuss the relationship between the beliefs and preferences of an embedded individual and the community in which he/she is situated. Recognizing the existence of these pre-rational elements pushes us to be interested in how they operate, are constructed and are modified in that previous instance. While in the previous chapter we focused on the contributions of the NIE to undertake the institutional analysis and what prevented the conventional economics from doing it rigorously, in this one we see the complexity of some factors still left out of the analysis. To meet this challenge, it must reform not only his field of study but also the intellectual tools it manages. This chapter presents some examples developed in this and other social sciences that could shed light on the problem of cooperation. Next section is concerned with social and cultural embeddedness. Section 3 deals with human behavior and the formation of preferences, with special attention to values. The fourth section is concerned with beliefs, highlighting the different roles of positive mental models, identity and ideology. Section 5 closes the chapter with some conclusions about the importance of culture for the study of cooperation and economic development.

2.2. Social and cultural embeddedness The concept of embeddedness refers to the epistemological insertion of the individual and the economic action into an institutional, social or cultural context. From this approach, it is emphasized that economic actors are not atoms that act with independence of their context, but are embedded in concrete, institutional, social and cultural systems. Conventional economic theory does not dip the individual in his/her cultural and social context. It conceives the subject as isolated and making decisions with independence of the social and cultural environment to which he/she belongs. The NIE has made efforts to place the individual within the incentive system that shapes the formal and informal 41

institutional structure of a society. The neoinstitutional individual, endowed with instrumental rationality, makes utility-maximizing decisions within this incentive system, which promotes or prevents decisions on investment, entrepreneurship, rentseeking, etc. From network analysis approach, Mark Granovetter (2005) considers that social structure, especially in its form of social networks, affects the economic outcome for three main reasons: (a) social networks affect the flow and quality of information, (b) social networks are an important source of rewards and punishments, and (c) trust —i.e. the expectations that others will do the “right” thing despite the individual cost-benefit calculation—may emerge from social networks. It is interesting to review some of the empirical contributions under this approach to better understand what social embeddedness consists of: 

There is a flow of non-economic content through economic exchange relationships. Often the content that is exchanged in economic relations is broader than the mere formal transaction. This is precisely because economic action is embedded in a broader social structure. The relations of economic exchange and personal relations are confused, and they distort the result of an impersonal market. As Dore (1983) argues, a long friendship between a buyer and a seller can prevent the buyer from leaving the seller simply for an item that is sold elsewhere at a cheaper price. In this respect, we can also find sociological studies on the network of friendship relations that the managers have and its positive impact on the firm success or its resistance to price wars (Ingram & Roberts 2000; Granovetter 2005). Economist George Akerlof (1982) acknowledges that economic exchanges—labor contracts, in this case—are only part of the content of a broader reciprocity relationship.



Continuing with the previous point, this flow of contents not necessarily economic will have an impact on the performance of imperfect markets. Social networks will alleviate the costs of finding information and, especially, reliable information. Granovetter (1974) shows how labor market deficiencies can be alleviated by certain characteristics of individual social networks. Since “all social interaction unavoidably transmits information, details about employers, employees and jobs flow continuously through social networks that people maintain in large part for non-economic reasons” (Granovetter 2005), thereby facilitating more efficient exchanges. Clifford Geertz (1978), from his study of the Bazaar of a Moroccan 42

region, shows how social networks are a partial solution by means of “clientelization”—an individual’s tendency to establish a stable relationship with a particular provider instead of searching comprehensively every time he/she goes to the market—and haggling. 

Verticality-horizontality or concentration-dispersion in social structures and networks can have enormous implications for sectoral or regional economic outcome. Saxenian (1994) argues that the main cause for the rapid technological progress of Silicon Valley as opposed to Route 128—two well-known high technology industrial regions in the United States—was the opening of its social networks and a more horizontally organized structure, crossing the formal limits of the firms. Saxenian’s comparative account reveals the centrality of social networks and cultural particularities in the different performance of these two industrial regions. Locke (1995) analyzes the process of staff restructuring in the seventies and eighties of the two largest Italian car manufacturers: Fiat (in Turin) and Alfa-Romeo (in Milan). The process of restructuring Alfa-Romeo, although it was longer, had a much more beneficial outcome for both the parties and the community at large. Locke explains how the way in which organizations were formed in the regions of Milan and Turin, and, in particular, the involved economic and political agents, determined the process and the result of the operation. The relative horizontality of the structure and the slight concentration of power in Milan contrasted with the structural polarity of Turin, where two powerful blocks were organized, with no mediating links of sufficient solidity and independence.

Paul DiMaggio (1990) and other more culturalist authors consider incomplete the structural embeddedness of Granovetter and see fundamental to incorporate the cultural contents. For instance, to the explanation economic action within markets, cultural embeddedness incorporates elements such as role relationships and normative scripts, which define what, with whom and how one should/can exchange. It is considered that there is a relationship of interdependence between social structure and culture: patterns of social relations lead and channel the acquisition and expression of culture, and patterns of cognition are deeply involved in the construction of social structure. Structural embeddedness, in the sense of network analysis, has important implications for cooperation since as the network gets more densified it is more likely to repeat the 43

interaction, the reputation effect becomes more intense and it increases the capacity of second- and third-party enforcement within the community. Cultural embeddedness is broader and incorporates social norms, beliefs and concrete values. The individual is no longer taken as given and only reacting to external stimuli. In turn, the subject is also transformed in his/her beliefs and preferences. The construction of the subject is one of the most neglected implications of conventional theory and the NIE, and this will occupy us during part of this chapter. Social and cultural contextualization affects the preferences and beliefs of individuals. What role plays embeddedness in cooperation? In the frequent scenario that an individual can opt for opportunism, Dasgupta (2002) identifies four types of mechanisms that reinforce cooperative behavior: 1. Mutual Enforcement. The agreement is mutually reinforced through a system of sanctions for deviant behavior. The cooperative solution is favored by a balanced distribution of power and the existence of subsequent repetitions. 2. External Enforcement. There is a third party that is responsible for enforcing the agreement: a state, an arbitration body or a social network in which the reputation effect discourages opportunism. 3. Pro-social disposition. The parties are honorable. Their integrity leads them on their own initiative to fulfill the contract or the norm even in the absence of affection. It can operate in impersonal contexts and in the absence of subsequent repetitions. 4. Mutual affection. In the group they take care of each other and concern about their well-being. The first two are accessible without any difficulty by the conventional economics, but the cooperation based on the other two is out of its radius of explanation. It has often been considered as residual behavior, nonexistent or even impossible. In the following sections, we will focus on individual’s pre-rational aspects that are susceptible to being endogenous to his/her social and cultural environment and to being shared with his/her community or groups. This allows us analyzing the micro mechanisms that, in aggregate terms, give a sort of personality or idiosyncrasy to the economic, political and social phenomena of a community, thereby conditioning their performance and evolution. 44

Let us return to the concept of social capital. This has been understood by some as an individual resource (Glaeser et al. 2004), which one may be interested in accumulating for the own benefit, and by other authors as a resource that resides in the community, from which all its members benefit. In another dimension it has also been understood as a configuration of social networks (Lin 1999) or as a cultural system. The broader version conceives it as a configuration of the community and integrates structural and cultural components: it draws a concept of social capital as a dense social structure whose topology is rather horizontal and where individuals share a series of cultural traits to civism, generalized trust and a cooperative and participatory spirit. This conception was the one formulated by Putnam et al. (1993), which we already mentioned in Chapter 1. They argue in their study that communities with a greater share of social capital are better able to take advantage of the economic opportunities offered to them. In their concept of social capital, they attach considerable importance to networks of civic engagement and argue, like Granovetter, that the existence of these networks increases the costs of opportunism, fosters robust rules of reciprocity and facilitates the flow of information. However, they also highlight the existence of a civic culture, democratic and organizational values, orientation towards public affairs and a high level of interest in politics16.

2.3. Preferences, values and habits For conventional economics, the action of individuals responds to rational decisions with accordance to their preferences. According to Samuel Bowles, preferences are “reasons for behavior, that is, attributes of individuals that (along with their beliefs and capacities) account for the actions they take in a given situation” (Bowles 1998, p.78). But, as he put it, “most economists have not asked how we come to want and value the things we do” (Bowles 1998, p.75). Conventional economics takes individual preferences as given, without concerning for their formation process, and pays attention exclusively to instrumental rationality, i.e. to the conscious calculation that connects means to ends. For conventional theory, values are part of the concept of preferences and operate under the same logic of instrumental rationality. Not so for Max Weber, who developed the 16

For an introduction to the debate about the concept and role of social capital, see Paldam (2000).

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concept of value-rational actions. This type of actions follows a rationality other than the instrumental to guide social action: it can be carried out regardless of the outcome. In Weber’s words, value-rational actions are those “determined by a conscious belief in the value for its own sake of some ethical, aesthetic, religious, or other form of behavior, independently of its prospects of success” (Weber 1978[1922], p.24). These do not need further ends and are considered as ends in themselves. Not only are they ends to be achieved, but they can also affect instrumentally-rational actions in the management of the means, since the procedures may be socially or ethically proscribed and prescribed. This neglect is striking especially when it has a determining impact on behavior. For Weber, two other patterns can also guide social action: the traditional and the affective. The traditional consists of customs that the individual ceremonially follow and in which rationality plays an insignificant role. The affective refers to visceral and irrational behaviors, based on emotion without the mediation of reason. These three forms of social action—value-based, traditional and affective—are systematically neglected by conventional economics. The neglect of traditional and value-based actions can be seen particularly serious because they are substantially shared by the rest of a community or social stratum, thereby contributing greatly to the explanation of individual and aggregate economic outcome. An example of this is the habitus, popularized by Pierre Bourdieu. The habitus is the disposition of an individual to behave in a similar way to its group of peers, adopting their tastes and beliefs, and is shaped by means of a constant process of socialization. They are schemes of perception, thought and action. This provides an explanation to why members of same social class tend to share tastes, aspirations, customs or ideologies. A fundamental question for solving the puzzle of cooperation is why someone is able to cooperate when honesty, loyalty or altruism have a negative pay-off. North (1990b) poses two possible responses: a) the existence of group conventions that prescribe cooperative behavior and acquire moral force (Sugden 1986) and b) the existence of a group identity that makes individuals assume the group interests as their own (Margolis 1982). The first alternative is covered in this section and the second one in the next. In The Evolution of Cooperation, Howard Axelrod (1984) presented the result of some computer tournaments that he himself organized, consisting of an iterated prisoner's dilemma. He discovered that there was a dominant strategy: tit-for-tat. Basically, what we usually call reciprocity. The player chooses to cooperate in the first place and then 46

responds to every opponent’s choice with the same movement. However, if both players play tit-for-tat and one mistakenly or purposely cheats, they cannot return to the cooperative equilibrium. An improved strategy is then reciprocity and forgiveness. Theoretically, with these strategies cooperation holds as long as the players expect the interaction to continue; once repetition is not expected the players have incentives to defeat. So, what can ensure cooperation in non-repeated prisoner’s dilemmas or when further interactions are not expected? Here ethical principles that prescribe cooperative behavior, which are assumed as values—ends in themselves—, play a fundamental role. A determining factor to choose the cooperative solution is the expectation of cooperation by the other players. This expectation of cooperation is what has been called trust. This is a high-value feature for a society when it spreads across a community. Economic activity involves more confidence than is normally assumed. In words of Kenneth Arrow (1971, p.22), “[i]t is useful for individuals to have some trust in each other’s word. In the absence of trust, it would be very costly to arrange for alternative sanctions and guarantees, and many opportunities for mutually beneficial cooperation would have to be foregone”. He remarks the role of norms of social behavior, including ethical and moral codes, which serve “to compensate for market failures”. In Moral Markets, Paul Zak (2008) argues that if the modern market economy works, it is because most people for most of the time are moral and decide to cooperate with the social norms and institutions in which the market is integrated. The property rights of the counterpart are respected, the fiscal and labor duties are fulfilled, and rules are observed even when individual instrumentally-based calculation prescribes opportunism. David Rose (2011) wonders in The Moral Foundations of Economic Behavior what kind of moral beliefs a society should have to ensure the overall maximization of prosperity and arrived to a similar conclusion. Honesty and ethics become essential to sustain cooperation in the generality of cases, especially when there are gains from opportunism and there is no possibility of punishment. Therefore, as we see, values can substantially condition economic life in society. The chapter that follows presents some of the values that the literature has identified as important for the economic and political development of a community.

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2.4. Beliefs North (2005) proposes a complementary annex to the NIE to address “societal change and the way humans understand and act upon that understanding of societal change” (North 2005, p.vii). This represents a "cognitive turn" in economics, not because beliefs were not hovering over the NIE from its inception, but because it places a much more intense focus on beliefs as explanatory factors of institutional design and change than hitherto. According to North (2005, p.2), “[t]he ‘reality’ of a political-economic system is never known to anyone, but humans do construct elaborate beliefs about the nature of that ‘reality’—beliefs that are both a positive model of the way system works and a normative model of how it should work”. Following sections present three important elements contained in the beliefs: mental models, ideology and identity. These decisively affect recognized factors related to economic behavior and the development of societies such as legitimacy, values, moral behavior or trust.

2.4.1. Shared mental models Mental models are aseptic considerations about how the world works. For North, any social science based on individual rational choice must include the “subjective models people possess to interpret information and of the information they receive” (North 2005, p.64). These mental models may be incomplete and wrong. Incomplete and wrong mental models can lead to unintended consequences in decision making—e.g., in institutional design—diverting again the reality from the outcome expected by conventional economics. Uncertainty is a key element for the economy. It has a fundamental impact on the possibilities of economic development, affecting investment and consumption decisions. One way to reduce it is by designing institutions that constrain possibilities in human behavior. Reducing uncertainty is one of the most important functions of institutions. A recurring example for the NIE is the ability of institutions at the top of the State to generate credible commitments on the security of property rights. In this way, constitutional or parliamentary constraints on the executive or the independence of the judiciary were broadly analyzed as relevant institutions.

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Mental models are often widely shared by a community. Societies construct mental models that connect causes and consequences and reinforce some decisions over others under uncertainty conditions. Culture, with all its myths, superstitions, taboos, stereotypes, local knowledge, historical experiences, etc., becomes a source of prescriptions that force aggregate choices over others. For instance, shared mental models may affect international trade flows. Beliefs about the reliability of others influence the tendency to exchange more with some countries than with others (Guiso et al. 2009). The effect is even stronger when it comes to goods that are more trust intensive. Thráinn Eggertsson (2005) formulated what he calld social models, “mental constructs that actors use to cope with uncertainty and complexity in their social environment” (Eggertsson 2005, p.26). They are a subset of the overall mental models and may also be incomplete. Social technologies are social models that describe how institutional arrangements create social outcomes. Unlike production technologies, which are more mobile across countries, social technologies do not travel well, thereby affecting the capacity of a community to import institutional arrangements. Eggertsson (2005) points out social technology as a major issue for economic development.

2.4.2. Ideology and legitimacy Here let us assume ideology as a normative system of ideas about how things should be. It is built upon beliefs about how the world is and works and based on very basic deep values, human aspirations and models on how they can be achieved. In ideology, there is an overlap of the terrains of beliefs and values. For instance, Alesina and La Ferrara (2005) show that those who consider that the social system is fair and success is determined on effort are less favorable to redistribution than those who believe that social mobility is a matter of luck and special social connections. Ideology affects the legitimacy of institutions and organizations. Its legitimacy will depend on the extent to which they resemble the normative conceptions prescribed by ideologies. The contradiction can lead to problems of institutional observance and even festering and violent disobedience. One of the key conflicts is the one about “the legitimate ends of government and the rights of citizens. All rights accorded to citizens—whether personal, economic, religious, civil, or political—imply limits to the 49

behavior of political officials” (North 2005, p.107). A good example is contained in Thompson (1971), which explains how the British population rebels against the crown after breaking a consensus broadly-perceived as legitimate. The foundations of the rebellion rely more on values and beliefs than on the material consequences of the reform. North (1981) had already recognized the fundamental importance of legitimacy for the social order and remarked that, in the absence of it, institutional enforcement could be too costly or even impossible. Ideology also affects the legitimacy of organizations and their own internal configuration. Meyer and Rowan (1977) argue that organizations are forced to incorporate practices and procedures based on society’s institutionalized conceptions. These institutionalized conceptions refer to products, services, techniques, policies and programs that function as powerful rational myths and are adopted by corporations ceremonially. The coherence of the organization structure with the institutionalized rules improves its legitimacy and stability and increases its chances of survival. They introduce their concept of isomorphism, understood as the way in which a society reproduces organizational structures—or incorporates structural elements—similar to those stored in their cognition in the form of rational myths. This isomorphism becomes, for various reasons, key for the survival of organizations and obliges them to incorporate these externally legitimized elements that can often be in conflict with efficiency criteria. As a result there will be a tendency to the homogeneity of organizational structures within a given environment. A shift in beliefs or values can affect the perceived legitimacy of a community’s institutions and force institutional change in the style of Roland (2004). In North’s words, “I know of no way to explain the demise of slavery in the nineteenth century that does not take into account the changing perception of the legitimacy of one person owning another” (1990b, p.24). It can affect even preferences over what things should or should not be consumed or traded and under what terms. Zelizer (1994) chronicles the process of historical change from a time when children had an economic value—to work in the countryside, to assist them when they grow old, etc.—to a modern childhood where children are economically “useless” and emotionally “priceless”. They went from being treated as an economic asset, with an instrumental value for other purposes, to be valuable in themselves.

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This forces us to rethink power and how individuals and organizations can be willing to transform the ideologies of others. In this sense, it is revealing the case contained in Zelizer (1978) about the transformation during the nineteenth century of the social meaning of life insurance for Americans, from a sacrilege to a moral obligation for heads of families. To this end, the insurance industry made use of the religious language and even obtained the support of the clergy community, which persuaded the faithful to ensure an economically worthy life for their family in the event of their death. A similar case occurred with the derivatives market: through an intense work planned by “lobbies”, the derivatives went from being considered a betting game to a serious and respected financial product (MacKenzie & Millo 2003).

2.4.3. Social roles and identity Every formal or informal institution appeals to at least one subject, and entitles or forces him to do or receive something. That is, it involves at least a social role. When one plays a social role, he/she acquires obligations and rights associated with it. Social roles refer to social functions and individuals often occupy a plurality of them—father, citizen, physician, member of a football team, etc. They “are defined by norms structured by the institutions and organizations of society. Their relative weight in influencing people’s behavior depends upon negotiations and arrangements between individuals and these institutions and organizations” (Castells 1997, p.6). While roles organize the function in the social organization, identity is about organizing the meaning. It answers to who I am, who mine are and who the others are, what distinguishes me or what my attributes and aspirations are. For Castells, identity is a process of endowment of meaning on the basis of a cultural attribute or set of them, which are given priority over other sources of meaning. They are "sources of meanings for the actors themselves, and by themselves, constructed through a process of individuation" (Castells 1997, p.6). By meaning, Castells refers to the “symbolic identification by a social actor of the purpose of her/his action” (Castells 1997, p.7). So, while roles are something external, localizing the individual in the functional structure of a society, identity refers to the very meanings and aspirations of the self. While structural embeddedness could address this insertion of the individual into a system of roles, it is not enough for theorizing about the operations of identity. Its 51

formation process is more complex and refers to the very formation of the individual: the conception of himself/herself, his aspirations or his/her communities of feeling. Identity is the construction of what is significant in oneself, what is similar in his/her peers and what is different from his/her opposites. Thus, the formulation of an alterity is always implicit or explicit. It is, therefore, essentially a social question: it is located and defined within and with respect to social groups. It may have attached notions about legitimate rights, responsibilities, goals, aesthetic canons and behaviors. But, in another dimension, it implies the existence of intersubjective feelings, which makes the individual capable of assuming group utility functions or internalizing the happiness of others. This relaxation in the borders of the economic individual allows analyzing more precisely the overcoming of the free-rider problem, altruism and even cases of extreme cooperation and identity fusion. In cases of identity fusion, what might be called a personal identity and a person’s social identity become functionally equivalent (Swann et al. 2009) and can explain phenomena such as extreme heroism, soldiers at war or terrorist immolation. In addition, an individual can identify with several social groups assuming a plurality of identities. These identities overlap—not necessarily concentrically—and may create internal conflicts if they pose contradictory constructions. The articulation of identities is also a complex and poorly understood process. The possibility that an individual can be integrated into supra-individual identities, assuming group preferences as his/her own, is something denied to the individual formalized by conventional economics. All preferences associated to identity fall outside the analytical capabilities of neoclassical thought. There have been well-known attempts to address this identity-related behavior at microeconomic level, as in the case of Margolis (1982). This work posed the maximization of a utility function that integrated an individual function and a social function. In this manner, the individual has to manage to optimize his/her individual preferences and that of his/her group within the same rational operation. More recently, Akerlof and Kranton (2000, 2010) dealt with the effect of acts of an individual on the utility of other individuals through identity-related mechanisms. For instance, a politician with a corrupt behavior affects the image of the collective thereby creating a deep unease in other politicians. The anxiety that is generated in the other 52

members is formalized as a direct loss of utility—that is, not through any subsequent professional or personal damages that may arise. Individuals will attempt to create standards, specific penalties or systems of sanctions to prevent or respond to damages. According to Akerlof and Kranton (2000), the introduction of this particular concept of identity necessarily expands economic analysis because it involves a new type of externality and because it raises a new process by which the preferences of an individual can be transformed. Indeed, the fact that an individual’s actions directly affect another by means of identity operations has not minor implications for the economic outcome, but that is only part of the story. We must also study the formation process of intersubjectivities and supraindividual identities, the basis on which the identity-alterity binomial is built, the construction of identity-based meanings, aspirations and values and the implications that all this has for real behavior —consumption, investment, cooperation, etc. Regarding the importance of identity over consumption we can recall what Hirsch defined as positional goods (Hirsch 1976). These goods make implicit reference to social status and acquire their value precisely from their scarcity. Their consumption produces direct utility by the fact that others are excluded from owning them. By extending this logic, we can identify a category that would be called identity goods, whose consumption involves identity-related utility that do not refer necessarily to a vertical status. It can be associated to group membership or a differentiation within a group. Status as an identity trait has indeed important implications for behavior in commodity consumption but also for design and institutional change. Part of the problem of transitions is the resistance of elites to losing their status. But, again, under the logic of identity goods, we can understand that non-status identity traits in general can also affect preferences toward forcing or resisting institutional change. On the other hand, previous section pointed out that the internalization of social norms and prescriptions—such as honesty, reciprocity or forgiveness—were crucial for imposing and sustaining cooperation in the long term. But when we talk about the scope of cooperation in a community, identity becomes fundamental because it involves a “with whom” to cooperate. This could be revealing the idea of an underlying “us” in the beliefs and feelings of individuals. As stated above, identity always refers to some kind of otherness. This is context-dependent and an important element is the construction of 53

the other and its characteristics and what can normatively be granted to and demanded from the other. Identity is thus key to the application of ethical norms and cooperative behavior. Banfield (1958) distinguished what he called “moral familism” and “generalized morality”. Amoral familism denotes moral schemes in which members of a community apply moral imperatives only when dealing with their own relatives. In turn, behavior with members outside the family circle is openly opportunistic. In the case of generalized morality, moral standards apply broadly to the entire community. At least for this case, the identity marks the application or not application of ethical standards within human interactions. This statement finds empirical support across countries (Alesina & Giuliano 2011). The difficulties to identifying with a larger group might explain why the level of ethnic fractionalization within a community may affect—though not necessarily—cooperative spirit (Alesina & La Ferrara 2000), generalized trust (Alesina & La Ferrara 2002) and the provision of public goods (Alesina et al. 1999). But not only diversity by ethnicity affects trust, inequality of wealth and income also does so (Alesina & La Ferrara 2002; Uslaner & Brown 2005). Any element that serves as a pivot for the creation or consolidation of opposing identities can affect the capacity for cooperation and trust levels within a group. This is why advanced communities invest resources in the extension of group identity, breaking down identity barriers, fostering tolerance for diversity and establishing emotional and identity bonds between groups. Cooperation is necessary to enable a society to build new levels of organization. Thus morality and widespread trust—and not only limited to family or personal relationships—allow larger well-functioning organizations (La Porta et al. 1997) or more functional complex markets (Guiso et al. 2004). Culture and the socialization process are therefore of crucial importance. Although largely stable over time, identity maintains a constant dialectical relationship with the social environment and is thus subject to continuous transformations (Berger & Luckmann 1991). This process would involve a pre-rational operation of identity construction—partly deliberated, partly imposed, partly unconsciously assumed. It is the process by which an individual would assume or get rid of group identities or specific roles in an instance prior to the rational articulation of his/her maximization strategy. 54

Not only the socializers but also the institutions themselves play a fundamental role in the formation of identity. Dominant institutions can originate concrete identities based on the roles they define. It happens when “social actors internalized them, and construct their meaning around this internalization” (Castells 1997, p.7). The next chapter explores the literature about the capacity of institutions to affect the culture of a community—including identities—with long-lasting effects and Chapter 5 empirically tests the hypothesis that historical political institutions affected the political culture of the Spanish regions.

2.5. Conclusion This chapter delved into the conventional economics’ conception of human behavior. Beyond the old vision of the limited homo oeconomicus, driven by an instrumental and perfect rationality, the chapter presents a human whose behavior could also respond to value-based rationality, identity imperatives or habits. On the other hand, they have incomplete mental models with positive beliefs about how the world is and works, but also a system of normative considerations about how it should be. They contain aseptic beliefs about the consequences of concrete decisions but also a universe of meanings that is also composed of identities, feelings, notions of good and evil and deep human aspirations. These affect decisively the design, the change and the institutional performance (Rodrik 2014; Eggertsson 2015). Social orders or reforms that defy ideologies may face a lack of legitimacy, leading to problems of enforcement—in the form of fiscal fraud, for example—or deliberate disobedience—strikes, boycotts—and violent confrontation—protests, revolutions. Besides all the great advances promoted by the NIE, it is necessary to incorporate into the institutional study new logics different from those of instrumental rationality and to investigate the formation and evolution of the pre-rational traits, which in a substantial part are shared by a community or a group. A microeconomics that admits group generalities necessarily redirects us to certain degrees of holistic analysis and leads us to become interested in cultural systems, their reproduction and their evolution. The shaping process of beliefs and preferences is an entire new world that occurs in a prerational instance in the individual. This instance was treated as given by conventional economics but not by the rest of the social sciences. This is why economists would do 55

well by rescuing classics from sociology and promote interdisciplinary communication. The NIE is in a privileged position to bridge the gap between economics and the rest of the social sciences. The process of socialization becomes a mechanism for the intergenerational transmission of values and beliefs, making them highly persistent over time. The dialectical mechanisms that link the formal institutional environment with culture and those that allow the autonomous evolution and reproduction of culture in the long term are thus fundamental for institutional economics. North (1981) already was an enormous and honorable precedent when he spoke of the importance of the learning process for institutional change and pointed to the process of socialization as a mechanism for stability and persistence. As we will see in the next chapter, cultural persistence and the mechanisms of socialization that make it possible boosted a recent and active line of research in economics. The chapter that follows and the empirical chapters 4 and 5 will be concerned with the interaction between formal institutions and cultural systems: how they affect each other in their co-evolutionary process and how the coherence between the two becomes central to the economic, political and social performance.

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Chapter 3 Culture, institutions and economic and political performance

3.1. Introduction Over the last decades, the study of the cultural aspects of a society has gained increased interest within political economy and the new institutional economics. This increasing interest is due to the (re)discovery of culture—beliefs, values, traditions, social norms, etc.—as a fundamental element in the explanation of the functioning and evolution of formal institutions (Roland 2004; North 2005; Caballero & Soto-Oñate 2015) and economic performance through time (North 1990b; Knack & Keefer 1997; Guiso et al. 2006, 2011; Fernández 2008). But, what is culture? Frequently, in institutionalist political economy, and making difficult its interpretation, the concept of institution is not well isolated from that which is attributable to culture. As Alesina and Giuliano (2015, p.3) assert, “[s]ince cultural economics is in its infancy, those who write about institutions don’t seem to worry much about whether institutions are well identified and isolated from cultural influences, which may be problematic”. It is important to make a more precise distinction. Here we will understand institutions as those more formal and superficial and culture as beliefs, values, social norms, traditions, etc. Including—but not only—what in the literature have been identified as informal institutions. Guiso et al. (2006, p.23) regard culture as “those customary beliefs and values that ethnic, religious, and social groups transmit fairly unchanged from generation to generation”. Greif highlights as key the cultural beliefs, which he has defined as “the ideas and thoughts common to several people that govern interaction—between these people and between them, their gods, and other groups—and differ from knowledge in that they are not empirically discovered or analytically proved. In general, cultural beliefs become identical and commonly maintained, and communicated” (Greif 1994, p.915). Therefore, these orientations, attitudes, beliefs, values, and customs, to be 57

qualified as “cultural” must meet two features that are supposed to be essential: a) being widely shared by the individuals of a community and b) being transmitted almost integrally to later generations. It provides communities with some sort of idiosyncrasy that is stable over time. Some well-known cultural traits within the research programs of political culture, social capital or institutional economics have been related to better social, political and economic performance (Putnam et al. 1988; Putnam et al. 1993; Knack & Keefer 1997; Uslaner 2004; Beugelsdijk & Van Schaik 2005; Guiso et al. 2008b; Tabellini 2010; Alesina & Giuliano 2015). These cultural traits include: personal independence, civism, generalized trust, political involvement or social participation, among many others. But this better performance occurs when they are present within a concrete institutional framework, generally inclusive or open access political-economic systems. The relationship between culture and—formal—institutions is an aspect that has also concentrated an increasing interest. It is fundamental to understand their own evolution and the performance of organizations in the fulfillment of their tasks. Since cultural features have such a determining role in the performance of open access institutions, the origins of cultural disparities have also been taken very seriously. This chapter is structured as follows. Next section focuses roughly on the dialectical relationship that culture and institutions maintain, continuously affecting each other. Section 3 defends the importance of the coherence between an institutional framework and the cultural system for the desired outcome in the economic, political and social spheres and deepens on the research programs of social capital and political culture. Section 4 concludes with some reflections on this complex relationship between institutions and culture.

3.2. Culture and institutions The study of the relationship between institutions and culture is fundamental to understanding their evolutionary trajectories. The two together make up a very complex coevolutionary trajectory. This relationship, although it is visibly fed back, has been generally analyzed as punctual or prolonged unidirectional impacts and the subsections

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that follow will cover both directions. More recent works tend to represent the dynamics that are generated between the two rather than treating them as isolated effects. The works that focus on the first direction study fundamentally the role of culture in the initial design of institutions and in trapping their evolution in a long path-dependence. The effect of institutions on culture is often analyzed as the impact of political or economic experiences that can shape cultural traits. This imprint on culture is able to persist even after the institutions that originated them have disappeared long ago.

3.2.1. The role of culture in the design and evolution of formal institutions North (1990b) recognized the enormous importance of informal institutions and culture in institutional path-dependence. Culture, together with the distribution of power, was one of the keys to institutional change and to the long-term persistence of manifestly poor institutional configurations for economic development. Avner Greif (1994) uses game-theoretic reasoning to analyze the relationship between culture and institutions and shows how culture plays a fundamental role in determining the institutional structure and leading its path dependence. One of the keys are posed by Roland (2004), who describes cultural elements—beliefs, values and social norms—as slow-moving institutions, whereas the more superficial and formal ones—constitutions, political institutions, legal frameworks—are fast-moving institutions. The former condition the speed—and direction—to which fast-moving institutions can evolve, since they often need to find a fit or support in the cultural heritage of the community. This is how culture is able to condition the emerging institutions and their evolution, making them path-dependent. Here are some examples. Fischer (1989) describes how the four major waves of original settlers to the United States would have determined the different regional institutions. Their cultures— different in civil liberties, social rights and conceptions of the role of the State—had a decisive effect on the formal institutions subsequently erected where they were established and in their evolution over time17. Greif (1994, 2006) compares the emerging institutions from two distinct cultural patterns. The Maghribi, a collectivist culture with Judeo-Muslim social norms, had 17

Seen in Alesina and Giuliano (2015).

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strong social enforcement mechanisms and used to establish relationships within their identity network of trust. The Genoese, however, with norms derived from the Christian culture and classifiable as individualists, lacked a closed social network and informal enforcement mechanisms. This led them to develop formal institutions and legal mechanisms of enforcement with greater intensity than the Marghribis. These included the codification of commercial laws and other incipient mechanisms to protect property rights in commercial activities. In a new comparison, Greif and Tabellini (2010) extended the collectivist-individualist thesis to the differences between the cultural patterns of Europe and China and reflect on their role in the institutional frameworks that both civilizations developed. Along the same line of thought, Gorodnichenko and Roland (2011) dealt with how individualist cultures tend to adopt the democratic system more quickly than the collectivist, even though they a priori seem less able to solve the problems of collective action. On the other hand, Alesina et al. (2001) suggest that the absence of a communist party in the United States is due, among other things, to its fundamentally individualistic culture, and this conditioned the possibility of building a European-style welfare system.

3.2.2. The role of institutions in shaping culture Some important contributions have highlighted the relevance of inclusive political experiences at local levels in the development of persistent cultural patterns. For instance, Nunn and Giuliano (2013) suggest in an empirical research paper that democratic experiences at local levels helped to generate persistent beliefs and attitudes toward the appropriateness of democratic institutions. As seen in chapter 1, the case of Italy has been deeply studied (Banfield 1958; Putnam et al. 1993; Guiso et al. 2008a) and provides us with some guidance on the mechanisms through which inclusive institutions at local levels may generate these traits. It was suggested that the current disparities in societal traits across Italian regions have their roots in their different local political experiences during the Middle Ages. During the eleventh century, the Normans invaded the southern part of Italy and established “a feudal monarchy, which continued in some forms or another until the Italian unification in 1861” (Guiso et al. 2008a, p.10). This regime, highly hierarchical and bureaucratic, precluded the formation of independent city-states. Even “any glimmerings of communal autonomy were extinguished as soon as they appeared” (Putnam et al. 1993, p.123), thereby hindering 60

the development of civic traits. In contrast, in northern city-states, “those who governed the communal republics acknowledged legitimate limits on their rule. Elaborate legal codes were promulgated to confine the violence of the overmighty. In this sense, the structure of authority in the communal republics was fundamentally more liberal and egalitarian … [and] provided a breadth of popular involvement in public decision making without parallel in the medieval world” (Putnam et al. 1993, p.125). From this perspective, it is understood that the effects of these historical institutional configurations have persisted until the present day by way of culture. In a similar fashion, Chapter 4 will propose that the current disparities in cultural traits associated to participation and cooperation across Spanish regions find their origin in their different local histories of political autonomy and inclusiveness. Similar phenomena were attributed to inclusiveness at the top of the State hierarchy. Tabellini (2010) considered institutional constraints on the executive as having an impact in the development of similar cultural traits by preventing the elites from undertaking arbitrary actions and providing a space for individual freedom where cooperative behaviors could flourish. Becker et al. (2016) argued that the serious and well-functioning bureaucracy of the Habsburg Empire left a cultural legacy that promoted generalized trust and discouraged corruption. Although not related to the dimension of inclusiveness, other works showed how preferences could be shaped by the political regime and are able to persist in the long term. For instance, Alesina and Fuchs-Schündeln (2007) argued that 45 years of state intervention and communist indoctrination in east Germany instilled in people the notion that the state is essential for individual well-being; and Peisakhin (2015) presented how contemporary Ukraine is regionally divided in terms of political attitudes and behavior by the ancient border that separated the Austrian and the Russian empires. Economic institutions are also capable of promoting relevant cultural transformations. Perhaps the most famous postulates are those proposed by historical materialism, in which those institutions that affect productive relations—let us assume that they are institutionalized relations—can affect the entire cultural and institutional structure of a society18 . On the other hand, Bowles (1998) developed a model about the effect of 18

“The totality of these relations of production constitutes the economic structure of society, which is the real foundation, on top of which arises a legal and political superstructure to which correspond definite forms of social consciousness. It is not the consciousness of men, therefore, that determines their existence, but instead their social existence determines their consciousness” (Marx 1970, pp.20–21).

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the—economic institution of the—market on the shaping of cultural traits. He also reflects about the evolution of feminist values and family organization that are contemporary with the incorporation of women into the labor market.

3.3. Coherence: a culture for the open access social order The earliest conception of institutional performance provided by the NIE would refer to the extent to which an institution is able to contribute to efficiency in social exchange relationships. However, Putnam et al. (1993) consider that it is not sufficient, since, although such a conception of political institutions is pertinent, “it does not exhaust the role of institutions in public life” (1993, p.8). They affirm that institutions are mechanisms to achieve ends, not only to obtain agreements; they must do things like “educate children, pay pensioners, stop crime, create jobs, hold down prices, encourage family values, and so on” (1993, p.8). Institutional performance will also depend on their ability to effectively meet their objectives in the public provision of goods and services. They find that “Some regional governments have been consistently more successful than others—more efficient in their internal operations, more creative in their policy initiatives, more effective in implementing those initiatives … Some places are better governed than others, even when the governments involved have identical structures and equivalent legal and financial resources” (Putnam et al. 1993, pp.81–82). So, this institutional performance will depend to a large extent on the cultural context in which the institutions are located. Beyond formal institutions, institutionalists must address the cultural idiosyncrasy that characterizes the community. Max Weber (2001[1905]) defended the well-known thesis that the members of what he called “Ascetic Protestantism”—Calvinism, Pietism, Methodism and the Baptist sects—, compared to other religious denominations, accumulated higher levels of wealth and occupied the highest professions of public and private hierarchies due to the ethical system they prescribed. The ethics of these confessions formed a framework of beliefs, values and attitudes that prescribed thrift and accumulation along with austerity in consumption. In addition, it drew a particular conception of the profession by endowing 62

it with a powerful social and divine meaning. Unlike other confessions, accumulation of wealth was not frowned upon but, in fact, conceived as a symptom of God’s blessing. Success in the profession was a sign of belonging to the group of the elect of God. This cultural system invited them to the constant accumulation of wealth and continued and selfless work. With the passage of time, the mystical component faded away but the beliefs, values and attitudes towards work and the accumulation of wealth remained. Through forward reasoning and starting from systems like those defined in the section 6 of Chapter 1—OAOs or inclusive systems—, we could deduce a complex of cultural features congruent with them. In this section, we focus on those cultural elements that could be consistent with the open access system in its economic and political spheres. Almond and Verba (2015[1963]) called this congruent relation between institutions and cultural orientations coherence. This would be a set of cultural orientations of fundamental importance for the survival of institutions but also for their good performance. They are series of cultural traits that could be said to belong to an open access system, giving rise to positive affective and evaluative orientations towards the system as a whole and all its parts. In the OAOs, for the economic, political or social realms to obtain the best performance—the best ideas, processes, or social, economic and political initiatives—, they require the creation of mesostructures composed of organizations that will compete and cooperate under formal or informal norms. If this is so, some cultural requirements seem to be common to all these spheres under the OAO. The literature has thoroughly dealt with the cultural features that favor or hinder cooperation and participation and affect the performance of these kinds of social orders. However, they have usually been treated separately. In the following subsections, we discuss the right cultural features of an open access institutional regime for political and economic performance and formulate two key elements that have been identified and addressed in depth: cooperation and participation. We focus on two relevant research programs, arising from economics and political science respectively: social capital and political culture.

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3.3.1. Culture and political performance within the OAO: the political culture of democracy The will to explain political phenomena through characteristic categories of the domain of political culture is as old as the political science itself (Almond 1990). For instance, Aristotle, in Politics, called attention to the importance of civic virtue for political performance; Rousseau, in The Social Contract, pointed out the relevance of morality, customs and public opinion within a society; and Tocqueville remarked on the transcendental role of mental structures, the common notions and the “whole moral and intellectual conditions of a people” (Tocqueville 1945[1835-1840], p.310). More recently, Almond and Verba, in their seminal work The Civic Virtue (2015[1963]), developed a theoretical framework for the study of political culture and proposed an empirical analysis based on surveys of representative samples. They carried out a descriptive and comparative analysis across five nations—United States, United Kingdom, Germany, Mexico and Italy—that brought about as a result a revitalization of cultural perspectives in political science and the emergence of the political culture approach as a distinctive research program. It was followed by analyses in more-or-less depth on other nations, such as Switzerland and Austria (Lehmbruch 1967), Sweden (Anton 1969) or Canada (Ornstein et al. 1980); other cross-national comparative researches (Barnes & Kaase 1979; Inglehart 1988; Inglehart & Baker 2000); and studies that highlighted regional disparities within internally heterogeneous countries, such as Italy (Putnam et al. 1988, 1993) or Canada (Henderson 2004). Other subsequent works analyzed political culture’s interaction with political institutional systems (Pateman 1971; Inglehart & Welzel 2003) and economic modernization (Lipset 1959; Inglehart & Baker 2000; Inglehart & Welzel 2010). Likewise, as a sign of its vitality and relevance, important publications presented exhaustive critiques and complete or partial theoretical revisits (Almond & Verba 1980; Pharr & Putnam 2000; Torcal & Montero 2006; Dalton & Welzel 2014). According to Almond and Verba (2015[1963], p.13), political culture refers to “the specifically political orientations -attitudes towards the political system and its various parts, and attitudes toward the role of the self in the system”. They emphasize the importance of the coherence between the formal political system and the political culture. We can thus identify a set of ideal traits that coherently fit the political system of democracy and that we could call political culture of democracy. That is, an ideal 64

political culture that is proper to the democratic institutional system and makes it wellfunctioning and long-lasting. Almond and Verba’s reference work identifies three types of pure schemes of political culture, usually found mixed within societies: participant, subject and parochial. Participant political culture is the most appropriate for the most genuinely democratic processes of the political system, but they identify what they called civic culture as the key traits to the survival of today’s Western representative democracies. In the words of Almond and Verba (2015[1963], p.31), “The civic culture is not the political culture that one finds described in civics textbooks, which prescribe the way in which citizens ought to act in a democracy. The norms of citizen behavior found in these texts stress the participant aspects of political culture. The democratic citizen is expected to be active in politics and to be involved. Furthermore, he is supposed to be rational in his approach to politics, guided by reason, not by emotion. He is supposed to be well informed and to make decisions—for instance, his decision on how to vote—on the basis of careful calculation as to the interests and the principles he would like to see furthered. This culture, with its stress on rational participation within the input structures of politics, we can label the “rationality-activist” model of political culture. The civic culture shares much with this rationalityactivist model; it is, in fact, such a culture plus something else. It does stress the participation of individuals in the political input process. In the civic cultures described in this volume we shall find high frequencies of political activity, for exposure to political communications, of political discussion, of concern with political affairs. But there is something else. … Thus attitudes favorable to politics within the political system play a major role in the civic culture, but so do such nonpolitical attitudes as trust in other people and social participation in general. The maintenance of this more traditional attitudes and their fusion with the participant orientations lead to a balanced political culture in which political activity, involvement, and rationality exist but are balanced by passivity, traditionality, and commitment to parochial values”. The result and procedure of the investigation were contested. Among the negative reactions, it was criticized for Occidentalism, and especially for a bias towards Anglo65

Saxon patterns. In any case, this research and its suggestive thesis helped to open a highly analytical and empirical debate for the study of the relationship between culture and institutional frameworks. For the survival of democratic institutions—which was the primary concern of this research program—, a high attention was paid to the citizens’ satisfaction with the political system the degree of affection and positive evaluations about its elements and their performance19. However, for the performance of democratic institutions, it seems that different features are needed, such as those that active participation—interest in political affairs, a tendency to learn about them, active participation in political initiatives, etc.—and cooperation—trust, tendency to engage in voluntary associations, etc. Other empirical studies have revealed some common cultural patterns and their linkages with democratic institutional performance. The work of Schwartz (1994, 1999) is relevant in this matter. He ventures into the codification of cultural patterns around three interrelated dimensions: Embeddedness-Autonomy, Hierarchy-Egalitarianism and Mastery-Harmony. The Embeddedness-Autonomy dimension addresses the relationship between the individual and the group. Under this approach, embeddedness refers to the cultural emphasis on the person as an integrated component of the group and committed to maintaining the status quo and the ownership and repressing the actions or inclinations that may disrupt the group’s solidarity and traditional order. Autonomy describes a cultural pattern in which the person is seen as an autonomous and limited entity that finds meaning in its own uniqueness. The Hierarchy-Egalitarianism dimension reflects the ideal way of undertaking cooperative and productive activities in society. Hierarchy reveals the cultural emphasis on obedience to role obligations within a legitimately unequal distribution of power, roles and resources, and egalitarianism on the transcendence of individual interests and the belief of being morally equal. The Mastery-Harmony dimension refers to the metabolic relationships that individuals establish with their natural and social environment. While mastery assumes the cultural emphasis on the active dominance of the elements of the social and natural environment,

19

It is noteworthy a recent phenomenon called political disaffection (Torcal & Montero 2006), which is broadly extended and consists of disaffection with the political matters and actors, but the desirability of democracy is not questioned.

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harmony refers to the acceptance of the environment as it is and conforming to it rather than transforming or exploiting it. Schwartz (1999) explains the coherence—compatibility or conflict—of these values with some conceptions, norms or values relative to the work. Licht et al. (2007) look for significant relationships between some configuration of cultural traits according to Schwartz’s (1994) classification and three governance norms: rule of law, corruption and democratic accountability. Their general hypothesis is that, in the long run, the modes of exercising power —governance—should be conceptually consistent with the cultural orientations that prevail in a society. They discover a strong relationship between the embeddedness-autonomy dimensions—what validates previous studies on the individualism-collectivism dichotomy—and these modes of governance. The cultures that emphasize individual autonomy tend to develop less corrupt modes of governance, with greater rule of law and greater democratic accountability. Chapters 4 and 5 deal with a subset of this political culture of democracy, which is related to the performance of the democratic system and will consist of cultural features that favor the active participation and cooperation. They are of interest since they are associated with, among other issues, the practical performance of democratic institutions through political accountability, governmental effectiveness, lower levels of corruption or the overcoming of collective-action problems (Putnam et al. 1988; 1993; Boix & Posner 1998; Uslaner 2004; Nannicini et al. 2013). Chapter 4 examines the origins of these traits and Chapter 5 tests their role in the performance of democratic institutions.

3.3.2. Culture and economic performance within the OAO: social capital This subsection delves further on the concept of social capital. The social capital research program deals with elements of the informal context that favor cooperation and social participation in any of its forms. They configure social environments that are favorable for collective action but also individual initiative, creativity, entrepreneurship spirit and the autonomous development of civil projects. Much of the attention in social capital is based on the assumption that its absence is an obstacle to economic development (Durlauf & Fafchamps 2005), especially, for its poor 67

use of the economic potential of the community. Putnam et al. (1993) argue that a greater endowment of social capital or civism does not imply a high and sustained economic growth, but it makes the difference when it comes to taking advantage of the circumstances. They argued that the “takeoff [of the Italian northern regions] was occasioned by changes in the broader, national, international and technological environment” (1993, p.159). They simply took better advantage of these new conditions. Advanced economies are not the only that benefit economically from the social contexts of social capital. According to Grootaert and Bastelaer (2002), social capital affects economic development in developing countries through facilitating transactions between individuals, households and groups for three reasons: first, because individuals participation in networks increases the availability of information and reduce costs; second, because participation in social networks and attitudes of mutual trust make it easier for any group to reach collective decisions; and third, because these networks and attitudes reduce the opportunistic behavior of the members of the community. Empirical research found that social capital, measured either as tendency to associate or as generalized interpersonal trust, was related to, among other things, overall economic growth (Helliwell & Putnam 1995; Knack & Keefer 1997; Zak & Knack 2001; Beugelsdijk & Van Schaik 2005; Guiso et al. 2006), the ease to cooperate in large organizations (La Porta et al. 1997) or the development of financial markets (Guiso et al. 2004). Throughout the last decades, different approaches to social capital have been elaborated, considering very different elements (Paldam 2000). Although generally all authors compose rather integral conceptions of social capital—see Coleman (1988)20, Putnam et al. (1993) 21 or Ostrom and Ahn (2003) 22 , that take into consideration a complex of networks and structures along with a set of values, beliefs and social norms—when the

20

In James Coleman’s (1988, p.S98) words, “social capital is defined by its function. It is not a single entity, but a variety of different entities with two elements in common: they all consist of some aspect of social structures, and they facilitate certain actions of actors—whether persons or corporate actors— within structure”. 21 Putnam et al. (1993, p.167) defined social capital as the set of “features of social organization, such as trust, norms, and networks, that can improve the efficiency of society by facilitating coordinated actions”. 22 Ostrom and Ahn (2003) attempted to order this system of elements and considered that trust was not one of the forms of social capital, but a consequence of social capital and the key for successful collective action. The existence of trust within a group of people can often be explained as the result of some configuration of these forms of social capital: trustworthiness, networks and institutions. Subsequently, this generalized trust will generate a greater ease for collective action.

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authors undertake an in-depth analysis of its ontology and its causes, they emphasize some elements over others. Usually they rely more on either structuralist or culturalist variables. For instance, Lin (1999) or Durlauf and Fafchamps (2005) develop a more structural discourse, placing special emphasis on networks, clubs and material structures. Others, such as Tabellini (2010) or Guiso et al. (2008; 2011), however, are oriented toward the most cultural aspects of the concept. In this section, we study the qualities of social capital in its cultural dimension, leaving aside the most material component of the concept —social networks, clubs, the topography of social structure, etc. 23 . From this perspective, a conception of social capital is developed from elements of the cultural sphere—that is, shared beliefs, values, attitudes, etc.—that affect social participation and cooperation. In this sense, Guiso et al. (2011) identified social capital as civic capital, and defined it as “those persistent and shared beliefs and values that help a group overcome the free rider problem in the pursuit of socially valuable activities”. Putnam et al. (1993) emphasized the role of social capital in the formation of the civic community, characterized by the active participation of citizens in the public affairs. It is not just about basic norms of civism, they talk of civic virtue: the “steady recognition and pursuit of the public good at the expense of all purely individual and private ends” (Skinner 1984)24. This is not to say that the powerful fuel of self-interest is given up. It could be what Tocqueville named “self-interest well-understood”, that is, the patient pursuit of long-term collective targets with individual rewards. It is not necessarily altruism understood as “nonrefundable” contributions. We could understand social capital as the generalized ability to transcend individual interest or suspend it to identify with a supraindividual entity and its institutions in the performance of concrete activities. Therefore, its effect does not end in specific activities—like a sale—but extends to more complex and prolonged relations in time. In the language of game theory, Paldam (2000) suggests, social capital could be the propensity to play the cooperative solution in the prisoner’s dilemma. This research program highlights three different but related ways in which social capital directly affects economic performance within an Open Access Social Order: a)

23 24

For a review on the structural component of social capital, see Soto-Oñate (2014). Seen in Putnam et al. (1993, p.88).

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reduction of transaction and agency costs, b) ease of cooperation and collective decision-making; and (c) individual empowerment. As mentioned above, trust becomes a fundamental element in the analysis of social capital and its effect on economic development. Both transactions in the market or operations within hierarchical organizations bring about transaction and agency costs based on lack of trustworthiness and trust. Agency Theory illustrates particularly well the costs generated by the socalled moral hazard and adverse selection. In these cases, it is necessary to spend resources in both monitoring—by the principal—and bonding—by the agent—costs to reduce the risk of an eventual opportunistic use of information asymmetry. This fact affects both the cost of transactions and organizations as well as the possibility that they may materialize or survive. Additionally, trust derives in ease for collective action. This implies a capacity for spontaneous cooperative movements in the community—without external intervention—and a greater probability of success for all initiatives of this type. Hence, the concept of social capital was central to the study of the management of common resources at the local level (Ostrom 1990; Ostrom & Ahn 2003). On the other hand, one element is usually left aside but somehow implicitly present in the social capital literature. It is the features of a culture that makes it more favorable to individual empowerment, independence and autonomy. It derives in the feeling that one is able and has the right to play certain roles within their community and it requires a society that is tolerant with the individuality. This is crucial in the economic, political or social fields of any kind, and can be linked to the level of social entrepreneurship in any form. Guido Tabellini (2010) has emphasized the positive role of individual independence, empowerment and the formation of the participatory spirit in opposition to a culture of obedience. He proposed a comparative analysis based on indicators such as generalized trust and tolerance, but also on the feeling that individuals have control over their own lives and the tendency of socializers to encourage in children the value of independence.

3.4. Conclusion This chapter has addressed the recent coverage of political economy to the relationship between culture and the fabric of formal institutions. In subsection 2, it dealt with the capacity of institutions and culture to coevolve and transform each other. Significant 70

progress has been made in this regard, and more and more comprehensive and elaborated schemes are already being developed to deal with this relationship. Subsection 3 talked about the fit between culture and institutions to give rise to political, economic or social performance. It took the formal configuration of open access social orders (OAOs) as starting point for the analysis. The characteristic institutional system of the OAOs grant a broad space of civil, economic and political freedoms and rights but the fit that these institutions may find across cultures may be diverse. This different matching produces different outcomes in terms of political and economic performance. If OAOs need the emergence of a dynamic mesostructure of transactions and organizations, the level of social capital and the coherence of its political culture decisively affect its construction and operation. The chapter covered a number of cultural orientations that favor the performance of open access social orders when they affect two key elements: cooperation and participation. We refer to cooperation in its broadest sense: cooperation with common norms both in unified governance structures and in organized competition with conflicting objectives—values and beliefs promoting civism and integrity, associative tendency, generalized trust, ease for collective decision-making, etc. On the other hand it pointed out the importance of the participative spirit, the individual initiative, the empowerment or the autonomy of the members of a society to carry out projects of social entrepreneurship in any of its forms—companies, legislative initiatives, protests, political parties, NGOs, etc.—or actively participate in any of the processes or organizations—voting, contracts, control of elites, contacts with public representatives, etc. It refers to the cultural recognition of individual empowerment and active participation beyond the guarantee of a mere space of formal freedom. It is a configuration of intrinsic and extrinsic incentives that motivate the entrepreneurship and the social participation in any of its forms. Among the intrinsic motivations are the conviction of the relevance of oneself as an individual actor along with the confidence in one’s own competence and the feeling of having the right or the imperative to participate in political, economic or social life. The extrinsic motivations can operate through the cultural denouncement of action/inaction or the positive/negative valuation of individual autonomy. However, all these cultural traits and orientations that have been defined here are key to the specific institutional order from which we had departed—the OAO. If they are located within other political schemes, such as the most 71

typical of the Ancient Regime, it could lead to the dysfunctionality of the system, the prosecution of its bearers or the collapse of the social order itself. It is also interesting to advance a new line of research that addresses the capacity of institutions and the incentives they generate to activate or deactivate a moral or cooperative response as opposed to individual self-interest and opportunism. Sometimes incentives “crowd out ethical reasoning, the desire to help others, and intrinsic motivations” (Bowles 2016, p.113).

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PART II Empirical Case Studies on Institutions and their Context

Chapter 4 The Cultural Legacy of Political Institutions: The Case of the Spanish Regions25

4.1. Introduction In both political science and political economy, many authors have wondered about the origins of the persistent geographical disparities in terms of civic culture, orientation towards public affairs, generalized trust, associative participation, etc. This kind of traits gives rise to cultural contexts that favor cooperative and participative behavior. Chapter 3 defended that they are a set of highly relevant cultural features that fit coherently with open access institutional system and affects its political and economic performance. It is well known the capacity of historical experiences to shape culture, leaving a long lasting legacy. Often, authors have attributed to inclusive political institutions this ability to imprint a legacy of cooperative and participatory traits in cultures. However, little research has been done with regard to which characteristics of inclusive institutions leave which kind of cultural traits. This chapter deepens the link between inclusive institutions and the development of cultural patterns of participation and cooperation and attempts to introduce and analyze the role of proximity in the depth of the imprint that inclusive institutions leave on culture. Proximity refers to how close and transcendental the inclusive institutions are to the life of the broad majority of the population. If those inclusive institutions are proximate, they are supposed to be able to leave a more persistent and intensive cultural imprint on a society. This research examines the regional patterns across Spain in terms of what is called here political culture of participation and argues that they may partially find their roots in the distant past. For that purpose, it delves into Spanish history and focuses on two historical institutional experiences that presented significant differences across regions. They will allow us to proxy the comparative level of inclusiveness in their political organization and the proximity of the political process to the population. The 25

A previous version of this chapter will be published in Hacienda Pública Española/Review of Public Economics (Soto-Oñate, forthcoming).

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inclusiveness of political institutions at the local level is proxied by the capacity of the towns to develop their own custom-based legal order in the High Middle Ages. At that time, the municipalities of some Iberian areas held a transcendental part of the political process for the everyday life of the population. At a different level of proximity—the top of the State—inclusiveness is proxied by the levels of constraints on the executive during the Modern Age in the different kingdoms. The article provides evidence that (a) past inclusive political experiences may have played a determinant role in shaping the current disparities of participation patterns across the Spanish regions and (b) inclusive institutions were better able to leave this cultural imprint when they affected the political process at a more proximate level to the bulk of the population. Although this chapter refers exclusively to political orientations, the features under consideration are highly linked and overlapped with those normally attributed to social capital. This will allow us the extension that we will see in Chapter 5. Section 2 reviews the literature on political culture, the cultural legacy of institutions and the mechanisms of long-term cultural persistence. Section 3 introduces the Spanish case, presents the current regional distribution of political culture of participation and the distinctive political trajectories that Spanish regions followed prior to unification. In section 4, the theses are empirically tested. Finally, the last section discusses the results and draws some concluding remarks.

4.2. Political culture, institutions and long-term persistence: A literature review This section delves into the concept of political culture, the capacity of institutions to affect culture and the mechanisms that permit their cultural legacy to survive in the long term.

4.2.1 Political culture and political culture of participation As mentioned in chapter 3, political culture may be defined as “the specifically political orientations -attitudes towards the political system and its various parts, and attitudes toward the role of the self in the system” (Almond & Verba 2015[1963], p.13). This literature emphasizes the transcendental relevance of the coherence between the formal 76

political system and the political culture. We can thus identify a set of ideal traits that coherently fit the political system of democracy and that we could call political culture of democracy. That is, an ideal political culture that is proper to the democratic institutional system and makes it well-functioning and long-lasting. The present article is focused on a subset of traits within this political culture of democracy that foster active participation and cooperation. This subset of traits will be called herein the political culture of participation 26 , though also the cooperation spirit must be considered as belonging to this concept. These traits are similar to those included in the concept of social capital, which in Putnam, Leonardi and Nanetti’s (1993) work also finds its roots in the political culture literature. They are of interest since they are associated with, among other issues, the practical performance of democratic institutions through political accountability, governmental effectiveness, low levels of corruption or the overcoming of collective-action problems (Putnam et al. 1993; Boix & Posner 1998; Uslaner 2004; Nannicini et al. 2013). Regarding Spain, a wide variety of studies on the political culture of Spaniards was published after the arrival of democracy. Important works were interested in the evolution of their political culture over time, especially in the effect on and of the transition to democracy (López Pintor 1982; Benedicto 1989, 2004; Montero & Torcal 1990; Botella 1992) or its similarities and particularities within the European context (Torcal et al. 2005; Galais 2012). Inasmuch as participation is an important part of an ideal political culture of democracy, it has concentrated a great deal of attention in Spain (Morales 2005; Montero et al. 2006; Cantijoch & San Martin 2009) and several works revealed internal differences in participation based on gender, age, level of education, income and occupation (Justel 1992; Morán & Benedicto 1995; Morales 1999; Ferrer et al. 2006; Morales et al. 2006; Morán 2011), and across Spanish regions (Montero & Torcal 1990a; Mota & Subirats 2000; Frías 2001; Mota 2008). However, very little attention has been paid to the origins of these regional differences across Spain. Those studies that attempt to explain participation based on individual features or immediate experiences with the political system are complemented by this approach, 26

It should not be confused with the concepts of participant political culture or civic culture, which are broader concepts defined by Almond and Verba (2015[1963]). They include other dimensions related to evaluations and judgments about the system and their main actors, involving issues such as the legitimacy of the system, support for democracy or satisfaction with the performance of political parties.

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which suggests the existence of a generalized component rooted in the cultural environment. As will be seen in section 3, the highest levels of political culture of participation are concentrated in the northeastern quarter of the Iberian Peninsula and this article attempts to explain this geographical distribution by suggesting a possible institutional origin. The next paragraphs review the literature about the role of historical events, especially political experiences, in the shaping of these cultural traits and the mechanisms through which they can persist in the long term.

4.2.2. The role of historical institutions in the origins of political culture disparities Although culture is in constant evolution, it is also evident that a persistent or slowmoving cultural component exists that reflects historical experiences and is able to condition its evolutionary path (Inglehart & Baker 2000; Roland 2004; Portes 2006). In the last decades, important empirical studies were conducted on some highly persistent cultural traits that found their roots in a distant past (Putnam et al. 1993; Guiso et al. 2008a; Tabellini 2010; Nunn & Wantchekon 2011; Voigtländer & Voth 2012; Alesina et al. 2013; Giuliano & Nunn 2013). This cultural legacy is able to persist even after its original circumstances have long ago disappeared. Part of these works has pointed out political experiences as powerful factors that deeply shape culture. Two dimensions of institutions are taken into account here: inclusiveness and proximity. Inclusiveness is the level to which the members of a population condition political decision-making and/or their interests are reflected in the institutions and public policy. In its concrete form, inclusiveness is usually associated with more democratic institutions, rule of law, separation of powers, or a set of individual rights and liberties for civil, political and economic matters. Those institutional environments where participation is permitted and even requested are better able to make participation and cooperation traditions flourish. On the other hand, it seems reasonable to think that in systems in which the political processes were more proximate—i.e., in which the bulk of the important political decisions were made at a closer level to the population—, the inclusive institutional environment would be more capable of generating the dynamics of political participation and the schemes of thought about the Political that leave a persistent imprint in the local culture. This proximity of the political process makes reference not only to geographical space but also to the location of the political process 78

within the strata of a State’s hierarchy and its distance with regard to the bulk of the population27. The current chapter contributes to this literature by providing evidence and reflecting on the capacity of institutions to leave a cultural imprint depending on their degree of proximity.

4.2.3. Reverse causality and other background determinants However, as mentioned earlier, the causal relation between formal institutions and deep elements of culture—beliefs, values, attitudes, etc.—acts in both directions, and this problem of reverse causality between culture and institutions hinders causal inference. One common way to overcome reverse-causality problems in economics has been to resort to the so-called natural or historical experiments (Dunning 2008; Diamond & Robinson 2010). They require finding historical events in which the effect of institutions on culture—the causal direction of interest—is observable in isolation from the effect of culture on institutions. Section 3 presents the conditions that allow one to consider the case of Spain within the framework of a natural experiment. Besides endogeneity problems, other important relevant factors like socioeconomic modernization have preoccupied researchers when approaching this matter. In a famous article, Lipset (1959) suggested that the “modernization” associated to economic development led to or permitted the development of a sustainable and long-lasting democracy by generating fundamental sociocultural transformations. Inglehart and Baker (2000) empirically supported his thesis and concluded that economic development tends to push societies in a common direction but, rather than converging, they move in parallel, path-dependent trajectories that are shaped by their cultural heritages. In another empirical study, Inglehart and Welzel (2010) explored the mechanism that links economic development to democratization and argue that prosperity certainly tends “to bring enduring changes in a society’s values and, at high levels of development, make the emergence and survival of democratic institutions incrementally likely”. Persson and Tabellini (2009) proposed a feedback link between development and democratization through what they called democratic capital, an accumulated stock of civic and social assets. Therefore, shifts in cultural traits could

27

Chapter 3 presented a variety of previous empirical works that make reference to the capacity of inclusive institutions to leave this cultural imprint but operate at different levels of the public hierarchy.

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have also been brought about by socioeconomic transformations and this must be taken into account.

4.2.4. The mechanisms for long-term persistence An institutional environment can generate shared attitudes and behavioral patterns in a community as an immediate, rational response to the institutional environment’s conditions. However, in this kind of works we address the persistent imprint left by an institutional environment that no longer exists. This is what is known as the long shadow of history or, more specifically, the cultural legacy of political institutions. But, how can this long cultural shadow of history persist across centuries? Generally, researchers on this topic have appealed to an essentially cultural mechanism. In the last two decades, in order to explain cultural persistence, economists and political scientists have devoted a great deal of effort to the theoretical modelling and empirical investigation of the intergenerational transmission of cultural traits (Bisin & Verdier 2001, 2011; Giuliano 2007; Tabellini 2008; Guiso et al. 2008b; Alesina & Giuliano 2010; Fernández & Fogli 2009; Luttmer & Singhal 2011). For instance, Guiso, Sapienza and Zingales (2008b) propose a theoretical model to explain how as a result of an historical impact a community can be trapped in a low-trust equilibrium; however, a positive shock to the benefit of cooperation can permanently shift the equilibrium toward a cooperative one. They build an overlapping-generations model in which children learn beliefs and values from their parents and then, after interacting within the society, they inculcate—update—values in the next generation. This is the logic complements the reasoning of this article. Therefore, it is assumed that, at aggregate levels, combined schemes of socialization and historical experience are what generate the patterns of persistence and change in a political culture.

4.3. The case of Spain The intricate interrelationships among variables, the local specificities and the difficulty of measuring the qualitative complexity of culture and institutions distort the conclusions of the comparative research across nations. In recent decades, the usefulness of country—analytic—narratives to study complex puzzles such as those involving formal institutions, culture and economic performance have been highlighted 80

(Rodrik 2003a). They permit one to hold variables of interest or background variables constant, circumvent reverse causality and be more accurate with descriptions and interpretations. This is also the aim of natural experiments, which often find the proper conditions in specific events of a nation’s history. According to Diamond and Robinson (2010, p.2), natural experiments consist of “comparing … different systems that are similar in many respects but that differ with respect to the factors whose influence one wishes to study”. They are empirical approaches that aim to take advantage of the inferential power of true experiments. In true experiments, researchers compare the response of experimental subjects to treatment with the response of a control group, the assignment of the subjects to treatment is random, and the manipulation of the treatment is under the control of the experimental researcher (Dunning 2008). However, in social happenings, generally, the manipulation of the treatment and the background factors are out of experimenter’s control. In natural experiments, researchers find the conditions in which the assignment of the subjects to treatment and control conditions is “as if” random. This is why, as Dunning (2008) argues, a detailed case-based knowledge is fundamental “both to recognizing the existence of a natural experiment and to gathering the kinds of evidence that make the assertion of ‘as if’ random assignment compelling”. Figure 4.1. Regionally distinctive effects of political institutions on political culture

The case of Spain presents the conditions for a natural experiment to study (a) the causal link between the inclusiveness of political institutions and the development of cultural traits that foster participation and (b) the autonomous persistence of this cultural

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legacy until the present time. Figure 4.1 uses a simplified outline to illustrate the chain of events and the causal flows covered in this reasoning. Chronologically, Figure 4.1 suggests that there was an exogenous impact, the so-called Reconquista—the Christian Reconquest—that established an early distribution of political institutions across Spain that had nothing or little to do with previous political cultures in the regions. It represents an “as if” random assignment of the subjects to treatment. This impact laid the foundations of regional institutional trajectories, which were coevolving in continuous feedback with regional political cultures, until political unification. The dashed line indicates the moment from which political institutions no longer show regional variation, leaving the regional political cultures theoretically isolated from a regionally distinctive effect of formal political institutions. Of course, political institutions were still affecting political culture, but the effect of regionally distinctive political institutions no longer exists—remember that our intention is to know the cause of the regional distribution of cultural patterns. At this moment is when the shadow of history operates. It is understood that the old distribution of cultural traits affects the current one through a long and complex mechanism of intergenerational transmission in the fashion of those presented in section 2. The exogenous impact of the medieval Reconquista allows us to observe a causal direction in the origin from institutions to political culture. On the other hand, modern Spanish unification offers the chance to investigate to what extent the current geographic distribution of political culture of participation is due to a long-lasting legacy that is capable to autonomously persist even when the originating institutional circumstances have long disappeared. Additionally, the Spanish case, as a novelty, permits one to reflect on the possible role of proximity in the generation of these traits. The following subsections deepen this outline addressing three key questions: (a) How the regional patterns of political culture of participation are and how they are measured—subsection 3.1—; (b) how the inclusiveness of the regional political trajectories are measured—subsection 3.2—; and (c) why early political institutions in the regions are exogenous to a previous political culture—subsection 3.3.

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4.3.1. The regional distribution of political culture of participation in Spain In this subsection, a summary index of political culture of participation is constructed from survey data. This index is meant to proxy how political culture of participation is extended across the Spanish provinces. These traits are directly associated to political involvement and active participation, so the indicators should attempt to proxy beliefs, values and attitudes related to both the active role of the individual as a political actor and the intensity of his or her links with the political realm. Initially, six cultural indicators are built from different surveys. Later, a summary variable, called Participation Index, is constructed from the first principal component of those indicators to reflect the variation of these cultural traits across 50 Spanish provinces—the autonomous cities of Ceuta and Melilla are excluded. Unfortunately, the available data are scarce and this fact involves a number of complications. There is no complete survey that could provide us with all the needed indicators, so we have to resort to different surveys from the Spanish Centro de Investigaciones Sociológicas (CIS), which nonetheless will not make it possible to cover all the factors that would be desirable—e.g., early socialization process at home, generalized trust, social values, etc. The aim of this index is to obtain a proxy for the provincial variation of this political culture of participation, but, lamentably, the sample of some of the considered surveys is designed to obtain regional aggregations at the autonomous community level and not at the provincial level 28 . Only the CIS (2000, 2008b, 2011b, 2015) surveys of are designed to get provincial aggregations. The other surveys from CIS (1998, 2002, 2008a, 2011a), although they cover all the Spanish provinces, provide an insufficient amount of observations for the smallest ones. Therefore, from the six indicators—which will be presented below—, three will be aggregated at the autonomous community level29 and three at the provincial level. This construction, mixing aggregates at provincial and autonomous community levels, makes sense under the assumption that there exists certain consubstantiality among these variables and therefore their real provincial variability within the autonomous communities is similar.

28

Autonomous communities are administrative and political entities of a higher hierarchical level. Most autonomous communities comprise more than one province (see Appendix I). 29 The value obtained for the autonomous community is imputed to its province(s).

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To build this proxy for political culture of participation, we take into account information about people’s interest in politics (intpol)30, the frequency in which they are involved in conversations on politics (convpol)31, their information-seeking habits about politics (infopol) 32 , their feeling of being informed about politicians’ activities (infogov)

33

, and their tendency to participate in voluntary civil organizations

(association)34 and in unconventional political actions (action)35 36.

30

From CIS (2000, 2008b, 2011b, 2015). The four surveys ask the same question: “Generally speaking, would you say that you are interested in politics a lot, considerably, a little or nothing at all?” By pooling both waves, a substantial number of observations is obtained, with the smallest provincial sample (Soria) comprised of 916 individuals. To build this indicator, the options are valued in a range from 1 to 4, with 1 being “nothing at all” and 4 “a lot”. The indicator intpol corresponds to the provincial average of this measure. By pooling these waves, the province with the smallest sample was Soria, which had 916 observations after removing the missing values. 31 From CIS (2000, 2011b, 2015). The three surveys ask the following question: “Generally speaking, how often do you talk about politics with your friends, relatives or work colleagues?” The options are “usually,” “occasionally,” “rarely” and “never or almost never”. To build this indicator, the options are valued in a range from 1 to 4, with 1 being “never or almost never” and 4 “usually”. The indicator convpol is the provincial average of this measure. By pooling these data, the province with the smallest sample was Ávila, with 707 observations. 32 From CIS (2000) we use the questions “Could you tell me how often you read general-information newspapers? How often do you watch the news on TV? How often do you follow the news on the radio?” For every means of communication the options are “every day or almost every day,” “four or five days per week,” “two or three days per week,” “only in the weekends,” “rarely” and “never or almost never”. To build this indicator, the options are valued in a range from 1 to 6, with 1 being “never or almost never” and 6 being “every day or almost every day”. A single variable is obtained from the first principal component of the three means of communication and the indicator infopol reflects the provincial average of the variable. The smallest sample for a province corresponded to Soria, which had 233 observations. 33 From CIS (1998, 2002). Both surveys ask “Generally speaking, would you consider you are very informed, quite informed, a little informed or not informed at all about the activities developed by your autonomous community’s government? What about the activities of your autonomous community’s parliament? What about your city council’s activities?” Again we value the options in a range from 1 to 4, with 1 being “not informed at all” and 4 “very informed”. We extract the first principal component of the responses in the three political actors (community’s government, community’s parliament and city council) and construct the indicator infogov from its average in the autonomous community. After pooling both surveys, the smallest number of observations for an autonomous community was 821 (La Rioja). 34 We obtain this information from CIS’ (1998) question: “From the following associations and organizations, can you tell me about each of these organizations, whether you belong, whether you have ever belonged or whether you never belonged to...?” The kinds of associations listed were: “sports associations and groups,” “local or regional societies,” “religious associations,” “educative, artistic and cultural associations and groups,” “juvenile organizations or groups,” “charitable associations,” “ecologist associations,” “labour unions,” “political parties,” “human rights organizations,” “pacifist movement association,” “feminist associations”. For each kind of organization, a dummy is created, taking value 1 when the respondent currently belongs to any organization of that type. The first principal component of all the dummies is computed and the indicator association reflects its average for the autonomous communities. The autonomous community with the smallest sample was La Rioja, with 412 observations. 35 From CIS (2008a, 2011a). Both surveys ask the same question: “I would like you to tell me whether you have carried out on many occasions, sometime or never the following actions that people may pursue in order to make known their opinion about an issue”. However, because surveys do not present the same options, we take into account only those actions that appear in both surveys: “participating in a demonstration,” “buying or refusing to buy a product for ethical reasons or to protect the environment,” “participating in a strike” and “occupying buildings, participating in a lock-down or blocking the traffic”. A single variable is created by obtaining the principal component of these four alternative political actions and the indicator action computes its average for the autonomous communities. By pooling both surveys, the smallest sample for an autonomous community was La Rioja, which had 118 observations.

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A summary variable called Participation Index is obtained from the first principal component of all these six measures—intpol, infopol, convpol, infogov, association and action. The principal component analysis returns a normalized variable, so this index shows mean 0 and standard deviation 1. Its highest value is reached in Madrid (2.84) and the lowest in Badajoz (-1.78). Figure 4.2 shows the geographical distribution of the resulting variable. The highest values are located in northern Spain, especially in the northeastern quarter of the Iberian Peninsula. Figure 4.2. Geographical distribution of the Participation Index

4.3.2. The regional political trajectories As suggested above, the Spanish regions followed distinctive political paths. These regionally distinctive political paths end with the unification process. This fact is of fundamental importance, since it integrates all the regions in the same formal political institutional framework. Thus we do not consider formal institutions as transmitters of regional variation after unification. This is how we theoretically isolate subsequent political culture from the effect of subsequent formal political institutions. This subsection presents the distinctive political paths that regions followed before unification in the early 18th century. We focus on two different periods in Spanish history that permit us to establish an interregional comparison in terms of political institutions. In each period, we can find institutional elements that present significant 36

Although political orientations and political participation itself are often treated separately to study the effect of beliefs, attitudes and values on concrete forms of participation, since this is not the intention of this research, here they are jointly used to obtain a single indicator.

85

differences across regions and reveal information on the level of inclusiveness of the political institutional system and the level of proximity of the political process. These institutional elements illustrate the level of inclusiveness of the institutional systems in the regions at two different levels of the State hierarchy. The inclusiveness of political institutions at the local level is proxied by the capacity of the towns to develop their own custom-based legal order in the High Middle Ages. At a different level of proximity, the top of the State, inclusiveness is proxied by the levels of constraints on the executive during the Modern Age in the different kingdoms. The following paragraphs assess both political experiences.

4.3.2.1. Local-level inclusiveness: Municipal autonomy in High Middle Ages The literature review mentioned the case of Italy and highlighted the importance of the experiences of the northern free cities in the Middle Ages for the development of these cultural traits. We do not find in Spain free city–state cases in the Italian sense, but there did exist other kinds of political experiences at the municipal level during the High Middle Ages that presented clear regional disparities in terms of inclusiveness. During the process of the Reconquista (8th–15th centuries), the Iberian Peninsula experienced a peculiar period in terms of sociopolitical organization. Significant events of this time, like the existence of a weak central and integrative power or the need to repopulate the newly conquered areas, gave rise to a wide range of political and legal arrangements at the local level across Medieval Spain. At this time, the municipalities were endowed with great competences, to the extent that in some areas the bulk of the important political decisions were located in the municipal corporations. In the early stages of the Reconquista, the towns that were founded or repopulated were provided with a kind of contract, similar to small constitutions, called fueros, cartas forales or cartas pueblas, in which a series of rights and freedoms were granted to the inhabitants. They were intended to make more attractive the newly reconquered areas and consolidate positions against Muslim raids. The first documents granted were very much reduced and are known as fueros breves (brief fueros). They were fundamentally used in the central and northern areas of the Iberian Peninsula. This legislative corpus was insufficient to cover all the normative 86

necessities that the daily life required. Therefore, gaps in the legal code had to be covered by another complementary legal code or—formally or informally—completed by locally developed legal codes or customary norms. Later, in more advanced stages of the Reconquista, fueros extensos (extensive fueros) became more common. The elites of the kingdoms tended to offer more complete legal orders and, from a certain point on, large codes were imposed with territorial scope either as complementary texts or definitively displacing the local codes. Until the eventual imposition of these large codes of territorial scope, extensive areas of the Iberian geography in its northern half were in need of a way to autonomously complete their own local law—endowed only with a brief fuero—either by the relatively direct and active participation of an important proportion of the population, the use of political delegates or through the judicial creation of law. However, this was only so in the northeastern part of the Iberian Peninsula, since the elites of the western kingdoms opted to complement the local orders with the Visigothic law 37 as an underlying legal corpus. According to García-Gallo, “in stark contrast to the Visigothic system, centered on the validity of Liber Iudiciorum, we find what we could characterize as free law; that is, an always-in-progress legal order, within which the norms to be applied are freely sought for each case, and for any dispute judges judge freely according to their ‘free will’” (García-Gallo 1979, p.377). They created or formalized the law in accordance to what is “in the mind of the population,” even when it was not previously formalized. Except in rare cases, “it never was a capricious and arbitrary decision by the judge, since the people would have never accepted such a regime” (García-Gallo 1979, p.369). With regard to the expansion of this judicial creation of law, “it had deep roots in Castile38, Navarra and Aragon” (Gacto et al. 2009, pp.121–122). Although not by the judicial process, in these regions and in the Basque Provinces (Gacto et al. 2009, p.204) and

37

The ancient Visigothic code Liber Iudiciorum regulated the “private relations of all kinds, procedural and criminal” (García-Gallo 1979, p.259). It was an extensive and ambitious legal order that, given its romanist roots, granted the power to legislate to the monarch (Gacto et al. 2009, p.188; Orduña 2003, p.108). Although the Liber Iudiciorum corresponds to the Visigothic period, previous to the Muslim invasion, these monarchs opted for its validity after the Reconquista. The validity of this code implied generally the impossibility of developing an entire legal tradition based on the customs of the population and evolving according to the new requirements. 38 In that context, by mentioning Castile, the author refers to current provinces Ávila, Burgos, Guadalajara, La Rioja, Madrid, Santander, Segovia, Soria and parts of Palencia and Valladolid.

87

Catalonia (García-Gallo 1979, p.445) custom-based legislation was also developed by local political actors. It is a tough challenge to spatially delimit the extension of this kind of organization, comparatively more inclusive and autonomous, across medieval Spain; especially because a gradual degeneration of these features occurred both over time and in the spatial margins. Relying on the catalog of fueros by Barrero and Alonso (Barrero & Alonso 1989), Figure 4.3(A) illustrates the distribution of towns with known brief fueros and no complementary legal code before the beginning of the royal enactment of extensive fueros and long codes of territorial regency, such as the Ordenamiento de Alcalá in Castile (1348), the Usatges de Barcelona in current Catalonia (1251) or the Fueros Generales de Aragón (1238)39. We thus take into account here the regency of a custom-based legislation locally developed as a proxy for the geographic extension of this modality of municipal organization that is comparatively more autonomous and inclusive. Although autonomy certainly was a sine qua non condition to maintain inclusive institutions in the period from the 9th to the 13th century, it does not mean that municipal autonomy leads necessarily to political inclusiveness. The empirical foundation addressing the comparative inclusiveness in these areas is provided by historians. With this information we build a dummy variable—Local-level inclusiveness in Middle Ages—that takes value 1 in 20 current provinces in the northeastern quarter of the Iberian Peninsula—Alava, Avila, Barcelona, Biscay, Burgos, Cantabria, Girona, Guadalajara, Gipuzkoa, Huesca, La Rioja, Lleida, Madrid, Navarre, Segovia, Soria, Tarragona, Teruel, Valladolid and Zaragoza—as presented in Figure 4.3(B) This variable, by capturing the autonomy in the elaboration of local law in the towns of the province, attempts to proxy the geographic extension of these more inclusive and autonomous municipal organizations. The reasoning behind it is that in these places that were granted with a fuero breve, and did not have an underlying extensive legal code to complement it, the population had to complete their own legislative framework by an explicit protodemocratic political process and/or the judicial creation of law. In this

39

Although the current Valencian Community, especially in the north, received brief fueros, almost immediately after the reconquest of the zone (1261), King Jaume I promulgated a code of territorial scope for the entire Kingdom of Valencia called Furs de Valencia.

88

environment, comparatively more inclusive, the population as a whole was more influential upon the political process than in the rest of the territories.

Figure 4.3. Local-level inclusiveness in the High Middle Ages: Presence of custom-based law at municipal level

(A)

(B)

4.3.2.2. State-level inclusiveness: Constraints on the executive in the Early Modern Age The disparities among the political systems that coexisted within early modern Spain are broadly known. Even though the same monarch held both crowns—Castile and Aragon—they were separate regimes, with different political institutions, bodies, traditions, etc. However, drawing a solid comparative assessment about the inclusiveness of these different systems is a difficult task. Diverse ways of accounting for the different elements of political organization have emerged within political economy, and the level of constitutional and parliamentary constraints on the executive was considered a key aspect. Thereby, they attempted to compare the extent to which 89

the executive power was monitored and constrained by an organized body, such as a parliament or equivalent. In this paper, the assessment of the institutional environment in early modern Spanish regions relies on Tabellini’s (2010) work. Tabellini evaluated past political institutions in the regions of five countries—including Spain—with regard to their constraints on the executive in the years 1600, 1700, 1750, 1800 and 1850. Following Polity IV methodology—see Tabellini’s (2005) working paper—, he assigns values from 1 to 7 in his evaluation of constraints on the executive, with 1 being “unlimited authority” and 7 being “accountable executive, constrained by checks and balances”. Between both extremes other situations are defined. A value of 3 is assigned if an executive has to face real but limited constraints—e.g., a legislative body with more than consultative functions. A value of 5 is assigned when executive power is subject to substantial constraints—e.g., a legislature that often modifies or defeats executive proposals for action or refuses funds to the executive. There are even values that correspond to transitions between situations. The values proposed by Tabellini for the Spanish regions (autonomous communities) are presented in the first columns of the table in Appendix II. He assigns a higher value to current autonomous communities of Aragon, Catalonia and Valencian Community in the years 1600 and 1700 due to the presence of stronger legislative Courts—the Cortes—, as opposed to those in the Crown of Castile and the equivalent body in the Kingdom of Mallorca. However, this part of Spanish history remains controversial (Grafe 2012). The traditional liberal perspective that sees the early modern Castilian Crown as absolutist, unconstrained and highly centralized has been strongly contested (Jago 1981; Thompson 1982; Fernández-Albaladejo 1984; Fortea 1991). Revisionist historians have argued that although the Castilian Cortes were actually debilitated over time, the power of the monarch was still constrained by the power of the elites of the main cities. Eventually, fiscal matters were bargained directly between individual cities’ elites and the monarch with no need to summon the Cortes. Yet still something can be said about the differences. Although the Crown of Castile should not be considered as a strongly centralized state, during the early modern age “the centralization and the tendency to absolutism are much greater than in the Crown of Aragon” (Le Flem et al. 1989, p.185). The Castilian Crown certainly faced important constraints in fiscal policy; however, in eastern kingdoms, the Cortes had a much broader role. For instance, as Gil (1993) put it, 90

“the Cortes of Aragon preserved their status as the highest legislative organ. The Cortes of Castile, in contrast, had early lost this power to the king and his Royal Council. Exclusive royal law-making was practically non-existent in Aragon, and if the viceroy had powers to issue pragmatics, these had to be subordinated to the higher principles established in the fueros40. … the Cortes not only dealt with fiscal matters … , but also with legislative issues and, by extension, political questions in general”. Therefore, Tabellini’s comparative assessment of these systems remains useful for our purposes, but needs to be slightly revised. Following Tabellini’s methodology and starting from the valuation of his indicator, the values for the levels of constraint have been modified in a new variable in order to take into account the most extended view among current Hispanists. On the one hand, the Crown of Castile could not be considered as centralized, unconstrained and absolutist; but, on the other hand, the new, modified variable has to express the difference in terms of constraints between the Crown of Castile and the Crown of Aragon before the Decrees of Nueva Planta. Therefore, the resulting valuation is the one presented in the two last columns of the table of Appendix II. The valuation for the Crown of Castile is elevated from 1 to 2 in 1600, and that of the Crown of Aragon is maintained in 3 in 1700 to express that distance contained in Gil (1993). Figure 4.4. State-level inclusiveness in the Modern Age: Constraints on the executive, 1600–1850

From this data, we rebuild his variable pc_institutions, which is the first principal component of all the periods assessed. Figure 4.4 represents the geographical 40

Here it refers to Fueros Generales de Aragón. They ruled in a territorial scope in the whole Kingdom of Aragon. Do not confuse with the municipal fueros.

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distribution of this variable—State-level inclusiveness in the Modern Age. It takes value of 1.98 for Aragon, Catalonia and Valencian Community and -0.495 for the rest.

4.3.3. On the exogeneity of early political institutions As suggested above, the “as if” random condition in the assignment of subjects to treatment is provided by the circumstances of the Reconquista and how they change at the different stages of the process. This fact allows us to circumvent reverse causality, since that exogenous impact imposes an institutional distribution that has nothing or little to do with previous political cultures. In this way, we can suggest a net institutional origin and defend the exogeneity of institutions with regards to a previous political culture in the area. The Muslim invasion and the Christian Reconquista marked a break with previous political organization in the Iberian Peninsula. The subsequent local political configuration resulted as a consequence of the different needs of warfare and repopulation, the different identity of the individuals or organizations in charge of them—clergymen, military organizations, free peasants, etc.—and the different power imbalances. In the first stages of the Reconquista, repopulation in the northeastern quarter of the Iberian Peninsula was more spontaneous. The need to make the newly conquered territories—uninhabited and desolated by war—appealing to new settlers led the monarchs to offer better institutional arrangements for those areas. The arrangements materialized into a broad set of civil and political rights and freedoms and the granting of land ownership to the settler who first ploughed it. In the last stages of the Reconquest process towards the south, the increasingly powerful religious–military orders, nobility and royal power were mainly the organizations in charge of not only the warfare but also the repopulation, the selection of legal orders and the distribution of land in the new areas, giving rise to a highly concentrated distribution of land and more politically hierarchical societies. This means that, as war was progressing toward the south, political organizations became more and more hierarchical and the distribution of economic resources and political power became more and more concentrated, with this being reflected in the local legal codes. We can thus recognize an important component

92

of exogeneity in the political institutions that where established across regions in the Middle Ages.

4.4. Empirical analysis 4.4.1. Historical political institutions and political culture This paper attempts to demonstrate in the first place that there exist empirical reasons to believe that the current regional differences in these political culture traits may have, at least partly, a historical and essentially political origin. More formally, the theses to be addressed are (a) that past inclusive political experiences led to the different patterns of participation in the current Spanish regions and (b) inclusive institutions are better able to leave this cultural imprint when they affect the political process at a more proximate level to the bulk of the population. This section deals with the relation between the measures of participation and the historical institutions separately and then argues about the capacity that inclusive institutions have to generate these cultural traits depending on their proximity. Table 4.1. Participation measures and historical political variables: Coefficients of linear correlation [1]

[2]

[3]

Local_incl State_incl Part_index

[4]

[5]

[6]

[7]

intpol

infopol

convpol

action

[8]

[1]

Local_incl

1

[2]

State_incl

0.306**

[3]

Part_index 0.605***

0.345**

1

[4]

intpol

0.435***

0.301**

0.818***

1

[5]

infopol

0.443***

0.192

0.726***

0.431***

1

[6]

convpol

0.420***

0.235

0.797***

0.854***

0.606***

1

[7]

action

0.420***

0.243**

0.619***

0.477***

0.157

0.389***

1

[8]

association 0.468***

0.418***

0.698***

0.384***

0.494***

0.255*

0.312**

1

[9]

infogov

0.073

0.604***

0.220

0.366***

0.15

0.407***

0.619***

0.423***

[9]

association infogov

1

1

*Significant at 10%; **Significant at 5%; ***Significant at 1%. Local_incl, State_incl and Part_index are abbreviations for Local inclusiveness in the Middle Ages, State inclusiveness in the Modern Age and Participation Index, respectively.

Table 4.1 provides the correlation coefficients between the participation measures and the historical political variables presented in section 3.2. Both historical institutional factors present a positive relationship with the summary measure of political culture of participation and its components. Columns (1) and (2) in Table 4.2 report ordinary leastsquares (OLS) regressions of the summary measure for political culture of

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participation—Participation Index—on the historical political variables—Local inclusiveness in Middle Ages and State inclusiveness in the Modern Age. Both historical variables’ coefficients present a positive and significant effect on the development of these cultural traits. The following exercises introduce sets of controls in the regressions to assess the robustness of the results. Table 4.2. The impact of political institutions on political culture of participation: controlling for geographic factors (1)

(2)

(3)

(4)

Participation Index Local Inclusiveness in Middle Ages

1.22***

0.867***

(0.24)

State Inclusiveness in Modern Age

(0.29) 0.345**

0.205

(0.14)

Latitude

(0.16) 0.082**

0.127**

(0.04)

(0.05)

Longitude

-0.046

-0.048

(0.03)

(0.05)

Altitude

-0.158

0.342

Coast Density Ruggedness Index _cons N adj. R²

(0.34)

(0.41)

2.438**

3.24

(1.17)

(2.53)

0.01

0.017*

(0.01)

(0.01)

-0.489***

0.00

-3.82**

-5.692**

(0.14)

(0.13)

(1.65)

(2.04)

50

50

50

50

0.3527

0.1009

0.4248

0.3193

Notes: Standard errors in parentheses: robust errors in columns (1) and (3) and uncorrected errors in the rest. *Significant at 10%; **Significant at 5%; ***Significant at 1%. Estimation method: OLS.

The regressions in columns (3) and (4) in Table 4.2 include geographical factors as controls, which were also suggested to have a role in shaping individual preferences and cultural traits (Landes 1998). The geographical control variables included in the regressions are Latitude, Longitude, Altitude, Coast Density—length of the coast divided by the province’s area—and the Ruggedness of the terrain. Appendix III presents, respectively, the descriptions and the main descriptive statistics of all the used variables. After the inclusion of these geographical factors, the coefficient for Locallevel inclusiveness remains highly significant but State-level inclusiveness loses all its predictive power.

94

Table 4.3. The impact of political institutions on political culture of participation: controlling for current economic development, education and inequality (1)

(2)

(3)

(4)

(5)

(6)

Participation Index Local inclusiveness Middle Ages

0.308

0.932***

(0.24) State inclusiveness Modern Age

GDP per capita (1998-2008)

0.72**

(0.25)

(0.29)

0.065

0.215*

0.174

(0.11)

(0.12)

(0.10)

2.99***

3.4***

(0.55)

(0.54)

Level of education (1998-2008)

5.095**

7.99***

(2.17)

(2.63)

Level of inequality (1998-2005)

_cons

N adj. R²

-21.89***

-29.19***

(5.79)

(4.9)

-29.26***

-33.19***

-4.26**

-6.1***

6.34***

8.85***

(5.26)

(5.27)

(1.61)

(1.99)

(1.86)

(1.53)

50

50

50

50

50

50

0.5219

0.5145

0.4062

0.2824

0.4812

0.4193

Notes: Robust standard errors in parentheses. *Significant at 10%; **Significant at 5%; ***Significant at 1%. Estimation method: OLS.

Another concern is that this distribution of cultural traits may simply be reflecting, as modernization theory could assert, current regional socioeconomic conditions. These traits are supposed to be positively affected by the level of income (Inglehart & Baker 2000) and the level of education (Campbell 2006; Helliwell & Putnam 2007), whereas inequality in its various forms is supposed to have a negative impact (Putnam et al. 1993; Kyriacou & Velásquez 2015). However, one must also expect these issues to be endogenous to the considered cultural traits. Due to reverse causality, one must be careful when interpreting the outcomes. What we are able to assess is whether the historical political institutions had a distinctive effect on current cultural traits beyond that contained in the effect of these contemporary variables. Columns (1) and (2) of Table 4.3 introduce a control variable for current provincial income levels: the logarithm of the average annual GDP per capita of the province between 1998 and 2008. While current levels of income are highly significant, historical political variables’ coefficients are strongly affected, losing all their significance; but, in this case, this does not mean that institutions did not play any role. It means that they do not contribute a further effect, apart from that offered by current GDP per capita; in fact, historical political institutions could be behind both political culture and income. Furthermore, as it was suggested (Guiso et al. 2008a, 2011; Tabellini 2010), culture may be the missing link between historical experiences and current economic performance; this would 95

explain the high correlation between the three factors in favor of our thesis. This complex interrelationship exceeds the scope of this article, but should be revisited in subsequent research for the case of Spain. Columns (3) and (4) introduce the current Level of education, the average proportion of active population with postcompulsory education during the period 1998–2008, and both institutional variables remain significant and show the expected sign. Finally, the regressions in columns (5) and (6) control for Level of inequality, the average Gini coefficient of household expenditure by equivalent person between 1998 and 200541, and under this specification only Local inclusiveness are significant. Table 4.4. The impact of political institutions on political culture of participation: the role of proximity (1)

(2)

(3)

(4)

(5)

Participation Index Local Inclusiveness in Middle Ages State Inclusiveness in Modern Age

1.113***

0.821**

0.304

0.871***

0.668**

(0.26)

(0.32)

(0.24)

(0.25)

(0.29)

0.177

0.116

0.063

0.137

0.122

(0.13)

(0.16)

(0.12)

(0.12)

(0.12)

2.87***

GDP per capita 1998-2008

(0.63) 4.67**

Level of education 1998-2008

(2.27) -20.87***

Level of inequality (Gini) 1998-2005

(5.91) 0.092**

Latitude

(0.04) -0.03

Longitude

(0.31) -0.07

Altitude

(0.40) 2.72**

Coast Density

(1.2) 0.01

Ruggedness Index

(0.01) _cons N adj. R²

-0.445***

-4.29**

-28.14***

-3.91**

6.06***

(0.13)

(1.65)

(6.05)

(1.7)

(1.89)

50

50

50

50

50

0.3684

0.4196

0.5150

0.4110

0.4840

Notes: Robust standard errors in parentheses. *Significant at 10%; **Significant at 5%; ***Significant at 1%. Estimation method: OLS.

41

Unfortunately, last data that IVIE provides corresponds to 2005.

96

The second thesis made reference to the level of proximity of the political process and asserted that those inclusive institutions that are more proximate to the bulk of the population are better able to leave this cultural imprint. When both historical institutional variables are included in the same regression and we make them to compete, as in Table 4.4, Local-level inclusiveness remains always significant, except in column (3), while State-level inclusiveness loses its significance for all the specifications. This means that our proxy for inclusiveness at the top of the State has no distinctive effect when municipal experiences are taking into account. Even despite being further back in time, the municipal experiences of inclusiveness in the Middle Ages seem to have been able to leave this cultural legacy in a more intense and persistent way or, perhaps, they were the only one capable of doing it.

4.4.2. On the unification assumption: The persistence of the historical private law An issue that could raise doubts about the results is the continuity after unification of part of the historical formal institutions that were regionally distinctive and may have functioned as an alternative origin and factor of persistence. Formal differences in private law actually transcended unification and were not been taken into account in the stylized outline of the case. In order to isolate the direct effect of local inclusiveness on these cultural traits from the possible effect of these distinctive legal orders, strategically reduced samples will be used. These subsamples represent critical zones in which one can observe variability in Local-level inclusiveness within a specific civil code. The robustness of previous results is assessed in two subsamples: (A) Those regions in which Castilian private code had already formally ruled before the processes of unification: all the provinces under the Crown of Castile except Basque Country and Navarre. The geographic location of this critical zone of 35 observations is illustrated in Figure 4.5(A). In column (1) of Table 4.5, we can see how Local inclusiveness remains highly significant and its coefficient shows the expected sign. (B) Those provinces of subsample A plus Catalan provinces and the Balearic Islands are included here. Despite the unification of both crowns under the political institutions of Castile, both Mallorca and Catalonia maintained their civil codes. If one considers that the Catalan and Balearic legal orders share common roots, one 97

could identify them as belonging to a common legal family within which to observe variation in the variable Local inclusiveness—see Figure 4.5(B). Column (2) conducts the same regression on this new subsample and control for the fixed effects of these legal codes by including the dummy Castilian private law, which takes value 1 in the subset A. Results are again satisfactory: the coefficient for Local inclusiveness is significant and shows similar result to the basic model. Figure 4.5. Critical zones: historical variables’ effect isolated from the effect of civil codes

Table 4.5. On the unification assumptions: The persistence of the historical private law

(1) (2) Participation Index 1.103*** (0.30)

1.06*** (0.33) -0.709* Castilian Private Law (0.36) -0.643*** -0.077 _cons (0.15) (0.36) N 35 40 adj. R² 0.2726 0.3932 Notes: Standard errors in parentheses: robust errors in column (2) and uncorrected errors in the column (1). *Significant at 10%; **Significant at 5%; ***Significant at 1%. Estimation method: OLS. Column (1) shows reduced samples according to Figure 4.5(A) and column (2) according to the 5.5(B). Local Inclusiveness in Middle Ages

98

4.5. Discussion and concluding remarks Tons of ink have been devoted to the characteristics that citizenry should have to make democracy work. Previous research has remarked upon the importance of an active citizenry that is more interested in political matters, more informed and conscious, more willing to hold the political elites accountable, etc. This research has focused on political culture of participation, and a set of indicators has been used to account for its interregional variability within Spain. It addressed the origins of these differences and suggested the inclusiveness and the proximity of historical political institutions as principal factors. For that purpose, it delved into Spanish history and exposed the different political paths that regions followed. As proxies to account for the comparative level of inclusiveness in the political organization and the proximity of the political process, two factors were considered: the capacity of the municipalities to develop a custom-based legal order in the Middle Ages and the constraints on the executive at the top of the State in the Modern Age. Both historical political experiences are positively correlated to the distribution of these cultural traits. The OLS regressions showed a significant effect of both facts, but not both of them presented the same robustness to the inclusion of other important determinants of culture, such as economic prosperity, education, inequality or geographic factors. The proxy for State-level inclusiveness—constraints on the executive—proved not to be robust to the inclusion of some of these controls. Moreover, when institutional variables were made to compete in the same regression, the proxy for State-level inclusiveness lost all its significance to the measure of local-level inclusiveness. It does not mean it did not have any causal effect; it could have played a role in preserving previous comparative levels of political culture of participation. It does suggest that constraints on the executive had no distinctive effect on the development of these traits apart from that related to municipal-level inclusiveness. The result is consistent with previous insights (Putnam et al. 1993; Guiso et al. 2008a) that suggested that prolonged experiences of more horizontal organization and citizens’ empowerment at the local level were the factors that left this persistent legacy in northern Italy. In turn, an inclusive environment for the elites at the top of the political hierarchy may be insufficient to bring about cooperation and participation dynamics in the lower strata of society. The suggestive thesis of this work helps to open an elemental but necessary debate about whether inclusive institutions are linked to the development 99

of participative traits simply because they offer a space of liberty within which they autonomously flourish or, rather, it is actually necessary an invitation or demand for participation from the political system. In any case, the available data to carry out this work have important limitations affecting the investigation both in the architecture of the variables and the modelling. The procedure followed in the construction of the Participation Index to obtain a more complete variable with provincial variation required mixing indicators aggregated at provincial and autonomous community levels, which may have led to an overrepresentation of autonomous community-level variation. The variables to proxy institutional inclusiveness are essentially dummies, which do not capture differences in degree. Additionally, the ways to proxy inclusiveness at the two levels of proximity are not homogeneous. In order to obtain convincing empirical conclusions on the role of proximity, it will be necessary to find homogeneous ways to proxy inclusiveness at different levels of proximity. Additionally, although this and other works (Tabellini 2010; Peisakhin 2015; Becker et al. 2016) use the political integration of the regions to isolate culture from the subsequent national institutions in their natural experiment designs, this involves a likely simplistic assumption that may not hold, which is that the same institutions have the same effect on different cultures. However, the coherence is different and institutions may thus have a different effect on the regional political cultures when they come into contact. When integration happens, institutions may affect differently the political culture of the regions. If this is true, it is not possible to speak with confidence about isolation from institutions and, therefore, of a cultural legacy that autonomously persists. Given the limitations of this research, interpretations must be made cautiously. However, it remains useful as a starting point for further research and to motivate the elaboration of more complete surveys on political culture, covering a wider range of dimensions, allowing aggregations at lower administrative levels and thus facilitating the performance of more sophisticated models such as those used these last years(Guiso et al. 2008a; Dell 2010; Becker et al. 2016). There is still a long way to walk before we fully understand the historical shaping of politically relevant orientations and behaviors. Further research should disentangle the 100

causal links between specific institutions and specific traits and the mechanisms through which they affect each other. The most immediate developments could descriptively explore the factors—historical, social, economic, educational, etc.—that explain political culture traits. Multi-level models could be of usefulness for this enterprise42. Finally, though substantial effort has been devoted to it, many unknowns still remain about how these political orientations affect political actions and how they specifically interact with the performance of a democratic institutional system.

42

This empirical research was macro-analytically addressed since our independent variables of interest operate at territorial—not at individual—level.

101

Appendix I. Maps of Spanish autonomous communities and provinces Figure 4.6. Map of Spanish autonomous communities

Figure 4.7. Map of Spanish provinces

102

Appendix II. Assessment of constraints on the executive Table 4.6. Constraints on the executive in the Spanish regions in 1600, 1700, 1750, 1800 and 1850 Tabellini (2010) Revised Crown Autonomous Community 1600 1700 1750 1800 1850 1600 1700 Andalusia 1 1 1 2 4 2 Asturias 1 1 1 2 4 2 Balearic Islands 1 1 1 2 4 2 Canary Islands 1 1 1 2 4 2 Cantabria 1 1 1 2 4 2 Castile and Leon 1 1 1 2 4 2 Castile-La Mancha 1 1 1 2 4 2 Crown of Castile Extremadura 1 1 1 2 4 2 Galicia 1 1 1 2 4 2 La Rioja 1 1 1 2 4 2 Madrid 1 1 1 2 4 2 Murcia 1 1 1 2 4 2 Navarre 1 1 1 2 4 2 Basque Country 1 1 1 2 4 2 Aragon 3 2 1 2 4 3 Crown of Catalonia 3 2 1 2 4 3 Aragon Valencian Community 3 2 1 2 4 3

103

2 2 2 2 2 2 2 2 2 2 2 2 2 2 3 3 3

Appendix III. Variables’ description, aggregation, source and main descriptive statistics Table 4.7. Variables’ description, level of aggregation, source and main descriptive statistics Variable infopol infogov intpol association action convpol Participation Index

Description

Aggregation

Source

Variables on political culture of participation Information habits about politics Province CIS (2000) Feeling of being informed about politicians’ activities Province CIS (1998, 2002) Interest in politics Province CIS (2000, 2008a, 2011a, 2015) Participation in twelve kinds of associations Province CIS (1998) Participation in alternative ways of political actions Province CIS (2008b, 2011b) Frequency in which the respondent is involved in conversations on Province CIS (2000, 2011a, 2015) politics with friends, family or workmates. First principal component from all political culture of participation Province Own indicators Variables on historical political institutions

Obs

Mean/freq.

Std. Dev.

Min

Max

50 50 50

-0.01 -0.001 1.98

0.25 0.14 0.1

-0.65 -0.41 1.75

0.50 0.43 2.27

50 50 50

-0.02 -0.04 2.35

0.11 0.13 0.15

-0.26 -0.30 1.98

0.21 0.50 2.71

50

0

1

-1.78

2.85

Based on Barrero and Alonso (1989), GarcíaGallo (1979), Gacto et al. (2009) Tabellini (2010)

50

20*

50

0

1

-0.50

1.98

Local inclusiveness in Middle Ages

Local development of a custom-based legal order in the High Middle Ages

Province

State inclusiveness in the Modern Age

Assessment of constraints on the executive during 1600-1850, based on Tabellini (2010)

Province

GDP per capita 1998– 2008 Level of education 1998–2008 Level of inequality 1998–2005 Latitude Longitude Altitude Coast density

Log of the annual average GDP per capita of the province between 1998 and 2008 Percentage of population that completed post-compulsory education between 1998 and 2008 Average Gini coefficient of household expenditure by equivalent person between 1998 and 2005 Latitude (degrees) of the capital of the province Longitude (degrees) of the capital of the province Altitude in meters of the capital of the province Province’s coast length divided by province area

Province

INE

50

9.76

0.21

9.43

10.19

Province

50

0.76

0.06

0.57

0.86

50

0.30

0.02

0.26

0.34

50 50 50 50

40.10 3.84 0.37 0.03

3.16 3.73 0.368 0.06

28.2 -2.82 0.01 0

43.5 16.25 1.13 0.29

Ruggedness

Terrain Ruggedness Index

Province

50

33.52

14.80

9.43

75.25

Castilian private law

Castilian private law before unification

Province

Fundación Bancaja and IVIE (2014) Fundación Caixa Galicia and IVIE (2009) aemet.es aemet.es aemet.es Based on INE (2003)(2003) Goerlich and Cantarino (2010) Own

50

35*

Control variables

Community Province Province Province Province

*Dummy variable: instead of the mean, the frequency of times the dummy takes value 1 is displayed.

104

Chapter 5 The role of coherence between institutions and culture for economic and political performance: The case of the Spanish regions

5.1. Introduction In North’s words, “[t]hat the informal constraints are important in themselves (and not simply as appendages to formal rules) can be observed from the evidence that the same formal rules and/or constitutions imposed on different societies produce different outcomes” (North 1990b, p.36). This chapter discusses the role of the coherence between the formal institutions and the culture of a society—not only informal institutions—for the economic and the political performance. Assuming the same open access institutional framework in all Spain, the chapter studies how the geographical distribution of cultural features affects the economic and political development of the regions. As mentioned in the previous chapters, it is common to find scientific works covering both this causal direction—from institutions and culture to performance—and the opposite. In special, it is well known the theses presented under the name of modernization theory, which defends that the improvement of socio-economic conditions promotes a cultural and material transformation that favors the process of democratization and its consolidation. If we try to explain the economic and political performance of the Spanish regions in terms of culture, we will face a problem of reverse causation. This raises a theoretical issue that leads to some methodological complexity. To address this problem, we must find a source of exogenous variation to escape the circle of retrocausality, that is, a variable that is related to these cultural traits but not directly to economic and political performance today. This exogenous variation will be provided by the level of historical inclusiveness in the medieval municipalities—presented in the previous chapter—, which was determinant for the distribution of cultural traits across Spanish regions. Therefore, in this chapter, a two105

stage least squares model will be performed, using the variable Local Institutional Inclusiveness in Middle Ages as an instrumental variable. In this way we will be taking into account only the effect of the historical component—due to historical political experiences—that these cultural traits have on current economic and political performance. The following section presents the multidimensionality of this cultural context oriented to participation and cooperation that fits coherently with the open access institutional structure and justifies its proxy for the Spanish regions. Section 3 presents the interregional differences in terms of political and economic performance. Section 4 poses and performs an empirical analysis based on two-stage least square modelling. Finally, section 5 concludes the chapter with some reflections.

5.2. Participation and cooperation for Open Access Social Orders Chapter 3 had defined a series of features that are a priori congruent with the institutions of an open access social order to ensure a smooth performing in the political and economic fields. We argued that the inclusive or open access institutional regime seems to require similar cultural traits for both the economic and political spheres. These cultural traits are presumably related to the capacity for cooperation and social participation in any of its forms. This finds support in the empirical literature. We also saw in the previous chapter that a series of these traits showed for the Spanish case a regional distribution with its higher levels concentrated in the north of the Iberian Peninsula, especially in the northeast. In the practice of empirical research, we find an important limitation. This is the difficulty of getting useful data at regional level to identify regional patterns in terms of political culture of participation or social capital. Fortunately, these traits tend to be found altogether to a greater or lesser extent. This means that the indicators that we have used in the previous chapter can act as a proxy for a wider cultural environment of cooperation and participation. This environment, which in other works was identified as a civic community (Putnam et al. 1993) or civic capital (Guiso et al. 2011) is characterized by favorable cultural schemes for cooperation and social participation. Table 5.1 shows some of the available 106

recurrent variables in these works obtained from the World Values Survey (WVS), for a sample of 60 countries between 2010 and 2014. These variables capture the average value obtained in each country: [1] independence43: Importance of encouraging the quality of independence in children. [2] obedience44: Importance of encouraging the quality of obedience in children. [3] good for society45: Importance of doing something for the good of society. [4] ideas46: Importance of think up new ideas, be creative and to do things one’s own way . [5] association 47 : Active participation in some voluntary—non-religious— organization. [6] trust48: Generalized interpersonal trust. [7] interest in politics49: How interested the individual is in politics. [8] action50: Participation in alternative political actions.

43

Textually, this WVS question asks: “Here is a list of qualities that children can be encouraged to learn at home. Which, if any, do you consider to be especially important? Please choose up to five!”. The options are: “independence”, “hard work”, “feeling of responsibility”, “imagination”, “tolerance and respect for other people”, “thrift, saving money and things”, “determination, perseverance”, “religious faith”, “unselfishness”, “obedience”, “self-expression”. This variable computes the percentage of people who chose “independence”. 44 Again, from previous question, this variable computes the proportion of people who mentioned “obedience”. 45 From the question “Now I will briefly describe some people. Using this card, would you please indicate for each description whether that person is very much like you, like you, somewhat like you, not like you, or not at all like you?”. There are several propositions. This variable is built from the aggregated degree of agreement with the statement “It is important to this person to do something for the good of society”. 46 From the previous question, this variable corresponds to the degree of agreement with the statement “It is important to this person to think up new ideas and be creative; to do things one’s own way”. 47 From the question “Now I am going to read off a list of voluntary organizations. For each organization, could you tell me whether you are an active member, an inactive member or not a member of that type of organization?”. With the options being: “church or religious organization”, “sport and recreational organization”, “art, music or educational organization”, “labor union”, “political party”, “environmental organization”, “professional association”, “humanitarian or charitable organization”, “consumer organization”, “self-help group, mutual aid group”, “other organization”. This variable measures the percentage of people by country who declares to be an active member of at least one of the non-religious organizations. 48 From the question “Generally speaking, would you say that most people can be trusted or that you need to be very careful in dealing with people?”, this variable express the proportion of people who declares that “most people can be trusted”. 49 From the question “How interested would you say you are in politics? Are you (1) very interested, (2) somewhat interested, (3) not very interested or (4) not at all interested?”, this variable presents the aggregated response by country. It is inverted so that high levels imply higher interest in politics. 50 This variable refers to the following question: “Now I’d like you to look at this card. I’m going to read out some forms of political action that people can take, and I’d like you to tell me, for each one, whether you have done any of these things, whether you might do it or would never under any circumstances do it”. It offers the political actions “signing a petition”, “joining in boycotts”, “attending peaceful demonstrations”, “joining strikes” and “any other act of protest”. This measure computes the percentage of people who declares to have participated at least in one of them.

107

These environments tend to present values oriented towards independence and autonomy (independence, ideas) as opposed to obedience and vertical relational patterns (obedience). In addition, it is positively linked to a more intense orientation towards collective objectives (good for society). Thus we find an environment more dominated by generalized confidence (trust) and a greater tendency to participate in voluntary organizations (association). In the political environment, this is reflected in a greater attention to political issues (interest in politics) or the willingness to carry out alternative political actions to the simple electoral participation (action). Table 5.1. Correlations matrix among Participation and Cooperation indicators [1]

[2]

[3]

[4]

[5]

[6]

[7]

[8]

[1]

independence

1

[2]

obedience

-0.4715

1

[3]

good for society

0.2314

-0.3639

1

[4]

ideas

0.1953

-0.5159

0.5749

1

[5]

association

0.1550

0.0205

0.2327

-0.0573

1

[6]

trust

0.4114

-0.3970

0.4794

0.4147

0.3477

1

[7]

interest in politics

0.3822

-0.1160

0.1096

-0.0084

0.3980

0.4444

1

[8]

action

0.2251

-0.1122

0.0225

0.1876

0.5406

0.4176

-0.0117

1

In Table 5.1 we can see how practically all the variables are positively correlated— some more and others less51—except obedience, with which the other variables have a clear negative relation. For Spain, only some indicators are available at the regional level and are those that have been used in the previous chapter. They will be useful in this one as well. For the interpretation, it is important to take into account that these variables are not in themselves—nor by themselves—all those that have an effect directly on the economy. In turn, these indicators are used here as a proxy for a much broader cooperation and participation environment. The main intention with these indicators is to obtain an interregional variation of these cultural environments. Therefore, we will use the Participation Index of the previous chapter as a measure of this environment of participation and cooperation—Part-Coop Index will be called hereafter.

51

From these 28 pairs, there are five that show no correlation: association-obedience, association-ideas, ideas-interest in politics, action-good for society, and interest in politics-action. Further research may attempt to understand the connections and disconnections between these behaviors.

108

5.3. Economic and political performance in the Spanish Regions 5.3.1. Regional economic performance in Spain The highest levels of per capita GDP are also geographically located in the northeastern quarter of Spain. For our empirical analysis, we use the logarithm of the average per capita GDP during the period 1998-2008—according to figures from Instituto Nacional de Estadística (INE)—as a measure of current economic development. This measure, Log GDP per Capita 1998-2008, has a mean of 9.76, obtaining Alava its maximum value (10.19) and Jaen its minimum (9.43). Figure 5.1 illustrates the geographical patterns of economic development according to this measure.

Figure 5.1. Geographical distribution of Log GDP per capita 1998-2008

It is noteworthy that this geographical distribution, despite long periods of convergence, remained similar for most of the twentieth century. There is a correlation of 0.7 between provincial per capita GDP in 1930 and that in 2000 (Alcaide 2003)—see Figure 5.2. The remarkable political and economic transformations of those 70 years barely altered the geographical patterns of development. Between these two dates, Spain witnessed, among other things, the end of a dictatorship, a 5-year democratic republic, a three-year civil war, another 40-year dictatorship, the transition to democracy, a regional decentralization, the building of a wide welfare system, the integration into the single European market and the adoption of the euro. A key fact for this work is that the processes that led to this distribution seem to have occurred during the nineteenth century. The nineteenth century started with a very 109

different distribution, where, for instance, Extremadura and Andalusia were among the richest regions and País Vasco, La Rioja and Aragón were below the average (Carreras et al. 2005). In the early twentieth century these positions were already inverted and remained until nowadays. Figure 5.2. Provincial GDP per capita in 1930 and 2000 (in Pesetas of 1995) 6.55 Girona

Log GDP per Capita in 1930

6.5

Álava Baleares

Madrid Barcelona Vizcaya

Navarra

6.45

La Rioja Tarragona

Castellón

Zaragoza Guipúzcoa

Lleida

6.4

Valladolid Valencia

Burgos Teruel

Huesca Soria Segovia Palencia Guadalajara Cantabria Alicante Las Palmas A Coruña Salamanca Tenerife León Asturias Ávila Murcia Almería Málaga Toledo Pontevedra Zamora Albacete Ciudad Real Huelva Cáceres Lugo Cuenca Córdoba Ourense Sevilla Jaén

6.35 6.3 6.25 6.2

Granada

Badajoz

Cádiz

6.15 5.3

5.4

5.5

5.6

5.7

5.8

5.9

6

Log GDP per capita in 2000

Figure 5.3. Part-Coop Index and income

Log GDP per capita 1998-2008

10.3 10.2

Álava Guipúzcoa

10.1 Tarragona

10 Burgos

9.9

Teruel

Baleares Castellón Valladolid Segovia

Madrid

Navarra LleidaGirona Barcelona Vizcaya La Rioja Zaragoza

Huesca Soria Cantabria Palencia Las Palmas Valencia Almería Tenerife Alicante Asturias Guadalajara León A Coruña Murcia Salamanca Pontevedra Huelva Toledo Ávila Ciudad Real Sevilla Cuenca Málaga Lugo Cádiz Zamora Albacete Ourense Granada Córdoba Badajoz Cáceres Jaén

9.8 9.7 9.6 9.5 9.4 9.3 -2

-1.5

-1

-0.5

0

0.5

1

1.5

2

2.5

3

Part-Coop Index

Correlation between Log GDP per Capita 1998-2008 and Part-Coop Index is 0.73. Figure 5.3 displays a scatter plot relating both variables. However, no causal conclusions can be drawn due to the endogeneity of culture. Because of this, instrumental variables will be used in order to take into account only that persistent 110

component of culture that is due to historical factors and is exogenous with regard to current economic development.

5.3.2. Regional political performance in Spain In contrast to the available data on economic performance, political performance does not allow us to go back so far back in time. The lack of clear and well-considered indicators to measure political performance prevents us from even providing a reliable and incontestable indicator. Added to this is the difficulty of finding measures disaggregated regionally and taken over a long period of time to analyze the persistence in the distribution of performance. Here a proxy for regional political performance is constructed from information about corruption and the public provision of fundamental goods and services. A measure of corruption is built from a report issued by the Spanish Consejo General del Poder Judicial in 2013 (CGPJ 2013). It provides the number of ongoing corruption cases in the autonomous communities, which is relativized by the number of inhabitants. Figure 5.4. Part-Coop Index and political performance 2.5

Political performance

2

Vizcaya Álava Guipúzcoa Navarra

1.5 1

Teruel León Burgos Zamora Palencia

0.5

Asturias Zaragoza Huesca La Rioja ÁvilaValladolid Segovia Salamanca Soria Tarragona LleidaGirona Barcelona

Pontevedra

0 Badajoz Cáceres Murcia

-0.5

Ciudad CuencaReal Albacete

Toledo Guadalajara Baleares Castellón Alicante

Cantabria

-1 Huelva

-1.5

Madrid

Ourense ALugo Coruña

Valencia

Cádiz Sevilla Málaga Jaén Córdoba Granada Almería Tenerife Las Palmas

-2 -2

-1.5

-1

-0.5

0

0.5

1

1.5

2

2.5

3

Part-Coop Index

The regional performance in the provision of fundamental public goods is measured by assessments of the quality of provision of public education 52 , health 53 and social

52

It is composed of the following measures contained in MECD (2015): number of students per teacher in non-university public schools, rate of early school leaving and percentage of students repeating a grade at the beginning of secondary education.

111

protection54, which mainly depends on the autonomous communities’ government. This measure has as main disadvantage the impossibility of offering provincial variation. It only varies at autonomous community level. Therefore, the value for an autonomous community is imputed to its provinces. A variable called Political performance is obtained from the first principal component of the variable of corruption and the indicators about the quality of the provision of public goods and services—education, health and social protection. Figure 5.4 is a scatter plot showing the positive linear relationship of this variable and the cultural index of participation and cooperation (Part-Coop Index). They have a linear correlation coefficient of 0.56.

5.4. Empirical analysis 5.4.1 Outline The starting hypothesis of this chapter points out the importance of cultural features consistent with the open access institutional system for economic and political performance. As anticipated in Figures 5.3 and 5.4 and we can see in Table 5.2, those regions that had a greater presence of these cultural features [1] also obtained a better economic [3] and political performance [4]. There is a high and positive relationship between the widespread presence of these cultural traits and this performance. Therefore, we will try to evaluate the causality of this relation in order to know to what extent we can speak of a causal effect of these cultural traits on economic performance (Culture  Economic performance) and political performance (Culture  Political performance) within an institutional regime of open access.

53

Index made from measures of resources endowment—beds, operating rooms, equipment, doctors, nurses, etc.—per inhabitant in the healthcare system and users’ evaluation of the services and level of satisfaction. Appendix I shows the indicators and the sources of this index. Though it was updated and reelaborated, the author must acknowledge that the composition of this index relies on the report of FADSP (Spanish Federation of Associations for the Defense of the Public Healthcare System). 54 Index of Social Services Development (Índice de Desarrollo de los Servicios Sociales). It is a composite measure elaborated by the Asociación Estatal de Directoras y Gerentes de Servicios Sociales (García et al. 2015) which contains information about the economic effort of autonomous communities in providing social protection, the extent of the rights and services covered by the regional system of social protection and the specific public policy and governance of the system.

112

Table 5.2. Correlation matrix among Part-Coop Index, historical institutions, and economic and political performance [1] Part-Coop Index

[2] Local Inclusive institutions in Middle Ages

[3] Log GDP per capita 1998-2008

[1]

Part-Coop Index

1

[2]

Local Inclusive institutions

0.6049***

1

[3]

Log GDP per capita 1998-2008

0.7285***

0.7338***

1

[4]

Political performance

0.5630***

0.6386***

0.5845***

[4] Political performance

1

Note: *Significant at 10%; **Significant at 5%; ***Significant at 1%.

The main problem that we are going to find is endogeneity. As has been suggested elsewhere, economic development can drive a shift in cultural traits (Lipset 1959; Inglehart & Baker 2000). At the same time, the good or bad functioning of political institutions can lead to sociocultural dynamics that are being captured by our cultural indicators. For instance, Almond and Verba (2015[1963]) argue that apathy toward public issues may be a realistic response to a political environment due to the complexity of the political matters or the difficulties of getting information. To address this problem we need to look for a source of exogenous variation. This implies finding a variable that is related to the explanatory variable of interest, but not to the dependent variable. The long shadow of history offers the opportunity to find this exogenous source of variation. We use here the institutional origin of these cultural traits that was discussed in chapter 4. Using the variable Local Incusive Instituions in Middle Ages as an instrumental variable in the first stage of a Two-Stage Least Square (2SLS) model we can avoid reverse causation. Interpreting the big picture, the chain of events suggested by our hypothesis is that the historical institutional experiences after the Reconquest helped to establish a set of cultural features. The regional distribution of these traits that is somehow still present in the Spanish regions is supposed to affect positively the economic and political performance. But only as Spain deepens the adoption of OAO institutions, with which these cultural features are coherent, it is when these traits are making the difference in the promotion of economic and political performance. This outline emphasizes culture as the main factor of persistence or the missing link that connects historical experiences with current phenomena. Thus, historical institutions  historical culture  current culture  current economic and political performance.

113

Now, the process by which Spain becomes an Open Access Social Order is discontinuous, with advances and setbacks, and with heterogeneous progress. The paces of transformation are different depending on the realm. While certain degrees of openness in the economic sphere are achieved in the nineteenth century with the liberal revolution—although it recoils after the Civil War—it is not until 1978 that there is a solid and prolonged opening at the political level—the Second Spanish Republic ended up collapsing in 5 years. On the other hand, as seen in the previous chapter, the unification process of Spain is key to ensure the required conditions for this natural experiment. In a very stylized story, the empirical strategy will consider three important events as key milestones for the opening and the integration processes: a) The process of integration or unification of the Spanish regions. This event marks the end of regionally distinctive political trajectories and allows us to consider a theoretical isolation of the cultural features from political institutions from that moment, since it no longer varies regionally. This fact was fundamental in the previous chapter to avoid retrocausality. b) The Liberal Revolution, i.e. when main institutional transformations from the Ancient Regime toward the Liberal State occurred. It marks the beginning of the opening in the economic sphere. We locate these processes in the first half of the nineteenth century. According to Carreras and Tafunell (2003), in the economic sphere, the Liberal Spain can be considered to be “born between 1833 and 1839”. The regional distribution of economic development prior to the liberal revolution was very different from the current one and it seems plausible that this event triggered a transformation towards the new distribution. This distribution seems to have entrenched since the beginning of the 20th century. c) The Spanish transition to democracy, which involves the stable opening of political institutions. At present, we do not have data on how political institutions functioned in the regions before the transition. Therefore, in contrast with the economic data, we will not be able to deal with the difference between before and after the opening process in the political realm. Future research could be devoted to find a good indicator of regional administrative performance prior to the democratic transition. When using instrumental variables (IV), at least the following two conditions must be fulfilled: a) IV needs to be a strong instrument, that is, it must be sufficiently correlated 114

with the instrumented variable, and b) the exclusion restriction must be fulfilled, i.e., the instrumental variable must affect the dependent variables of interest—Log GDP per capita 1998-2008 and Political performance—only through the instrumented variable—Part-Coop Index. As seen in Table 5.2, the instrumental variable [4] shows a high positive correlation with the variable to be instrumented [1]. However, further tests later will be applied to evaluate the strength of the instrument. With regards to the identification condition, there are several alternative channels—different than culture— by which historical institutions could affect the economic and political performance of the regions, and this complicates further the analytical. Other alternative factors will be taken into account in the regressions. Regressions will control for historical levels of economic performance—GDP per capita in 186055—, education—Literacy rates in 1860 56 —and inequality—Access to land in 1860 57 —, since they could have been transmitters—violating the assumption of identification—or could have been themselves the actual cause of the current economic and political performance of the regions. Additionally, regressions will control for geographic factors58, which have also been suggested to have a role in performance.

5.4.2. OLS estimates The following are estimates for simple OLS models. Linear regressions take the following form: (1) Yi = 𝛼 + 𝛽Ci +𝛶p Zpi + εi Where Yi is the economic—Log GDP per capita 1998-2008—or political—Political performance—performance of the province i, Ci is the cultural index of participation and cooperation—Part-Coop Index—, Zpi is a vector of historical socioeconomic indicators and geographic control variables, εi is the error term and 𝛼, β y 𝛶 are the coefficients or vectors of coefficients associated to these variables. 55

It is the relative index of GDP per capita in 1860 with Spain being 100 (Carreras et al. 2005). This variable is only available on an Autonomous Community basis so their values are imputed to their provinces. 56 It is proportion of people that could read and write on the overall population in the province (DGIGE 1863). 57 It is the proportion of land owners over the population employed in agrarian activities in the province (DGIGE 1863). 58 These geographical variables were presented in the previous chapter.

115

Table 5.3. OLS regressions: Part-Coop Index and economic performance in presence of historical and geographical controls

Part-Coop Index

(1)

(2)

0.15*** (0.02)

0.14*** (0.02) 0.37 (0.26)

Literacy rate in 1860

(3) (4) Log GDP per capita 1998-2008

GDP per capita in 1860

0.14*** (0.02)

0.15*** (0.02)

(5) 0.12*** (0.02)

0.0004 (0.0006)

Access to Land in 1860

-0.12 (0.21)

Latitude Longitude Altitude Coast Density Ruggedness Index _cons

9.76*** (0.02) 50 0.5210

9.68*** (0.06) 50 0.5302

9.72*** (0.06) 50 0.5144

9.8*** (0.08) 50 0.5139

0.002** (0.008) -0.016** (0.007) 0.04 (0.07) 0.91** (0.42) 0.001** (0.001) 9.67*** (0.34) 50 0.5723

N adj. R2 Notes: Standard errors in parentheses. *Significant at 10%; **Significant at 5%; ***Significant at 1%. Estimation method: OLS.

Table 5.3 presents the OLS estimates for those regressions that explain the economic performance—Log GDP per capita 1998-2008—as a function of these cultural features—Part-Coop Index—alone—column (1)—and in the presence of controls— columns (2)-(5). The coefficients of our cultural variable are always positive, highly significant and stable across regressions, while historical socioeconomic controls lose their significance and only a few geographical factors retain it. These specifications are able to explain more than 50% of the current regional distribution of economic performance, according to their adj. R². Table 5.4 repeats the regressions but this time with Political performance as the dependent variable. For all regressions, the coefficients of Part-Coop Index are positive and significant, but are considerably affected when controlled by geographic variables. Also the goodness of fit is reduced and seems volatile. We must take into consideration that our measure of political performance is rather rudimentary and shows variability at autonomous community level instead of at province level. This could explain the worse capacity of our models, and the cultural variable in particular, to account for this indicator of political performance. 116

Table 5.4. OLS regressions: Part-Coop Index and political performance in presence of historical and geographical controls (1) (2) (3) (4) (5) Political performance 0.56*** 0.42*** 0.69*** 0.57*** 0.27** Part-Coop Index (0.12)

(0.12) 4.65*** (1.42)

Literacy rate in 1860 GDP per capita in 1860

(0.13)

(0.12)

(0.11)

-0.01** (0.003)

Access to Land in 1860

0.97 (1.24) 0.21***

Latitude

(0.04)

Longitude

0.02 (0.03)

Altitude

0.80***

Coast Density Ruggedness Index _cons

0.00 (0.12) 50 0.3027

-0.96*** (0.31)

0.75** (0.36)

-0.34 (0.44)

(0.28) 1.9 (1.8) 0.01 (0.01) -8.95*** (1.48)

N 50 50 50 50 0.2971 0.6628 adj. R2 0.4202 0.3515 Notes: Standard errors in parentheses. *Significant at 10%; **Significant at 5%; ***Significant at 1%. Estimation method: OLS.

These preliminary results may be considered satisfactory, but these specifications are not sufficient to conclude a causal relationship. In order to escape the problem of endogeneity—between economic and political performance and culture—we will perform a 2SLS model, in order to use only the exogenous component of culture, which is due to determinant historical factors, such as Local Inclusive institutions in Middle Ages, and not to current economic—Log GDP per capita 1998-2008—or political— Political performance—performance.

5.4.3. Two Stage Least Square estimates The validity of our results depends on the assumption that inclusive local experiences in the Middle Ages do not have an effect on current economic and political performance either directly or through alternative channels. Therefore we control for other variables that could be related to historical political experiences and current performance and could jeopardize the exclusion restriction.

117

Table 5.5. Culture and Economic Performance: Two-Stage Least Square Regressions (1) (2) (3) (4) Panel A: Second-stage Dependent: Log GDP per capita 1998-2008 0.25*** 0.26*** 0.28*** 0.25*** Part-Coop Index (0.04) (0.05) (0.05) (0.04) -0.19 Literacy rate in 1860 (0.39) -0.001 GDP per capita in 1860 (0.001) -0.09 Access to Land in 1860 (0.25) Latitude Longitude Altitude Coast Density Ruggedness Index _cons Panel B: First Stage Local Inclusive institutions in Middle Ages Literacy rate in 1860 GDP per capita in 1860 Access to Land in 1860

9.76*** (0.02) 1.22*** (0.23)

9.8*** 9.88*** 9.79*** (0.08) (0.1) (0.9) Endogenous: Part-Coop Index 1.16*** 1.03*** 1.24*** (0.28) (0.24) (0.23) 0.66 (1.67) 0.01** (0.003) -0.94 (1.2)

(5) 0.33*** (0.9)

-0.02 (0.02) 0.001 (0.01) -0.01 (0.1) 0.33 (0.67) -0.003 (0.003) 10.71*** (0.65) 0.87*** (0.28)

0.08* (0.05) -0.05 Longitude (0.04) -0.16 Altitude (0.39) 2.44 Coast Density (2.3) 0.01 Ruggedness Index (0.01) -0.49*** -0.6* -1.12*** -0.17 -3.82** _cons (0.15) (0.32) (0.31) (0.43) (1.84) 50 50 50 50 50 N 27.69 17.4 18.76 28.04 9.92 F-statistics 0.00 / 0.00 0.00 / 0.00 0.00 / 0.00 0.00 / 0.00 0.00 / 0.00 Endogeneity tests (p-value) Notes: Standard errors in parentheses. *Significant at 10%; **Significant at 5%; ***Significant at 1%. Estimation method: 2SLS. Instrumental variable: Local Inclusive Institutions in Middle Ages. F-statistics is F-test against the null that the instruments are irrelevant in the first-stage regression. Endogeneity tests report Durbin and Wu-Hausman test’s p-value against the null that Part-Coop Index is exogenous. Latitude

Table 5.5 presents the results for a 2SLS model that attempts to explain the economic development of the Spanish regions in terms of Part-Coop Index, with this being instrumented by the Local Inclusive institutions in Middle Ages. The first stage confirms the important impact of local experiences of inclusiveness in the middle ages on the current distribution of Part-Coop Index, as seen in the previous chapter. It also shows that the level of historical economic development, proxied by GDP per capita in 118

1860—column (4)—, and the Latitude—column (5)—may have had a positive effect on Part-Coop Index. With regards to the second stage, the coefficient of the instrumented variable Part-Coop Index is positive and highly significant for all specifications and shows stability before the inclusion of the different controls. Table 5.6. Culture and Political Performance: Two-Stage Least Square Regressions (1) Panel A: Second-stage Part-Coop Index

1.06*** (0.22)

Literacy rate in 1860

(2) (3) (4) Dependent: Political performance 0.85*** (0.25) 2.73 (1.82)

GDP per capita in 1860

1.41*** (0.30)

1.04*** (0.22)

1.09 (1.39)

Latitude Longitude Altitude Coast Density Ruggedness Index

Panel B: First Stage Local Inclusive institutions in Middle Ages

0.00 (0.13)

-0.56 (0.39)

1.6*** (0.54)

-0.37 (0.5)

0.15*** (0.05) 0.067* (0.04) 0.68** (0.34) 0.4 (2.22) -0.002 (0.01) -6.27*** (2.16)

Endogenous: Part-Coop Index 1.22***

1.16***

1.03***

1.24***

0.87***

(0.23)

(0.28) 0.66 (1.67)

(0.24)

(0.23)

(0.28)

Literacy rate in 1860 GDP per capita in 1860

0.01** (0.003)

Access to Land in 1860

-0.94 (1.2)

Latitude Longitude Altitude Coast Density Ruggedness Index _cons

0.81*** (0.29)

-0.02*** (0.01)

Access to Land in 1860

_cons

(5)

-0.49*** (0.15) 50 27.69 0.00/0.00

-0.6* (0.32) 50 17.4 0.02 / 0.02

-1.12*** (0.31) 50 18.76 0.00 / 0.00

-0.17 (0.43) 50 28.04 0.00 / 0.00

0.08* (0.04) -0.05 (0.04) -0.16 (0.39) 2.44 (2.3) 0.01 (0.01) -3.82** (1.84) 50 9.92 0.01 / 0.01

N F-statistics Endogeneity tests (p-value) Notes: Standard errors in parentheses. *Significant at 10%; **Significant at 5%; ***Significant at 1%. Estimation method: 2SLS. Instrumental variable: Local Inclusive Institutions in Middle Ages. F-statistics is F-test against the null that the instruments are irrelevant in the first-stage regression. Endogeneity tests report Durbin and Wu-Hausman test’s p-value against the null that Part-Coop Index is exogenous.

Two types of tests are applied to evaluate the weakness of the instrument and the level of endogeneity of the dependent variable. It is recommended, as a rule of thumb, that 119

the instrumental variable obtain an F-statistics close to or higher than 10 (Stock et al. 2002)—even if it obtains a p-value lower than 0.01—to rule out that it is a weak instrument. This requirement is met for all regressions in this table. The endogeneity test reveals for all the specifications that it is convenient to treat the Part-Coop Index as an endogenous variable and, thus, it is right to use instrumental variables. Table 5.6 repeats the regression process in Table 5.5, but this time with political performance being the dependent variable. The results of the first stage are, of course, identical to those in Table 5.5, since the same variables are involved. The second stage shows satisfactory results, with coefficients for positive and highly significant PartCoop Index, but, as in the OLS model, coefficients show greater volatility in their size across specification. Again our indicator Political performance reveals the weakness of its composition presumably due to its level of aggregation. The endogeneity test reveals that Part-Coop Index must certainly be treated as an endogenous variable.

5.4.4. Continuity of historical private law In the previous chapter, we were cautious about the continuity of the different regional private law, which may have been capable of generating particular beliefs, values or attitudes in the regions. This is important here for an additional reason: they could have played the role of alternative channel through which historical political institutions affect performance—i.e., Historical political institutionsprivate laweconomic and political performance. Table 5.7 repeats a similar version of that robustness test, using those strategically-reduced samples. The result of this test is again satisfactory. The coefficients of the variables of interest in both stages continue to show the expected sign and are highly significant. It should also be noted that in the expanded sample—columns (2) and (4)—the Castilian civil code has a significant negative relation with Part-Coop Index—as already seen in chapter 4—but does not show a significant effect on performance in the second stage. The instrument continues to show strength according to F-statistics. For these specifications, the endogeneity test confirms the adequacy of this specification to explain economic performance but advises the treatment of Part-Coop Index as an exogenous variable rather than using an instrument.

120

Table 5.7. The robustness of results before the persistence of the historical private law

Panel A: Second-stage Part-Coop Index

(1) (2) Dependent: Log GDP per capita 1998-2008 0.23*** (0.06)

0.21*** (0.05) -0.08 (0.1) 9.82*** (0.09)

Castilian Civil Code _cons Panel B: First Stage Local Inclusive institutions in Middle Ages

9.75*** (0.03)

0.76*** (0.29)

0.01 (0.17)

0.80*** (0.27) 0.43 (0.52) -0.41 (0.44)

Endogenous var.: Part-Coop Index 1.10***

1.06***

1.10***

1.06***

(0.30)

(0.28) -0.71* (0.39) 0.08 (0.4)

(0.30)

(0.28) -0.71* (0.39) 0.08 (0.4)

Castilian Civil Code _cons

(3) (4) Dependent: Institutional performance

-0.64*** (0.15)

-0.64*** (0.15)

35 40 35 40 N 13.74 14.69 13.74 14.69 F-statistics 0.00 / 0.00 0.00 / 0.00 0.19 / 0.21 0.097 / 0.11 Endogeneity tests (p-value) Notes: Standard errors in parentheses. *Significant at 10%; **Significant at 5%; ***Significant at 1%. Estimation method: 2SLS. Instrumental variable: Local Inclusive institutions in Middle Ages. F-statistics is F-test against the null that the instruments are irrelevant in the first-stage regression. Endogeneity tests report Durbin and WuHausman tests’ p-value against the null that culture is exogenous. Columns (1) and (3) show reduced samples according to Figure 4.5(A) in chapter 4 and columns (2) and (4) according to Figure 4.5(B).

5.5. Conclusion This research reveals the importance of coherence between formal institutions and the deep elements of culture so that the human organization can perform properly. In the last decades, with the emergence of the social capital research program, authors found empirical links between these cultural traits and performance in the economic, political and social spheres. As a novelty, this chapter points out and makes visible that these cultural traits only work favorably for performance when they are located within an open access institutional system and not under the institutions of the previous Ancient Regime. The results of this chapter validate, at least for the case of Spain, the theory that considers culture the missing link that connects key historical events with current performance, following the line of previous works such as Tabellini (2010) or Guiso et al. (2008a, 2011). It must also invite us to rethink previous works that assumed that formal institutions loaded their own factor of persistence—e.g. Acemoglu et al. (2001). Other related but missing cultural and material elements may have had a role in improving performance, in linking historical institutions to current performance or even in affecting the survival of institutions over time. As posed in the previous chapter, with 121

the Part-Coop Index, we proxy a wider informal context that favors participation and cooperation and may be comprised of both cultural and material components59. It is necessary to raise awareness and devote a more intense theoretical and empirical effort to the study of transplants of institutions developed outside a given social context, to the survival and functioning of endogenous institutional transformations and other related institutional phenomena. Coherence thus becomes a key issue, but there is still a long way to go. Especially by economists, who, as Portes (2006) suggests, do not have incorporated sufficient conceptual tools to perform a good institutional reasoning. It becomes necessary, therefore, the participation of other disciplines of the social sciences to decode this relationship and understand more deeply the causal flows.

59

Following this chapter, there is an epilogue that is motivated by the recent work by Oto-Peralías and Romero-Ávila (2016). It precisely reflects on the need to account for the cultural and the material spheres of society.

122

Appendix I. Indicators on the quality of the public provision of healthcare services Table 5.8. Components of the index for the quality of the public provision of healthcare services [1]

[2]

Hospital beds per 1000 people

[3]

Operating rooms per 100,000 people

CT and MRI equipment per million people

[4]

[5]

[6]

[7]

Specialty care doctors per 1000 people

Primary care doctors per 1000 people

Specialty care nursing professionals per 1000 people

Primary care nursing professionals per 1000 people

[8] Satisfaction with HC System

[9]

[10]

% of people who thinks HC System works well or very well

Global valuation of the HC System by users

[11]

[12]

% of people who prefer Public HC

[13]

% of people who got appointment for specialty care within 15 days

% of people who got appointment for primary care within 1 day

Average after normalizing indicators

Andalusia

2.52

8.4

22.8

1.54

0.72

2.61

0.61

6.29

62.8

83.57

62

7.6

32.5

-0.82

Aragon

4.11

9.38

29.7

2.06

0.89

3.91

0.72

7.04

67.8

87.77

76.7

15.7

30.5

0.75

Prin. Of Asturias

3.84

9.34

27.3

2.16

0.75

3.44

0.64

6.57

79.4

86.43

70.1

6.3

43.7

0.29

Baleares

3.37

9.84

36.9

1.81

0.64

3

0.53

6.24

58.2

86.18

46.7

18.6

26.9

-0.22

Canary Islands

3.58

8.11

26.5

1.73

0.77

3.16

0.62

5.55

42.2

82

51.9

13.7

16.5

-0.80

Cantabria

3.53

8.13

23.8

1.67

0.79

3.07

0.65

6.72

69.1

90.85

50.7

3.2

47.7

-0.18

3.9

8.79

26.9

1.8

1.1

3.07

0.78

6.57

65.6

84.2

75.8

11.9

32.6

0.37

Castilla-La Mancha

2.84

6.61

28

1.72

0.82

2.85

0.76

6.07

54.5

85.23

70.4

15

29

-0.37

Catalonia

4.23

9.7

25.9

1.76

0.73

3.07

0.69

6.03

54.9

81.5

51.4

21.4

4.4

-0.35

Valencian Comm.

2.79

9.28

27.2

1.64

0.74

2.64

0.65

6.11

54.7

83.6

62

13.6

16.8

-0.62

Extremadura

3.76

9.89

27.9

1.72

0.88

2.76

0.84

5.99

59.5

85.05

59.8

9.7

27.9

-0.04

Galicia

3.68

10

32

1.76

0.81

2.1

0.65

6.22

73.2

86.25

83.6

11.4

51.3

0.24

Madrid

3.45

10.08

32.3

1.94

0.69

3.24

0.51

6.55

69.6

82.7

66.4

21.6

32.5

0.07

Murcia

3.3

9.68

28.9

1.75

0.77

2.87

0.58

6.41

63.7

88.15

64.2

18.6

11.6

-0.12

Navarre

3.73

11.07

28.4

2.34

0.77

4.24

0.73

7.18

80.3

86.2

61.7

14.5

41.5

0.84

Basque Country

3.85

10.77

30.4

2.22

0.78

4.1

0.64

6.9

77.3

89.9

75.5

15.9

43

0.91

3.09 7.7 21.1 1.65 La Rioja [1] Hospital beds per 1000 people (MSSSI 2015b) [2] Operating rooms per 100,000 people (MSSSI 2015b) [3] CT and MRI equipment per million people (MSSSI 2015b) [4] Specialty care doctors per 1000 people (MSSSI 2015b) [5] Primary care doctors per 1000 people in 2014(MSSSI 2015c) [6] Specialty care nursing professionals per 1000 people (MSSSI 2015b) [7] Primary care nursing professionals per 1000 people(MSSSI 2015c)

0.83

3

0.68

6.8

72.5

87.6

69.8

16

58.8

0.04

Castilla and Leon

[8] Satisfaction with HC System (MSSSI 2015a) [9] % of people who thinks HC System works well or very well (MSSSI 2015a) [10] Global valuation of the HC System by users (MSSSI 2015a) [11] % of people who prefer Public HC (MSSSI 2015a) [12] % of people who got appointment for specialty care within 15 days(MSSSI 2015a) [13] % of people who got appointment for primary care within 1 day (MSSSI 2015a)

123

Appendix II. Epilogue Recently, when this chapter 5 was already closed 60 , Oto-Peralías and Romero-Ávila (2016) published a very beautiful work that also connects the Reconquista with the current economic performance of the regions. They argued that the process of the Reconquista left diverse forms of organization throughout the regions with an economic and political power less concentrated in some regions and more concentrated in others. This diversity of organizational modalities in terms of distribution of power is perpetuated by some sort of path-dependence, making regions at the time of industrialization more able to take advantage of the new conditions. Their account is very similar to the one raised in these two chapters. The Reconquest is placed as an exogenous impact, leaving different organizations in terms of power across regions. This gave rise to regionally distinctive organizational trajectories. In the eighteenth and nineteenth centuries, the changes of the liberal revolution and the industrialization led to a transformation in the regional economic distribution. However, there are other issues that differ from our narrative, such as the explanation of the process of repopulation and its link to the speed of the Christian advance, which are not of interest here. The main difference, which must be addressed, has to do with the mechanism of impact on economic development and the factor of persistence. For both phenomena, Oto-Peralías and Romero-Ávila (2016) focus more their study on the material dimension, based on the enormous impact of the concentration of political and economic power, but leaving aside the cultural factors in the whole process 61 . This hypothesis, although true, only raises a part of the story and seems incomplete in the light of these chapters 4 and 5.

A5.1. Culture and social structure Alejandro Portes (2006) recalls the origins of sociology to highlight some elements that were always present in that tradition but that economics was neglecting in its study of institutions. He suggested that it was necessary, at least for analytical purposes, to establish a separation between the symbolic sphere or culture and the material sphere or social structure of society. Within the cultural realm are the “symbolic elements crucial 60

See that the most important points are already present in Soto-Oñate (2015, forthcoming). Only at the end of the conclusion do they mention the culture. The same thing happens in Soto-Oñate (2015), which does not recognize the material dimension of society until its conclusion. 61

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for human interaction, mutual understanding, and order ... is the realm of values, cognitive frameworks, and accumulated knowledge” (Portes 2006, pp.236–237). Social structure consists of “actual persons enacting roles and organized in a status hierarchy of some kind ... is the realm of interests, individual and collective, backed by different amounts of power” (Portes 2006, p.237). Both dimensions are interrelated, affecting each other in a dialectical relationship. It is often the case that an elite that concentrates enough power uses it to promote certain types of values and beliefs within the community. In his own words, “elites in control of power-conferring resources seek to stabilize and perpetuate their position by molding values so that the mass of the population is persuaded of the ‘fairness’ of the existing order” (Portes 2006, p.239). But the social structure itself may also be affecting culture without departing from a conscious decision by the elite. In this sense, Tabellini (2010), inquiring about the historical origins of certain cultural traits related to social capital, argues that “an autocratic and corrupt regime that survives thanks to a strong hierarchy of privileges and that subjugates the population with the arbitrary use of force ... will foster mistrust of unfamiliar people, limited as opposed to general morality, a sense of helplessness, and resignation” (2010, p.694); being the opposite case a social organization “where productive entrepreneurs or traders participate openly in the political organization of society, the rule of law is respected and the supreme authority is restricted by checks and balances” (2010, p.694). Social and cultural dynamics with respect to cooperation and participation may be of different types. These powerconferring resources can be of various types: legal, economic, military, cognitive (press), symbolic (religion), etc. This distribution of power operates jointly through and over the cultural and material dimensions of society, having a constant influence on the values, attitudes and beliefs of the population, but also on the distribution of resources. The verticality-horizontality dimension of the organization plays a fundamental role in the reproduction of these traits. Boix and Posner (1998) argued that because vertical organizations are based on relationships of dependence and authority, not of mutuality—not among equals—they have a very limited ability to generate norms of reciprocity and social trust. But verticality seems not only useless to produce generalized confidence, it also hinders it. Speaking of a polarized society, they argued that “[o]ne factor which would clearly affect social co-operation, and hence explain variations in social capital stocks across countries, is the degree of social and political 125

inequality among potential co-operating partners. Co-operation among unequals is problematic because there will always be incentives for the poor, who will naturally be dissatisfied with the existing distribution of assets, to defect from co-operative arrangements that perpetuate the status quo” (1998, p.688). Putnam et al. (1993, p.105) assert that “equality is an essential feature of the civic community” and that, unlike “the more egalitarian, cooperative civic community, life in a vertically structured, horizontally fractured community produces daily justifications for the feelings of exploitation, dependency and frustration, especially at the bottom of the social ladder, but also on somewhat higher rungs” (Putnam et al. 1993, p.111). Knack and Keefer (1997), in addition to considering that there are obvious theoretical reasons to expect a consistent negative relationship between inequality and levels of social capital, empirically demonstrate a strong association of this kind. We must therefore advance in an integral explanation that adequately states that social organization has a cultural and a material realm and that are in a deep dialectical connection, affecting each other until finding a harmonic fit—assuming the molding of either or both. The literature on social capital usually takes into account not only cultural features but also its structural component (Soto-Oñate 2014). Since both realms are interrelated, we can give a rough explanation in the absence of investigating the immensity of details with precision: The process of the Reconquest left organizational seeds throughout the regions, whose potentiality remained somehow latent until the arrival of the liberal revolution and the technological opportunities of the first industrial revolution. Those regions more horizontally organized and with a more favorable culture towards participation and cooperation are those which obtain better advantage from the new technological and institutional conditions. The liberal revolution and industrialization thus trigger a process of transformation towards the new regional economic distribution. Now, we also know that both realms are to some degree independent and that components of the cultural sphere are able to persist autonomously over the centuries— see examples in Chapter 3.

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A5.2. The Reconquest, culture and the factor of persistence The mechanism that connects the Reconquest with the current regional economic distribution according to Oto-Peralías and Romero-Ávila is the concentration of economic and political power in the social structure, which is proxied by the percentage of landless workers over the total agricultural active population and the percentage of the provincial area occupied by towns and cities of seigneurial jurisdiction in 1797. This distribution of internal power in the regions affects their capacity to take advantage of the new opportunities offered by the nineteenth century. Let us leave aside their political proxies, since they themselves recognize a slight effect and also the state jurisdictions at that time, because of the trading and concessions made by the kings from the Reconquest until that moment, are increasingly marked by arbitrariness and less linked to the existence of a previous social structure in the locality. In addition, one of our stylistic assumptions in chapters 4 and 5 raised political integration in the eighteenth century—though in rigorous terms it was completed in the mid-nineteenth century with the abolition of the Basque and Navarrese fueros. From that moment on, formal political institutions are considerably homogeneous for the whole territory, so they cannot have been a factor of persistence. The regional differences in uses and customs of political governance may have been survived, but that could be described as a political culture related to past experiences. However, this would require more historically accurate analysis. In Spain, both the most important liberal reforms and the first industrial revolution took place in the nineteenth century, when Spanish political integration seems to have been completed or was in its last stages. However, the structure of property somehow persists, which is the cause and consequence of political and economic power and is not a minor issue for the development and formation of cultural traits. They captured this factor, as we also did in chapter 5, with the proportion of landless workers. Land was a key asset in a historic period in which the economy was essentially based in agriculture. However, as seen in the chapter, the distribution of land in the nineteenth century a) has no significant explanatory power on these cultural traits, Part-Coop Index, in the presence of the variable of medieval political inclusiveness (Table 5.5, column 4, Panel B) b) nor on the current regional per capita GDP in presence of instrumented Part-Coop Index (Table 5.5, column 4, Panel A).

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This does not necessarily mean that the distribution of de facto power does not have a role in the formation of these traits; it may only point that it has no distinctive explanatory power beyond that provided by the level of inclusiveness of the medieval political institutions. What it does reveal is that at least there is an essentially cultural channel that connects the Reconquest with the current economic performance of the regions. In spite of these results, we must not stop assuming the existence and influence of the distribution of informal economic and political power. The role of economic inequality in the possibilities of taking advantage of the opportunities offered by the transformations of the eighteenth and nineteenth centuries is unquestionable. But we have also seen throughout this book that the cultural side of society has a powerful influence that is theoretically reasonable and empirically visible.

A5.3. Two complementary works Both works locate the Reconquista as an exogenous impact that establishes the bases of the local distribution of power, which evolved path-dependently, and identifies the technological and institutional transformations of the modern age as triggers of the new regional economic distribution. However, the works differ in the pointed mechanisms that transform the regional economic distribution and that make it persist until the present time. Their interpretation of the modern disparities of economic development is essentially focused in the local use of political power and the unequal distribution of economic resources. On the other hand, their explanation of the persistence of the regional economic distribution from the industrialization until today is based on agglomeration dynamics and the inheritance of a distribution of de facto power in the regions—only at the end of the conclusion they mention the culture generated by this distribution of power. In this chapter 5, we focused on the cultural legacy left by different levels of inclusiveness in the social organization—which also refers to power distribution, de iure and de facto—and its impact on economic development and political performance of the regions. It suggests that culture makes the difference in taking advantage of the opportunities provided by the national open access institutions. Both economic

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transformation since the 19th century and its persistence until our days is formulated under a culturalist perspective, leaving aside its most material sphere62. Both works read together give a more complete view of the mechanisms that have been operating to link historical processes with our current situation. As a general lesson, we must recognize the double channel through which historical experiences influence the present. However, a deeper analysis of both stories should be carried out to better understand the actual role of each realm in the unequal use of the same economic opportunities. This preliminary analysis suggests that the factor of persistence may be at least partially contained in culture. But the distribution of de facto power cannot be ruled out. Better variables need to be found, especially on historical culture. Our work lacked variables revealing the regional distribution of these cultural traits for the 18th or 19th centuries. That could help to solve the complex problem that we were announcing: the difficulty of disentangling the causal effects between formal institutions, social structure and culture.

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It is curious that Oto-Peralías and Romero-Ávila (2016) only in the conclusions recognize the possibility of culture as a factor of persistence and Soto-Oñate (2015 and this chapter 5) only in his conclusions recognizes the role that could have played the social structure. Both works were aware that they omitted something important.

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Chapter 6 International rules, governance diversity and institutional performance: The case of the regime of liability and compensation for oil pollution damage

6.1. Introduction Despite the proliferation of multilateral treaties and international conventions that attempt to regulate human relations at the global level, nation states still play a key role in the success or failure of their practical operation and even their own survival and transformation over time. This chapter delves into the international system of liability and compensation for oil pollution damage from the perspective of new institutional economics. This case provides a good ground to empirically investigate institutional performance and institutional change over time. The oil industry is currently of vital importance for both industrialized and developing countries. Much of the national and international oil movements are carried by sea. It is estimated that the amount of crude oil and petroleum products that was transported in 2015 by sea was around 2.8 billion tons (UNCTAD 2016)63. Technological advances substantially improved the safety conditions and the monitoring and prevention capacities of the authorities. However, oil transportation continues to be a highly risky activity, both for the actors involved in its production and exchange and for the rest of society. Damage from oil spills is a typical example of a negative externality. This is a situation in which the rights of agents not involved in production and exchange, and therefore do not benefit—at least directly—from it, are affected by its negative consequences. That is, they bear a cost without being part of the operation. The oil transportation, because it is likely to generate high costs for actors directly and not directly involved in the exchange, requires establishing institutional systems to allocate responsibilities and compensations in the event of a spill. The underlying intention is establishing a regulation on the assumption of the risks of the production and treatment of a good that benefits the entire 63

The estimated figures point out 1.77 billion tons of crude oil and 1 billion tons of petroleum products.

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society directly or indirectly to a greater or lesser extent. Moreover, the industry and the society as a whole are composed of a multitude of heterogeneous agents with different needs and interests. The construction of such institutional systems thus becomes highly complicated in complex societies, especially if several nations are involved in an international convention, as is the case that we are going to analyze in this chapter. This diverse network of actors, interests, needs, resources and capacities, coupled with the heterogeneity of national institutions, conditions both the functioning of the institutional system across countries and the evolution of the international system over time. New Institutional Economics and Law & Economics have been developing a theoretical body to face the analysis of the problem of social cost and its institutional solutions. This chapter applies this theoretical framework to evaluate the international institutions of liability and compensation for oil pollution damage, their operation in practice across countries and their evolution over time. It reveals how key factors in the national contexts affect their material performance. Especially, the enforcement capacity of nation-states turns to be crucial to the material success of international conventions. On the other hand, it addresses some of the limitations of the current system, which threaten its own survival as an international treaty due to the dissatisfaction of some of its contracting states. In this sense, it wonders what hinders the evolution of this international system and what makes it progress towards the integration of the diverse interests and the overcoming of conflicts. The chapter proceeds as follows. Section 2 presents the problem of social cost and the emerging organizational solutions to try to solve it under the new institutionalist perspective. Section 3 focuses on the international institutional framework of liability and compensation in cases of oil spills, its history and current status. Section 4 reviews the functioning of this system in practice through an analysis of the ten major oil spill disasters that the 1992 international regime had to face until the present time. Section 5 presents the most recurrent limitations and criticisms of the international regime, illustrated with the cases presented in section 4. Section 6 is concerned with institutional change and addresses the difficulties faced by the regime in extending its application to other countries that have not yet ratified it or even to ensure its own survival. Section 7 concludes the chapter with some reflections.

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6.2. Social cost, transaction costs and institutions As anticipated in the introduction, there are economic activities that may generate negative externalities—like, in this case, the production and transport of crude oil and petroleum products—causing costs to actors outside the transaction. The New Institutional Economics starts reasoning social cost from the fundamental basis of the Coase (1960). Traditionally, there was a consensus that anyone who generates negative externalities would be restricted, punished and/or obligated to provide an adequate compensation to the affected party. However, for Coase this was not so clear. Rather than wondering how to avoid A’s harm—which generates a negative externality—over B—who suffers it—, society should wonder if A should be allowed to harm B. Coase sees the damage as reciprocal. He understands that the restriction also generates a cost to A. This question makes sense if we understand that the objective is to avoid the greater damage. Coase warns: “What answer should be given is, of course, not clear unless we know the value of what is obtained as well as the value of what is sacrificed to obtain it” (Coase 1960, p.2). In The Problem of Social Cost, Ronald Coase (1960) formulated a scenario, in which, independently of the court judgement with respect to a negative externality case, in a world without transaction costs, actors would be able to reach ex post agreements that would allow an efficient reallocation of property rights—i.e., transferring the rights to the hands that value them the most. However, in a real world with positive transaction costs, that outcome is difficult. Thus, the institutions in force, the judicial judgments and the resulting distribution of property rights are of transcendental importance for the outcome, and may lead to inefficient results that are impossible to solve by means of ex post transactions. Transaction costs are the equivalent of the concept of friction in physics. These are the costs derived from information asymmetries, team production externalities or market power (Miller 1992) and take the form of costs of monitoring, enforcement, getting information, contract design, etc. All these costs distort the ability of a market to efficiently generate the exchanges that would lead to a Paretian optimum. Governance

structures—organizations

and

institutions—affect

the

amount

of

transaction costs of a market either by increasing or reducing it. Institutions also serve 133

the function of providing order and reducing uncertainty, making the behavior of other relevant actors predictable. They set up an incentive structure within which individuals make decisions. For example, if institutions sanction an oil spill, actors have less incentive to take risk and more incentive to invest in security. In a case of negative externality, like those of pollution from oil spills, in which victims usually do not have a contractual relationship with the owners of the ship or cargo and an efficient ex post agreement via the market is unlikely, institutions become essential to compel potential pollutants to ensure an optimal level of care through the configuration of the incentive structure. The responsible parties are obliged to internalize the costs of a possible spill and, with it, to assume the risks of its operation. In this way, investment in security is encouraged and a hypothetical compensation is granted to those who bear the externality. The various institutional regimes currently in force vary in the conception of damage, the treatment of environmental costs or the extent of liability and compensation by the actors involved. On the basis of these factors, it is stablished who is liable, who are affected, what elements are included in the evaluation of the damage and to what extent the responsible actor may compensate the victims.

6.3. The international rules: 1992 CLC and 1992 FC In the origins of the current convention is the two-tier system comprised of the International Convention on Civil Liability for Oil Pollution Damage—CLC hereafter—of 1967 and the International Convention on the Establishment of an International Fund for Compensation for Oil Pollution Damage—hereafter FC for the Convention and IOPCF for the Fund—of 1971. In 1992, both conventions were amended, giving rise to the so-called new regime of CLC/FC 1992 which came into force in 1996. The 1971 Fund Convention (FC) ceased to be in force in 2002 and the International Oil Pollution Compensation Fund (IOPCF) 1971 ceased to exist with effect from the end of 2014. As of December 2016, 135 nations have ratified the 1992 CLC and 114 are members of the 1992 FC. As the IOPCF (2016) itself asserts, this twotier compensation system of CLC/FC 1992 “was intended to ensure an equitable sharing of the economic consequences of marine oil spills from tankers between the shipping and oil industries” (2016, p.8). 134

The CLC determines the liability of shipowners for damages due to oil pollution. It establishes the principle of strict liability and creates a system of compulsory liability insurance for ships carrying more than 2,000 tons of oil. This strict liability follows the polluter pays principle. This means that it is not necessary to prove the fault to make the owner of the ship liable for the spill. The system provides three kinds of exemptions: a) the damage resulted from an act of war or natural disaster, b) it was completely caused by a deliberate act or omission by a third party, or c) it was completely caused by negligence of public authorities. The shipowner is entitled to limit his/her liability in respect of any one incident to an aggregate amount that is linked to the units of tonnage of the ship. It is provided that the shipowner. Currently, the owner can limit his/her liability to SDR 4.51 million 64 — US$6.12 million—65 if the vessel has a capacity of 5000 GT or less, or otherwise SDR 4.51 million plus SDR 420 for each additional ton up to a maximum of SDR 89.77 million—US$ 121.8 million. The owner will lose the right to limit its liability if it is proved that the damage “resulted from his personal act or omission, committed with the intent to cause such damage, or recklessly and with knowledge that such damage would probably result” (Art. V.2). On the other hand, the CLC establishes what has come to be called channeling of liability in the first instance towards the shipowner. This means that within the framework of the CLC, claims can only be made against the owner of the vessel and the obligation to compensate will be limited to the quantities mentioned in the previous paragraph. Claims against “the servants or agents of the owner, members of the crew, the pilot, the charterer—including bareboat charterer—, manager or operator of the ship, or any person carrying out salvage operations or preventive measures” (IOPCF 2016k, p.3) are not allowed. This controversial clause will be discussed later in this chapter. The Fund Convention (FC), which is voluntary and complementary to the CLC, establishes a fund to compensate those affected when the compensation provided by the CLC is not sufficient to cover all the damage. It is contributed by the oil industry66, according to the tonnage of oil received. In the year 2015, the countries that contributed

64

Special Drawing Rights (SDR) is an international reserve asset created by the IMF. SDR 1 equals to US$1.357194, as of December 7, 2016. 66 Specifically “by contributions levied on any person who has received in a calendar year more than 150,000 tons of crude oil or heavy fuel oil after sea transport in a 1992 Fund Member State”. 65

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the most were Japan (14%), India (13%), Netherlands (9%) and Korea (8%) (IOPCF 2016a). As the shipowners under the CLC, there is a limitation of liability for the Fund, which currently stands at SDR 203 million—about US$ 275.5 million. Since 2005 there is a third tier of compensation, the Supplementary Fund, which raises the available compensation to SDR 750 million (about US$ 1.018 billion). It contributes to this fund following the same logic of the 1992 FC. Currently, 31 countries are members of the Supplementary Fund. In the same year, the International Group of P&I Clubs—13 insurance companies that together cover the liability insurance of the 98% of the global oil fleet—assigned a voluntary agreement known as Small Tanker Oil Pollution Indemnification Agreement (STOPIA). Under STOPIA, the liability limitation of shipowners increases to SDR 20 million for small vessels—up to 29,548 gross tonnage—for damages in 1992 IOPCF Member States. This coverage was extended to larger tankers in 2006 with the TOPIA, in virtue of which the International Group of P&I Clubs will cover the 50% of the compensations paid by the Supplementary Fund. In reality, these two agreements do not affect the amount available to compensate the victims, it is only a redistribution of the responsibility to indemnify between the shipping companies and the oil industry.

6.4. The international regime in practice: The 10 major spills within the 1992 CLC/FC regime This section analyzes the 10 largest oil spills under the 1992 CLC / FC regime. Table 6.1 presents a summary of the main characteristics of each event. 6.4.1. Prestige (Spain), 2002 In 2002, the Prestige67, a Liberian single-hull tanker registered in the Bahamas, suffered a break in its hull in the middle of a storm at 50 km offshore from Finisterre (Spain). It ended up breaking in two and sinking to about 260 km from the coast of Vigo (Spain). It transported an amount of 77,972 tons of fuel oil and released approximately 63,000 tons of them. It affected more than 200 km of coast mainly in Spain, but also in Portugal and France (Loureiro et al. 2006).

67

For an in-depth review of this case, see Caballero and Fernández-Gonzalez (2015).

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By that time, the three countries had ratified the 1992 CLC and the 1992 FC, therefore the shipowner’s liability limitation stood at SDR 18.9 million—about 22.8 million euros of that time68—and the Fund’s limitation at SDR 135 million—around 171.5 million euros. Table 6.1. 10 major disasters within the 1992 CLC/FC system Incident

Year

Location

Estimated oil spilled (tons)

Compensation to be paid by the 1992 Fund until

Admissible claims amount (under Convention)

63,200

Compensation to be paid by shipowner and insurance company €22.8 million

€171.5 million

€362.7 million

Noncompensated damage (under Convention) €191.2 million

Prestige

2002

Erika

1999

Spain, France and Portugal France

19,800

€12.8 million

€184.8 million

€129.7 million

Nil

Hebei Spirit

2007

Republic of Korea

10,900

₩186.8 billion

₩321.6 billion

₩738 billion

₩414.4 billion

Natuna Sea

2000

Indonesia, Malaysia and Singapore

7,000

CLC’69, £5.1M; CLC’92, £18.7M

Not exceeded CLC limitation

Nil

Nakhodka

1997

Japan

6,200

¥23.2 billion £122 million SDR 135 million

Baltic Carrier Solar 1

2001

Denmark

2,500

Philippines

2,100

Not exceeded CLC limitation Not exceeded STOPIA limitation

Dkr 107 million (£10.1 million) SDR 15.71 M (₱ 1 billion)

Nil

2006

Volgoneft 139

2007

Russia and Ukraine

1,200-2,000

¥272 million £1.45 million SDR 1.59 million Dkr 118 million (£11.2 million) CLC92, SDR4.51M; STOPIA, SDR20M ₽ 174.8 million (SDR 4.51 million)

Malaysia, £320 000; Indonesia, £1.6 million; Singapore, £4.7 million ¥26.1 billion £137 million

₽ 7.9 billion (SDR 203 million)

₽ 0.5 billion (SDR12.98M)

SDR 1.51 million (insurance gap)

Slops

2000

Greece

1,000-2,500

Controversial

Controversial

€ 2.3 million

JS Amazing

2009

Nigeria

≈1,000

SDR 4.51 million

SDR 203 million

Unknown

Nil. 1992 Fund covered it Unknown

Covered by an extrajudicial agreement

Nil

Notes: Figures are up to 01.11.2016. Currency codes: SDR, special drawing rights; ₽, ruble; ₱, Phillipine peso; Dkr, Danish krone; ¥: yen; €, euro; £, pound sterling; ₩, Korean won.

The IOPC Fund received claims amounting to 1,037 million euros in Spain—of which 984.8 million were claimed by the Spanish State—, 109.7 million euros in France and 4.3 million euros in Portugal. However, the Fund carried out its own assessments, estimating the admissible claims in Spain at approximately 303 million euros, the French at 57.5 million euros and the Portuguese at 2.2 million euros69.

68

The exchange rate was 1 Euro = 0.787077 SDR, as of February 7, 2003. Other alternative estimates about the magnitude of the damage can be seen in Loureiro et al. (2006) and Garza-Gil et al. (2006). 69

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Of this amount, and due to the limitation of liability, the level of payments ended up being at 30% for Spain and France and at 15% for Portugal. The level of payments is established so that the principle of equal treatment could be granted to all victims. Therefore, only a portion of the damages recognized—30%—will be compensated by the shipping and the oil industry, with the major part having to be assumed by the victims of the incident. In addition to this, the Spanish State advanced the payments to be made by the Fund, which were materialized slowly. As of October 2016, 50.5 million euros are still pending of payment (IOPCF 2016e). In addition, the Spanish State took legal action against several actors: 

In the United States Court of Appels of Second Circuit, to the certification company, American Bureau of Shipping (ABS). The Court noted that “Spain has … failed to adduce sufficient evidence to create a genuine dispute of material fact as to whether Defendants recklessly breached that duty such that their actions constituted a proximate cause of the wreck of the Prestige” (US Court of Appeals for the Second Circuit 2012). Therefore, Spain could not demonstrate recklessness or negligence in ABS, unlike France with RINA, as we will see below in the case of the vessel Erika.



In the Provincial Court of A Coruña, a criminal complaint was filed against the master, the Chief Engineer and the civil servant involved in the decision not to allow the ship into a place of refuge in Spain. In the judgment of the Provincial Court (November 16, 2013), none of them were found criminally liable for damages to the environment. However, the master was found guilty for disobedience. This sentence was appealed by several actors before the Spanish Supreme Court. On January 26, 2016, the Spanish Supreme Court corrected the judgment of the Provincial Court of A Coruña in which the Prestige captain was acquitted of environmental crime and was only condemned for disobedience— which had no civil liability attached. The captain of the ship was sentenced to two years in prison for a crime of serious recklessness and the Court established a clear causal relationship between this and the environmental disaster, which made him civilly liable 70 . The case of recklessness leaves without effect the

70

The captain filed an appeal for nullity before this sentence, which was dismissed by the Supreme Court. In August 2016, the captain appealed the sentence before the Constitutional Court and declared that if it is not resolved in his favor he will appeal before the European Court of Human Rights (IOPCF 2016f).

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1992 CLC, which in the article V.2 stipulates that “[t]he owner shall not be entitled to limit his liability under this Convention if it is proved that the pollution damage resulted from his personal act or omission, committed with the intent to cause such damage, or recklessly and with knowledge that such damage would probably result”. In this way, the protection that the CLC 1992 establishes in its article III (4) for the pilot and other agents contracted by the owner is lost. The court also stated that the shipowner has subsidiary civil liability and has no right to limit it. It was considered that the owner was knowledgeable about the condition of the ship and acted negligently by allowing its navigation. Also, the insurer was found to be directly civilly liable by the Supreme Court up to the maximum amount in its insurance policy. The insurer of the vessel, The London Steamship Owners Mutual Insurance Association (the London P&I Club), covers this civil liability up to US$ 1 billion71. The IOPCF is also involved in the judgment as civilly liable, although the limitation of liability of the 1992 Fund is respected. The total amount of the damage remained to be elucidated until the execution phase of the judgment, but already contemplates compensations not only for objective economic damage—cost of repair and loss of profit—but also for purely environmental and moral damages. The recognized moral damage shall not be more than 30% of the material damage (Judgment of the Suprem Court 2016, p.144). The case of the Prestige oil spill highlighted the shortcomings of the 1992 CLC/FC regime to cope with the appropriate compensations with such a level of liability limitations. This greatly complicates the possibility of recovering the part of the damage that is admissible but above the financial cap—limitations of liability. It also showed the difficulty of States to hold accountable those who are involved, when it is necessary to prove the fault in such a difficult-to-monitor environment.

71

The IOPCF differs on this. In the note by the Secretariat of the March 30, 2016, it stated that this decision is actually a breach of the CLC since, under the convention, “the insurer may avail itself of the right to limitation of liability, even if the owner is not entitled to do so” (IOPCF 2016e). The International Group of P&I also showed their discontent and declared to have “significant concerns for the future viability of the compensation system as a whole and the pressures faced by insurers—and their reinsurers—in light of this judgment” (IOPCF 2016f). The Delegation of Spain, however, considered that the judgment was adequate in this respect and that the statements of the President and the London Club were due to an error of interpretation. The director of the fund seems to accept the explanation of the Spanish delegation but not the London Club (IOPCF 2016g). The controversy, however, remains with respect to the introduction of moral and purely environmental damages in the assessment of the damage, which does contradicts the Convention.

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In the courts, the Spanish State claimed 1,214 million euros for purely environmental damage (IOPCF 2016e) since the 1992 convention do not contemplate this type of damage. The valuation of environmental damage is a recurrent criticism received by the international system and will be discussed in section 5.

6.4.2. Erika (France), 1999 In 1999, the Erika tanker, registered in Malta, carried about 31,000 tons of fuel oil when it broke in two in the Bay of Biscay about 110 km off the coast of Brittany. The ship discharged about 19,800 tons of fuel oil affecting 400 kilometers of coast. At the time of the incident, France was part of the 1992 CLC and the 1992 Fund, so the shipowner could limit its liability to SDR 9.2 million—12.8 million euros. The Fund was responsible for the next tranche until SDR 135 million—184.8 million euros. Within the framework of the agreement, claims totaling 388.9 million euros were submitted and payments amounting to 129.7 million euros were made by October 2014 for which they were considered eligible under the accounts of the Convention. At the same time, however, legal proceedings were brought before the Criminal Court of First Instance in Paris against a number of the parties involved, finding four of them guilty: the shipowner’s representative—Revere Shipping—, the president of the management company—Panship Management and Services—, the classification society—RINA— and the “de facto” charterer (Total, SA). The sentence was ratified in successive appeals by the Court of Appeal and the French Supreme Court. In addition to criminal sanctions, the four actors were convicted jointly and severally to compensate the plaintiffs with 203.8 million euros. The damage valuation included repair and cleaning expenses and economic losses as well as purely environmental and moral damages. Consequently, the losses not included in the definition of damage of the international regime had to be resolved in the French national courts during the 15 years following the event. For this, it was necessary to demonstrate the neglect or recklessness of the actors and find the way to circumvent the channeling provision of the CLC (Popp & O’Connor 2013).

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6.4.3. Hebei Spirit (Republic of Korea), 2007 It was the worst spill in the history of the Republic of Korea. The incident occurred in December 2007 during a towing process under adverse weather conditions. The tow line broke and the crane struck the ship, piercing three of its tanks. The freighter, which carried about 209,000 tons of various types of oil, spilled 10,900 tons of oil. It affected about 375 km of coast in the western part of the peninsula. Only 20%—2,000 tons approximately—of the spill was collected at sea. At that time, the Republic of Korea was member of the 1992 CLC and the 1992 FC, but not of the Supplementary Fund. Therefore, the shipowner had the right to limit its liability to SDR 89.77 million and the Fund up to SDR 203 million. The Hebei Spirit Court of Appeal assessed the losses resulting from the incident and placed them at a total of KRW 738 billion, finding the 50% of the submitted claims admissible (IOPCF 2016b)72. As this amount far exceeds the Fund’s liability limit under the 1992 Fund Convention— SDR 203 million, KRW 307 million—, the Executive Committee currently places the level of payments at 60% (IOPCF 2016d). Cho (2010) highlights two limitations inherent in these international conventions that are revealed in the case of the Hebei Spirit. On the one hand, damage valuation, which took into account only the direct losses of the tourism industry, but not those of the support industries which were indirectly affected. Neither were the environmental costs nor the local economic rehabilitation needs admissible costs. On the other hand, it remarks the slowness to make effective the payment of the indemnifications. The Government of the Republic of Korea was forced to issue a special law to cover the remainder of the losses of the affected parties and to advance the compensations which the shipowner’ insurance and the Fund had to cover.

6.4.4. Natuna Sea (Indonesia, Malaysia and Singapur), 2000 The oil tanker Natuna Sea, which carried a cargo of 70,000 tons of Nile Blend crude oil, grounded in the Singapore Strait near the coast of Indonesia. It is estimated that it spilled 7,000 tons affecting the coasts of Singapore, Indonesia and Malaysia. According

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However, according to Kim et al. (2014), only 17.4% of the amount these claims were accepted. In total, only about the 10% of the amount claimed by the plaintiffs was admitted.

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to the Oil Spill Services Manager of the Singapore Oil Spill Response Center, “despite her age, she was in good condition, having been well looked after by her present owners and her mainly Indian officers and crew” (Richards 2001, p.1). The ship had deviated from its route to dodge other ships and entered an area of strong sea currents that ended up grounding it. Singapore was a member of the 1992 CLC and the 1992 FC. However, Indonesia was a member of the 1992 CLC but not of the 1992 FC and Malaysia was only a member of the CLC of 1969 and of the FC of 1971. This meant that the applicable liability limitation to Natuna Sea was SDR 22.4 million under the 1992 CLC and 6.1 million under the 1969 CLC. The claims eligible for compensation did not exceed these amounts and neither the 1971 Fund nor the 1992 Fund had to act. Compensations made by the owner and insurer were £ 320,000 in Malaysia, £ 1.6 million in Indonesia and £ 4.7 million in Singapore (IOPCF 2004). The economic issue was resolved with relative agility through the channels provided by the Conventions without having to resort to legal proceedings. Besides, the response by the authorities and companies responsible to manage the incident was immediate, avoiding larger damages. Volunteers, corporations and companies from the three countries, the Petroleum Association of Japan and scientists nominated by the IOPC Fund, collaborated in the tank drainage and the sea and coastal cleanings.

6.4.5. Nakhodka (Japan), 1997 In 1997, the Russian-flagged tank Nakhodka, loaded with 19,000 tons of medium fuel oil, was split in two at 100 kilometers offshore from the Oki Islands (Japan), spilling about 6,200 tons of oil and polluting the coast of ten prefectures along 1,000 kilometers. At the time of the incident, Japan was part of the 1992 CLC and 1992 FC, but Russia, where the ship was registered, was only member of the 1969 CLC and 1971 FC. The IOPC Funds considered that the responsibility of the shipowner was limited to the level established by the 1969 CLC, SDR 1.59 million. Additionally, it declared that the 1971 Fund Convention was applicable and was entitled to limit its liability up to SDR 58.41 million and if the amount to be compensated exceeds this amount, the 1992 Fund will

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be responsible for compensating victims up to SDR 135 million (£ 122 million, ¥ 23165 million). The total number of eligible claims was closed in 2002 amounting to £ 137 million (IOPCF 2003), exceeding the liability limit of the 1992 Fund (£ 122 million). Therefore, a level of payments of less than 100% had to be established in order to respect the principle of equal treatment for all victims. Finally, the level of payments was established at 80%. Investigations carried out by the Russian and Japanese authorities concluded that there could have been “fault or privity” by the owner—Prisco Traffic Limited—, as the maintenance status of the vessel was poor, presenting “extensive corrosion weakening the internal structure of the ship”(IOPCF 2002, p.72). The incident would not have had such an outcome in the face of bad but conventional weather conditions if it had been properly maintained. According to the Article V.2 of 1969 CLC, in this case the owner would not be entitled to limit its liability. The executive committees of the 1992 Fund and the 1971 Fund decided to take legal actions in order to redistribute the burden of compensation and recover part of the amount disbursed. However, in May 2002, an outof-court settlement was reached whereby the owner of the vessel and its insurer assumed that the owner had no right to limit its liability, with the insurer bearing the 42% of the compensation and the 1971 and 1992 Funds the 58%. In this way, all victims who submitted admissible claims were finally compensated.

6.4.6. Baltic Carrier (Denmark), 2001 On 29 March 2001, the Baltic Carrier, registered in the Marshall Islands, carrying 30,000 tons of heavy fuel oil, collided with a sugar-laden bulk carrier about 55 km offshore from Rostock—Germany—, releasing some 2,500 tons of oil. The spill affected the coasts of some Danish islands and slightly to Germany and Latvia. The acceptable damage claims were estimated at a total of Dkr 107 million (SDR 9.7 million) and the limitation applicable to the Baltic Carrier under the 1992 CLC was about SDR 10.66 million (Dkr 118 million). The Fund, therefore, has not had to face any compensation (IOPCF 2004).

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It is worth noting the deployment of resources and the international collaboration in the response to the spill. The Danish coastguard provided seven of its response ships, Sweden three and Germany two. The cleaning work in the sea ended in three days. Coast clean-up activities—mainly carried out in Denmark— were coordinated by the Danish and Swedish authorities, mobilizing hundreds of people including local security forces, municipal workers, contractors or volunteers. The emergency response phase was terminated in about 10 days and the cleaning work finished in summer (IOPCF 2003).

6.4.7. Solar 1 (Philippines), 2006 It is remembered as the worst oil spill in the Philippines. The tank vessel Solar 1 sank off the coast of Guimaras Island (The Philippines) during a storm in 2006. It spilled almost all its cargo—approximately 2,100 tons—, affecting hundreds of kilometers of coast (Cumo 2014, p.120). At the time of the incident, the Republic of Philippines was a member of the 1992 CLC and the CF 1992. In addition, the ship was insured by the Shipowners’ Mutual Protection and Indemnity Association (Shipowners’ Club), so it was part of the STOPIA program, which operated since 2006—see section 3. Under these conventions, the liability limit applicable to the owner was SDR 4.51 million, according to the 1992 CLC, but was extended to SDR 20 million under the STOPIA. From that amount, the Fund would be responsible for covering the compensations up to SDR 203 million, with accordance to the 1992 FC. The amount disbursed to July 2016 amounted to 986.7 million Philippine Pesos (IOPCF 2016h), corresponding to compensation for expenses in cleaning and repair and economic damages caused to the tourism, mariculture, capture fisheries and other sectors. This amount is around SDR 15.51 million today, exceeding the liability limit of the CLC— SDR 4.51 million—for the owner, but below the limit under STOPIA— SDR 20 million. The procedure required that the IOPCF had to assume the amounts that exceeded the CLC limit, which would later be reimbursed by the Shipowners’ Club. During the investigations of the incident serious irregularities were discovered that could have contributed to the outcome of the accident. The captain of the ship was not 144

in possession of the proper certificate to operate a vessel of this nature, and other crew members lacked proper documentation and, supposedly, adequate training. It is suspected that the ship was also overloaded. In addition, it was known that the ship was of considerable age and had been reconverted on several occasions, operating under different names throughout its life. This last fact occurred under the knowledge and consent of the maritime authority (Senate of the Philippines 2006; Baleña 2015).

6.4.8. Volgoneft 139 (Russian Federation and Ukraine), 2007 The case of the Volgoneft 139 illustrates the problems of poor monitoring and joins the list of cases that present irregularities with the compulsory insurance. In 2007, the Volgoneft 139 tanker split into two in the Kerch Strait, between the Russian Federation and Ukraine. At the time of the incident, the boat was anchored and caught in a storm. Despite the maneuvers, the boat broke and both sides sank. The ship was carrying 4,077 tons of heavy fuel oil and released approximately between 1,200 and 2,000 tons, affecting some 250 kilometers of coastline in both countries. At the time of the incident, the Russian Federation was a member of the CLC 1992 and the 1992 CF, but Ukraine had not signed any of the conventions. The liability of the tank owner under the 1992 CLC was limited to up to SDR 4.51 million. However, it soon became clear that the owner had taken out insurance for only SDR 3 million, which was the limitation of liability prior to the amendment of the year 2003. This meant that there was what was called an “insurance gap” of SDR 1.51 million. The amount to be compensated, 503.2 million rubles—around SDR 12.98 million—, far exceeded the owner’s liability limit, and, of course, the insured amount. The Fund assumed its share under the 1992 Fund agreement—i.e. from SDR 4.51 million— resulting in a disbursement of SDR 8.47 million. Who was responsible for covering the insurance gap was subject of controversy in the Russian courts. In 2008, the owner of the vessel, JSC Volgotanker, filed for bankruptcy, so it would not cope with the insurance gap. The insurance company, Ingosstrakh, was not willing to cover an amount not agreed in the contract that linked it to the ship. The Fund, on the other hand, considered an unjustifiable burden on its contributors to deal with an amount that was the sole responsibility of the owner under the 1992 CLC. The 145

case of the insurance gap passed by the Arbitration Court of St. Petersburg and the Region of Leningrad, the Court of Appeal, the Court of Cassation and the Supreme Court. Finally, the case returned to the Arbitration Court, which in November 2014 decided that the 1992 Fund should not take care of the insurance deficit and decided to deduct this amount from the final amount of the compensation package. This means that this part of the social cost ended up being borne by third parties not involved in the transaction (IOPCF 2016j). In addition, it is worth noting a recurring problem with the international regime, which also occurred in the Volgoneft 139 case: the claim for compensation for environmental damage. The case was brought to civil trial but was rejected by the St. Petersburg Arbitration Court. The environmental damage, as formulated in Article I.6 of the 1992 CLC, cannot be included in the valuation since it must be limited to costs of reasonable measures of reinstatement or prevention.

6.4.9. Slops (Greece), 2000 The Greek boat Slops is a “waste oil reception facility”. It was loaded with about 5,000 cubic meters of oily waters—of which between 1,000 and 2,000 cubic meters were supposedly oil—when it suffered an explosion in the Port of Piraeus. Among the consequences of the disaster are the death of an operator, the burning of two other ships nearby and a considerable amount of oil spilled into the sea. The Slops case is well known for its complexity. In particular, it revealed the limitation of the definition given in the international regime of the concept of “ship”, which was a point of contention between the parties. After several reconversions, the Slops went from cargo ship to facility for storage and treatment of oily waste, and it seems it had remained docked in port since then. The key problem is whether the Slops falls within the definition of “ship” given in the article I.1 of the 1992 CLC. Because, if the answer is no, the 1992 Fund would not have to be involved in this matter, and this was the position of the Fund’s Executive Committee. The Slops was not insured under Article VII.1 of the 1992 CLC and the owner declared himself insolvent. The plaintiffs took legal action against the 1992 Fund to cover the compensation. In its defense, the Fund argued that the Slops did not fall “within the 146

definition of “ship” laid down in the 1992 CLC and the 1992 Fund Convention”. However, the Court of First Instance in Piraeus concluded that it should be considered a ship and that, since the owner was financially insolvent and had no liability insurance, the 1992 Fund had to cover the compensation. The court ordered the Fund to pay the plaintiffs a sum of about 2.3 million euros. After successive appeals, the case reached the Supreme Court, which upheld the sentence. Finally, the Fund paid about 4 million euros in compensation, plus interest and legal costs. The Executive Committee devoted a long time to deciding whether taking legal action against the Greek State for not requiring the compulsory insurance, but finally determined not to do so (IOPCF 2009).

6.4.10. JS Amazing (Nigeria), 2009 The JS Amazing incident occurred at a refinery owned by the Nigerian National Petroleum Corporation (NNPC) located on the Warri River (Nigeria). The ship was docked improperly with insufficient mooring ropes and the movement drove it to crash into the remains of a sunken mooring dolphin. Two iron pipes pierced into the hull. About 1,000 tons of fuel oil were spilled, causing serious damage within a radius of 7.5 km. The National Oil Spill Detection and Response Agency (NOSDRA) hired a firm of experts and appraisers, which estimated the cost of the damage to 245 communities at 2,241 million NGN—about US$ 15 million in 2009 or nearly SDR 10 million. At that time, Nigeria had ratified both the 1992 CLC and the FC and, according to the tonnage of the vessel, the liability limitation of the owner stood at SDR 4.51 million and the Fund’s limitation at SDR 203 million. Presumably, the amount of estimated costs exceeded the liability limit of the owner, so the fund would have to cover the remaining amount. However, the claims sent to the Fund, based on insufficiently substantiated evidence, and the inability to prove the true source of the pollution led the IOPCF to reject all claims. The shipowner did not pay his indemnity share, corresponding to the first level— SDR 4.51 million. Only, and under pressure from local groups, the Pipeline and Product Marketing Company—PPMC, a subsidiary of the NNPC—provided a compensation of NGN 30 million —about SDR 130,000—to affected communities.

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The Marine Board of Inquiry, established by the Federal Ministry of Transport of Nigeria, found that there was no officer on duty, no first engineer officer, and neither the captain nor the crew were qualified to assume the management of a vessel of this nature. Additionally, it was later known that the vessel was not insured at the time of the incident nor was it classified as a certified transport to operate with the heavy oil it transported (IOPCF 2015). The case of JS Amazing highlights the difficulty of some nations’ authorities to successfully enforce the rules of the international regime. There were basic institutional problems related to the delimitation of property rights and the proper determination of the origin of the spill, the amount of damages and, thus, the subsequent compensation. Besides this, it is worth noting the Nigerian State’s inability to react to the disaster, which aggravated the consequences of the spill. Another illustrative sample of the enforcement problem is the following. NOSDRA requested PPMC to immediately undertake the cleaning and recovery of the affected areas, but PPMC ignored the order and was fined NGN 1 million. As this fine was not paid, NOSDRA took PPMC to court in 2010. The judge ruled that the PPMC had to proceed to the cleaning and to pay the fine that had been imposed. It is unknown if it was fulfilled. On the other hand, the Nigerian authorities showed no collaboration with the Fund. The Fund did not know of this incident until May 2010. Neither did they provide the identity of the owner of JS Amazing. There are still many details that are unknown.

6.5. Limitations of the international regime Specific parts of these conventions have often received substantial criticism. Some features of the regime even prevented the entry of such important countries as the United States. The main criticisms were directed towards the following issues. 6.5.1. Limitation of liability or financial caps Traditionally, maritime law has contemplated the right of the shipowner to limit his/her responsibility. The main reasons cited are:

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a) It promotes the development of transport activities, which were considered to be high-risk in the past. These activities would have been unrealizable if they had to fully cover the costs of a spill. It is also argued that this made sense in the past in order to allow the development of a competitive national merchant fleet. In turn, according to Faure and Wang (2008), taking into account “the change of the commercial structure and the modern technology, these reasons advanced in the 17th century were not valid anymore”. b) It makes sense to establish a reasonable risk distribution among all those who benefit from the activity. However, this configures a distribution of risk that is as indiscriminate as the place where the disaster occurs. c) It is necessary to comply with the requirements of insurers. It is understood that unlimited liability would be uninsurable or the costs would be too high. Gauci (1995) considers that the limitation of liability is an anachronism and concludes that there is no justification for its current existence, because it is an “unjustly discriminatory attempt to subsidize the shipping industry at the expense of other interests”. Faure y Wang (2008) agree that those conditions that motivated the financial caps in the first place do not hold anymore and qualify them as a “historical mistake”. The latter recall three recurrent criticisms of the limitation of liability: 1) It is a subsidy for the shipping industry, which ends up being borne by other actors—in many occasions the victims themselves. 2) Regarding the justification (c)—about the conditions of the liability insurance—, they argue that “the liability can be unlimited while the amount of insurance can be restricted to a certain amount”(Faure & Wang 2008, p.598). 3) Eliminating the financial caps would increase the incentives to invest in prevention by the shipping industry. But the limitation of liability applies not only to shipowners but also to the IOPCF under the 1992 CF. Beyond the limit imposed by this financial cap, the principle of strict liability does not operate. Any demand exceeding the cap must be made outside the CLC/FC regime in national courts and needs to demonstrate the culpability of some of the actors involved. In cases of large spills such as the Prestige, the Hebei Spirit or the Nakhodka, the available compensation did not even cover the admissible costs—in the sense of the 149

convention—originated by the spills. Limitations of liability were too low to adequately compensate for the generated social cost. Only in the case of the Nakhodka—and perhaps in the case of the Prestige—was it possible to recover the admissible costs through national court proceedings and extrajudicial agreements. The US liability and compensation regime, which was essentially constituted by the Oil Pollution Act (OPA) of 1990, imposes higher financial caps. In addition, the range of assumptions in which a shipowner may lose the right to limit his/her liability is much broader. In fact, as Kim (2003) states, the US regime “provides substantially unlimited liability through easily broken liability limits”. Therefore, the US regime is a precedent that serves as a guide for a possible evolution of the international system.

6.5.2. The channeling of liability to the owner of the ship The article III.4 (c) of 1992 CLC channels liability to the shipowner, thereby preventing claims within the Convention framework against other actors, such as the charterer, the crew members or the classification society. Again, legal proceedings against them would have to be carried out in parallel under national legal systems and under criteria other than strict liability, requiring fault or privity to be proven. Popp and Oconnor (2013, p.16) distinguished two main reasons why the international regime channels liability to specific actors under a strict liability regime and imposes financial caps: 1) By holding only one party responsible, the shipowner can obtain insurance without the need of another party to ensure the same risk. 2) The victims do not have to wait until the national courts issue their judgments on the claims between the shipowner and the charterer Faure and Wang (2006) argue that when the conditions of the Coase theorem do not exist, the channeling of responsibility becomes inefficient from an economic perspective. If other actors who can intervene in the damage are no longer exposed, the dissuasive effect of being exposed to responsibility is lost73.

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For a deep analysis of the implications of the channeling of liability from a coasean perspective, see Faure and Wang (2006).

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This arrangement, when combined with the limitation of liability, makes that sometimes plaintiffs can only direct actions against the owner of the vessel. For instance, in the Volgoneft 139 case, the insurance gap finally had to be borne by the victims because up to that figure it was the responsibility of the owner and claimers could not make the Fund subsidiary accountable. The channeling of responsibility, which is claimed to have only essentially distributional consequences, may affect the amount available to compensate the victims. In the Erika case, France managed to avoid the channeling of liability and take legal action against other actors. However, to do so, it had to demonstrate the negligence or recklessness of those other actors—cargo owner, classification society, owner’s representative, etc.—or their non-attachment to the owner so that they could not be protected by The CLC. Spain is currently attempting by the same means to break the channeling in the courts.

6.5.3. Reduced conception of damage and the measurement of the environmental cost The 1992 CLC defines “pollution damage” as “loss or damage caused outside the ship by contamination resulting from the escape or discharge of oil from the ship, wherever such escape or discharge may occur, provided that compensation for impairment of the environment other than loss of profit from such impairment shall be limited to costs of reasonable measures of reinstatement actually undertaken or to be undertaken” and “the costs of preventive measures, and further loss or damage caused by preventive measures”. Therefore, it limits the environmental damage to the amount spent or to be spent to mitigate or prevent the damage. As seen in the previous section, the plaintiffs often claimed purely environmental costs—Prestige, Erika, Hebei Spirit, Volgoneft 139—, what was systematically rejected by the Fund since they failed to define the actual cost of reasonable measures of reinstatement or prevention. These could only be claimed in parallel in national courts and outside the framework of the international regime. The Erika claimants were compensated for purely environmental damage after years of legal proceedings demonstrating the negligence or recklessness of the actors involved. 151

Recent movements in the Spanish Courts about the Prestige case could lead to a similar outcome. South Korea, for the Hebei Spirit case, and Italy, for the cases—not covered here—of the Patmos (1985) and the Haven (1991), unsuccessfully demanded compensation for purely environmental damage. This contrasts again with the 1990 US Oil Pollution Act. Unlike the 1992 international regime, the 1990 OPA “abstract quantification of non-market environmental damage is allowed in accordance with prescribed assessment standards” (Mason 2003, p.4). In fact, one of the reasons why United States is not Member State of the international conventions is because of its limited concept of damage (Mason 2003). The concept of economic damage itself has also been a bone of contention. It does not include the harm to auxiliary industries, which do not receive the damage immediately but indirectly (García Negro et al. 2007; Cho 2010). These are economic losses caused by the spill that also remain uncompensated under the international conventions.

6.5.4. A long process and strict admissibility criteria for compensation The objectives of these conventions included delimiting responsibilities among the actors involved and streamlining the compensation procedures. However, those States that felt they were being under-compensated faced long judicial processes to try to recover those costs that exceeded the financial caps or those not contemplated in the concept of damage by the regime. Moreover, within the international system there are recurrent complaints about the delay in the compensation. For example, the Prestige incident occurred in 2002, but as said above, today there are still 50 million euros of pending compensations. This led the states of Spain, France and South Korea to issue special laws to cover not only those non-compensable damages but also to advance those indemnities to be materialized. In addition to the long period to receive a compensation, claims face a strict evaluation system to prove that the damage was actually caused by the spill in question (Mason 2003; Kim et al. 2014). Many of the initial claims are automatically rejected due to this. This implies that the preventive force of the international regime is reduced. As a proposal, Mason (2003, p.8) argues that “monitoring of ship movements, combined with

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long-distance sourcing of oil types, could collectively facilitate more compensation claims against shipowners”.

6.5.5. Non-monetary sanctions: The potential role of criminal law In order to encourage prevention, it has also been proposed to introduce non-monetary sanctions, especially based on criminal law (Faure 2010). Criminal settlement seems to be a way by which nations can establish non-economic sanctions that serve as an additional deterrent. In this way, penal sanctions are added to the incentive structure to reduce pollution. It is especially useful in cases where there is a low probability of detection and a high potential gains from assuming risks. These measures may include jail sentences, confiscation of the instruments involved in the disaster—e.g., the vessel—or making public the identity of the offender and the details of the judgment. As the international regime does not provide adequate and sufficiently strong incentives to minimize discharges (Faure 2010), nations have had to develop complementary legal frameworks, even in dubious harmony with the international framework, to alleviate their gaps or vulnerabilities. For instance, following the Erika and Prestige disasters, the European Union began moves towards criminal sanctions in its legislation through Directives 2005/35— finally repealed—and 2009/123 on ship-source pollution and the introduction of Non-monetary penalties for infringements. Under these rules, spills will be considered a criminal offense “if committed with intent, recklessly or with serious negligence”. It also introduces other responsible parties other than the shipowner: flag States, charterers, classification Societies, port States and coastal States.

6.5.6. Heterogeneity of institutional performance across countries One of the most important analytical spaces for institutionalists left by this case of the international regime is the different performance of the international conventions across countries due to the different national contexts. National governance revealed itself a transcendental issue for the proper functioning of international institutions. Among the cases presented above, we have seen problems associated with the countries’ reduced capacity for monitoring and law enforcement, corruption in public corporations, lack of

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communication between agencies, weak centralization and coordination in prevention and cleaning, etc. Table 6.2 presents the different valuations that these countries achieved in the assessment of the Worldwide Governance Indicators (WGI) provided by the World Bank. They are made of subjective perspectives “on governance of survey respondents and public, private, and NGO sector experts worldwide” (Kaufmann et al. 2011). The table provides the average estimates during the period 1996 and 2009, the period in which the oil spills evaluated in section 6.4 occurred and considers four of the WGI: governance effectiveness, regulatory quality, rule of law and control of corruption 74. The countries’ performance is quite homogeneous across indicators since they evaluate different dimensions of the same system of governance. As seen in Figure 6.1, the positions among nations are stable and barely oscillate. It is remarkably clear in light of this table that those countries with better governance performance functioned better in dealing with the oil spill—monitoring, law enforcement, preventive activities, cleaning operations, assistance to victims, etc. Table 6.2. Worldwide Governance Indicators: heterogeneity in governance

Average 1996-2009 Government Regulatory Rule Control of Country/Territory effectiveness Quality of Law Corruption 1. Denmark 2.16 1.80 1.91 2.45 2. France 1.61 1.12 1.40 1.36 3. Spain 1.40 1.24 1.21 1.21 4. Japan 1.29 0.96 1.28 1.17 5. Korea, Rep. 0.90 0.71 0.87 0.40 6. Greece 0.70 0.85 0.81 0.42 7. Philippines -0.06 -0.02 -0.40 -0.54 8. Indonesia -0.37 -0.38 -0.72 -0.83 9. Russian Fed. -0.47 -0.32 -0.92 -0.91 10. Nigeria -1.00 -0.94 -1.26 -1.12

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The author define these indicators as follows (Kaufmann et al. 2011): governance effectiveness “reflects perceptions of the quality of public services, the quality of the civil service and the degree of its independence from political pressures, the quality of policy formulation and implementation, and the credibility of the government's commitment to such policies”; regulatory quality “reflects perceptions of the ability of the government to formulate and implement sound policies and regulations that permit and promote private sector development”; rule of law “reflects perceptions of the extent to which agents have confidence in and abide by the rules of society, and in particular the quality of contract enforcement, property rights, the police, and the courts, as well as the likelihood of crime and violence”; and control of corruption “reflects perceptions of the extent to which public power is exercised for private gain, including both petty and grand forms of corruption, as well as ‘capture’ of the state by elites and private interests”.

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The most capable states in governance terms mobilized sufficient resources and successfully coordinated their activities, even along with neighboring countries, to minimize the impact of the spill and accelerate the clean-up activities. The case of the Baltic Carrier was a successful operation in this regard, involving the emergency bodies of three countries—Denmark, Germany and Sweden—, coordinating a significant amount of human and material resources and finishing the emergency response phase in 10 days and the clean-up operations in a few months. Besides, these countries were able to take action with agility to assist the victims in their claims before the IOPCF, to advance the admissible compensations that were being slow to materialize—Hebei Spirit (Korea, Rep.), Erika (France) and Prestige (Spain)— or even assumed the compensation of the damage that the shipowner and the Fund were not obliged to cover due to the limitations of liability—Prestige (Spain). The story in the other spills was substantially different. For instance, it is remarkable how weak states have problems to enforce the international law and even their own executive decisions. Nigeria struggled with the PPMC to make it cover the clean-up. It contrasts with the power of the French state to make TOTAL, S.A. to assume all the clean-up costs of the Erika spill. Having a proper insurance is the responsibility of the ship owner, but the responsibility of monitoring if this requirement is fulfilled corresponds to the Contracting State in which the ship is registered (Article VII.2). Among these 10 cases, there are several uninsured—Slops (Greece), JS Amazing (Nigeria)—or inadequately insured—Volgoneft 139 (Russia)—ships. Their countries of origin did not properly monitor their vessels to identify irregularities in this regard. Moreover, in the cases of the Solar 1 (Philippines) and the JS Amazing (Nigeria), it was known that the captain and at least part of the crew had neither the certificates nor the qualification required to man their vessels.

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Figure 6.1. Worldwide Governance Indicators on government effectiveness, regulatory quality, rule of law and control of corruption

Government effectiveness 2.50 2.00 1.50 1.00 0.50 0.00 -0.50 -1.00

Control of Corruption Denmark France Spain Japan Korea, Rep. Greece Philippines Indonesia Russian Fed. Nigeria

-1.50

Regulatory Quality

Rule of Law

From the institutional point of view, it is also interesting to mention other incident—not covered above—to appreciate the monitoring difficulties for the least developed countries. This is the case of the barge Redfferm and the tanker MT Concept in 2009 in Nigeria, whose circumstances are still unclear. The barge Redfferm sank while performing a transshipment operation from the MT Concept. The spill was not reported until 2012. Since it contained less than 2,000 tons of oil—about 100 tons—, the vessel did not need to be insured (Article VII.1 of the 1992 CLC). The captain, who was also the owner of the vessel, is missing, so the Fund would have to cover the compensations by itself. Legal actions against the Fund have been carried out, but, as in the case of JS Amazing, it is impossible to determine the veracity of the claims (IOPCF 2016c). In addition to the more formal institutional issues, we must mention what we have already discussed in Chapters 2 and 3. How cultural and social factors are capable of affecting the performance of a formal institution. Much more research would have to be directed at this question, but this heterogeneity in performance is also expected to have a component associated with the actors’ reliability, ideology, perceived legitimacy, and so on. Some of the problems that have the worst performing countries are approachable with formal organizational mechanisms but others in principle could only be solved with social and cultural systems that discourage actors—shipowners, crew, certification agencies, insurers, States or potential claimants—from opportunism. 156

6.6. Institutional Change: the evolution of the International Regime Last section presented some deficiencies and limitations of the international regime. This section wonders what hinders the transformation of the institutional system and what makes it advance. Probably what intrigued institutionalists the most was the question of institutional change. Several approaches have been developed to explain the engine of institutional change and the factors that hinder it. In this section, we briefly recall some notions on institutional change and reflect about the evolution of the international regime of liability and compensation, its drivers and its obstacles. Although sometimes is guided by such strong impacts as wars, revolutions, invasions or natural disasters, institutional change is fundamentally incremental (North 1990b). Institutions are embedded in a broader social realm, so harmony becomes critical to their survival. If there is a conflict between two institutions it is likely that one ends up transforming, disappearing or being systematically unfulfilled. North (1990b), Roland (2004), Portes (2006), and others explain the capacity of culture, to prevent and promote change in formal institutions. On the other hand, the importance of power—the distribution of resources, bargaining power, the correlation of forces, etc.—is also emphasized in order to make the interests of some actors prevail over others in the process of institutional design and transformation (North 1990b; Portes 2006; Acemoglu & Robinson 2011). In the following subsections, we will see concrete examples regarding the evolution of the international regime. The international system necessarily evolves in a centralized way to provide a homogeneous legal substance globally. However, the heterogeneity of the characteristics among the contracting states often leads to conflicting interests. What rules will ultimately prevail is something that will depend on a number of factors. This section reviews the role of history, the balance of power and culture in the design and transformation of this international regime.

6.6.1. Disasters as engines of institutional change If there is something that institutionalism made clear is that the passage of time matters. The historical events transform institutions but also condition the subsequent steps that 157

will take place in its evolutionary path. Changes are mainly incremental. Major historical disasters served as an engine for the evolution of the international regime. The incidents revealed the shortcomings of the institutional structure and led to the increase of environmental awareness and aversion to this industry and the demand for greater penalties (Faure & Wang 2008): -

The disaster caused by the sinking of the tanker Torrey Canyon—in 1967—led to the creation of several international institutions, including the 1969 and 1971 CLC conventions.

-

The Amoco Cadiz incident—in 1978—revealed the shortcomings of the international system of that time and led to the 1984 revision. However the reform did not come into force because of the resistance of the United States, which considered it to be too soft.

-

The Exxon Valdez disaster—in 1989—led the US to refuse to join the international system and to create its own regime, based on the Oil Pollution Act 1990.

-

The Erika incident—in 1999—forced the adoption of the 2000 amendment to the 1992 CLC/FC Conventions. In this amendment, which came into force in 2003, the limitation of liability was increased. At the same time, movements were initiated within the European Union towards an own regulation that dealt with the damages caused by oil spills with elements not covered by the international regime. This materialized in the legislative packages Erika I, II and III.

-

The Prestige disaster—in 2002—involved the immediate banning of single-hull tankers near Spain and France right from the time of the incident and accelerated their prohibition throughout the European Union. The EU began to suggest the creation of its own compensation fund (Directorate General for Energy and Transport of the European Commission 2003) with the consequent split of the international regime. The international reaction was to establish the third level of compensation known as the Supplementary Fund and, in parallel, the TOPIA and STOPIA voluntary agreements were created.

Because of those disasters that showed the shortcomings of the regime, there was an institutional transformation towards a greater protection of the victims. As catastrophes were revealing the deficiencies of the system to compensate the plaintiffs, especially due to the limitation of liability, the financial caps were being revisited and the amounts available to compensate victims were increased, as shown in Table 6.2. 158

Table 6.3. Limitation of Liability for shipowners and the Fund in the International Regime 1969 CLC/1971 FC Before 1976

After 1976

Supplementary Fund

1992 CLC/FC before 2000 amendment (into force 2003)

after 2000 amendment

(Entry into force 2005)

STOPI A

TOPIA

(Entry into force 2006)

Shipowner ≤5000 GT

< 5000 GT

Maximum

SDR 3 million

SDR 4.51 million

2,000 francs per ton*

SDR 133 per ton

SDR 3 million + SDR 420 per additional ton

SDR 4.51 million + SDR 631 per additional ton

210 million francs

SDR 14 million

SDR 59.7 million

SDR 89.77 million

The London P&I Club SDR 20 million

50% of the Fund compensation

IOPC Funds 1971 1992

450 million francs

SDR 30 million SDR 135 million

SDR 203 million

Supplementary Fund

SDR 750 million

*Amended by the 1976 Protocol: the “franc” was replaced as unit of account by the Special Drawing Right (SDR) of the International Monetary Fund.

However, also the conditions under which a shipowner may lose the right to limit his/her liability have been reduced in the revisions. In addition, other agreements have emerged, as we saw in section 3, establishing additional provisions and funds for the actors, to increase the amount available to compensate the victims—Supplementary Fund—and to redistribute the burden among the indemnifiers—TOPIA and STOPIA . But through what mechanisms did these events evolve the international regime? The following subsections study two sets of conditioning factors for the design and evolution of the international system: geopolitics and culture.

6.6.2. Geopolitics, conflicting interests and distribution of power The geopolitical factors are key to explain specific elements of the international institutions or their transformation. The Member States belonging to these Conventions are considerably heterogeneous, with different profiles, needs, interests and bargaining 159

power. This was evident in the conferences prior to the creation of the 1969 agreement: countries engaged in the shipping industry were pushing for low financial caps, and coastal countries tended to demand higher limits (Faure & Wang 2008, p.604). The institutional transformations presented in the previous section are explained in part by changes in the balance of power. Changes in power distribution lead to efforts to restructure contracts, both political and economic (North 1990b). For example, new national initiatives emerged to promote the tightening of liability, the increase compensations or the inclusion of environmental costs. Countries like South Korea or Japan, which are highly importing and therefore major contributors to the IOPC Fund, are resisting this. This highlights the delicate geopolitical balance on which the international regime rests (IOPCF 2004, p.5), and it has been necessary to make concessions so that it does not break. Following the Erika incident, the conventions were harshly criticized in France by ministers, politicians and other opinion leaders for their “unacceptably low” limitation of liability, the slowness with which compensation was made and the excessive difficulty in demonstrating the loss (IOPCF 2001, p.113). Following this and the Prestige incident, the EU issued the Erika I, II and III legislative packages, defended the use of criminal law as an important tool to combat oil pollution (Faure 2010, p.162) and threatened with the establishment of a European fund. This led, as already mentioned above, to an increase in the limitations of liability and the creation of the Supplementary Fund (Mason 2003, pp.9–10). Faure and Wang (2008, p.604) explain it as follows: “the more accidents occurred, especially in western Europe and the larger the amount of damage was, the stronger coastal states like France and Spain became in their lobbying within the International Maritime Organization to increase the financial compensation to victims”.

6.6.3. Culture Cultural issues need to be brought up to explain two issues of fundamental importance for institutional analysis: the initial institutional design and its evolution over time. Regarding the initial design of the conventions, it is worth noting the importance of previous international arrangements and the similarities of national private law codes, 160

since they allowed the establishment of a common international regime with some ease (Mason 2003, p.10). It was constructed on principles and content that previously enjoyed some legitimacy among the contracting states. For example, the existence of the liability limitation in the CLC of 1969 responds more to the path-dependence of this institution’s long tradition in maritime legislation than to rent-seeking in the shipping industry (Donovan 1979; Gauci 1995; Faure & Wang 2008). However, despite the fact that it provided ease to build easily a common and legitimated system, this has a counterpart. Because of this path dependence, measures like this one, which are often considered anachronistic and unjustified, are being dragged (Gauci 1995; Faure & Wang 2008). On the other hand, cultural transformation—beliefs, values, traditions, etc.—affects the configuration of formal institutions. In this regard, it is worth noting the impact on the evolution of the international framework of the growing environmental awareness, which demanded increases in the penalties for the environmental risks of treatment and transportation of oil. This is fundamentally due to a cultural transformation at two levels: 

There is an increasing environmental awareness in general terms, due to the discovery of the ecological limits of growth. This lead to the social criminalization of fossil fuels as a source of non-renewable energy.



More specifically, there exists an increasing rejection of the impact of the spills on an incrementally valued natural heritage as well as a greater knowledge on the permanent damages that occur in the marine environment and the food products.

6.7. Discussion and conclusion Given the diversity of national laws, international treaties have being propelled since mid-19th century to harmonize institutions and behavior, reduce uncertainty and risk, or distribute responsibilities in accordance with global interests and common notions of justice and law. Regarding sea order, the most relevant formal milestone was probably reached in the second half of the twentieth century with the conferences on the law of the sea (1956, 1960 and 1967) and the subsequent approval of the United Nations Convention on the Law of the Sea in 1982, one of the most important multilateral treaties. This occurs in a post-war period where the will of cooperation between nations 161

propelled the proliferation of international treaties and conventions for joint regulation, with the intention of establishing a consensual distribution of rights and the peaceful resolution of conflicts. This convention set out such important issues as rights and freedoms at sea or the exclusive economic zones. Parallel to the efforts to minimize ecological disasters from oil transport, the International Maritime Organization (United Nations) promoted the implementation of a system that improves the provision of adequate and agile compensation to the victims of the oil spills. From it, the first set of conventions (1969 CLC and 1971 FC) emerged, which will lay the foundations of the current 1992 CLC/FC system. This chapter has used the theoretical tools of the New Institutional Economics to analyze this international institutional system, its performance and its evolution over time. According to the IOPCF itself, although the amount of oil spills has been decreasing over time, the cost and size of the incidents have been increasing. It is estimated that this reduction in frequency is mainly due to technological changes—navigation systems, shipbuilding, security, monitoring by the authorities, etc.—, but the ability of the international system to make the actors invest in prevention should not be underestimated. It sets up an incentive system that penalizes the spill under strict liability, imposing compulsory insurance, banning single-hull tankers, etc. From many perspectives the international regime has been a success, but there is still much room for improvement. This chapter highlighted the heterogeneity that exists in terms of performance in the application of these international conventions. It made clear how countries with good governance were able to mobilize resources and coordinate activities to prevent, minimize and repair the consequences of discharges, ensure timely and adequate compensation for the victims, identify and hold accountable those responsible for the spill and find the judicial or extrajudicial mechanisms for financing the compensations. However, countries with poor governance showed problems to enforce the law, properly monitor vessels, assist victims and prevent or minimize the spill consequences. Through the 10 major oil spills within the 1992 CLC/FC system, we have dealt with a number of problems frequently highlighted in the literature, such as the channeling of liability, the extent of the financial caps, the conception of damage, the heterogeneous practical functioning across countries, the strict admissibility criteria for compensation 162

and the excessively long process to obtain it. Some of these issues are solved or alleviated in the US system, based on the 1990 OPA, and we have asked ourselves why the international system does not incorporate the features contained in it. This led us to reflect about institutional change and to recall some developments of the institutionalist framework to address this issue. For an institutional system to be sustainable over time, it is necessary that those actors who support it feel benefited by it. When this is not the case, the actors no longer have rational incentives to cooperate under this framework. An overview of conflicting national interests showed us the weak equilibrium on which the international institutional regime rests. The autonomously-developed framework of the United States and the recent directives of the European Union threaten the international regime with an eventual fragmentation. From the discussion, some proposals emanate that could contribute to the survival of the international system: increase or elimination of the financial caps, subsidiary liability instead of channeling of liability, usage of nonmonetary sanctions like criminal provisions, a collective system for monitoring, simplification or assistance in the formulation of claims and demonstration of fault, etc. Institutional transformations in the coming years will be transcendental to resolve or alleviate the geopolitical tensions, ensure the survival of the international system and allow the possible entry of countries like the United States and China, which had hitherto remained on the sidelines. In this chapter, institutional analytical tools have helped us to construct a fairly eloquent explanation of the formation and transformation of the international system, the deficiencies that challenge its survival and the possible solutions75. On the other hand, it was helpful to reveal the relevance of the institutional, cultural and social context of a given institution for its adequate performance.

75

By the time this chapter was finished, the damage from a recent spill in Malaysia was being evaluated. The name of the vessel is Trident Star and the case is still under investigation. Initial estimates suggest that the amount to be compensated will exceed the 1992 CLC limitation for the owner—SDR 4.5million. The STOPIA is applicable, but the 1992 Fund may even have to cover part of the compensation (IOPCF 2016i).

163

PART III Conclusion

The chapters of this dissertation join the analytical debates on human organization, institutions and individual behavior. They immerse themselves in the role of factors such as historical experiences, culture and the formal institutions that societies establish to resolve conflicts, make collective decisions or organize the production and distribution of goods and services. The traditional aim of Political Economy involves the research of the economic development of nations. However, economic development is inseparable from the set of characteristics of the community. The boundaries that compartmentalize the social sciences are necessarily broken down to perform comprehensive analyses and to rigorously explore organizational systems and their process of change. Economics cannot interpret the history of economic development while neglecting the institutions, culture and social structure of the community. With respect to orthodox conventional economics, the New Institutional Economics represented a substantial progress in our understanding of the development process of nations. We know that economic development is more a process of institutional change than a mere accumulation of factors of production. Economic action takes place in an institutional context. This configures a system of incentives for human interaction, affecting a multitude of dimensions of the economic machinery and which, in aggregate terms, substantially conditions its actual operation and the possibilities of accumulation of factors. This led institutionalists to dedicate theoretical and empirical efforts to the shaping process of the institutional framework, since therein lies the key to organizational change and, therefore, the fundamental cause that may bind nations to underdevelopment. In this sense, political institutions become especially important. 165

But the human organization is not only made up of formal institutions, it also consists of cultural beliefs and preferences: collective imaginaries, hypotheses about how the world works, normative considerations about how relationships and organization as a whole should be, value systems, attitudes, customs, etc. On the other hand, there is also a social system with different roles and levels of status, social networks and exclusive clubs and a distribution of power-conferring resources. The importance of both realms for understanding the institutional phenomenon is sufficiently proved. Therefore, the imperative of dealing with the factors of the social structure and the cultural system of economies is taking an increasing space in the agenda of NIE. Institutions, culture and social structure are in continuous interaction, co-evolve together, and the fit they find between them is a fundamental element for the performance of a society. The chapters of this work gave an account of the current capabilities of the NIE, but also of its challenges when it comes to being precise in the understanding the institutional phenomenon in greater depth. Broadly speaking, their objectives addressed the theoretical grounding and the empirical testing of the importance of the dialectic relationship of a specific institution or institutional system with its institutional, social and cultural environment. In particular, the need to incorporate new theoretical tools to study their relationships with the cultural environment was proposed. The greater complexity of the cultural dimension requires the reconfiguration of some of the starting assumptions of the conventional economics that still are assumed by the NIE. The empirical testing of the hypotheses that have been raised was based on case studies that required the use of natural experiments and quantitative methods. The results provided new insights and evidence on institutional performance and change. The cases were good grounds for studying the institutional phenomena of interest and allowed us to analyze both the importance of these matters and the validity of our assumptions.

The

contents

of

the

chapters—and,

when

appropriate,

their

achievements—are discussed below in more detail.

Chapter 1 Chapter 1 presented the origins of the New Institutional Economics, its early theoretical framework and the recent developments. Firstly, it provided a review of the so-called 166

Original Institutional Economics—which is only partially found in the roots of the NIE—, its more holistic perspective and the way in which addresses institutional change. The NIE, however, emerged from neoclassical economics, relying in methodological individualism and orthodox notions of human behavior. As NIE was introducing new and more sophisticated accounts of the individual and the economic performance— bounded rationality, information asymmetry, transaction costs, governance structures, the role of history, etc.—was gaining accuracy and realism. Today the NIE is considered the new mainstream in institutional analysis and addresses a multitude of topics associated with every feature of human organization. The chapter accounts the role of institutions as a fundamental cause of economic development and points out why the cultural context becomes also crucial. It also presented recent developments that provided integral analytic narratives to account for the historical transformation of western societies towards inclusive institutional systems (Acemoglu & Robinson 2011) or open-access social orders (North et al. 2009). Finally, it reflects on how NIE has been increasingly incorporating other features of social organization, such as power or culture, thereby multiplying its links to other institutionalisms and favoring the mutual fertilization with diverse approaches.

Chapter 2 Chapter 2 showed some of the NIE’s remarks on individual, structural, and cultural elements that are central to solving problems of collective action but are neglected by orthodox economics. Although these are often mentioned by institutional economics, they are still underdeveloped. The chapter delved into the conception that conventional economics has of human behavior. Beyond the old vision of the limited homo oeconomicus, driven by an instrumental and perfect rationality, it drew an individual whose behavior could also respond to value-based rationality, identity imperatives or habits. Furthermore, this individual has incomplete mental models with positive beliefs about how the world is and works, but also a system of normative considerations about how it should be. It contains aseptic beliefs about the consequences of concrete decisions but also a universe of meanings that is also composed of identities, feelings, notions of good and evil and 167

deep human aspirations. These affect decisively the design, the change and the institutional performance. Social orders or reforms that defy ideologies may face a lack of legitimacy, leading to problems of enforcement—in the form of fiscal fraud, for example—or deliberate disobedience—strikes, boycotts—and violent confrontation— protests, revolutions. Besides all the great advances promoted by the NIE, it is necessary to incorporate into the institutional study new logics different from those of instrumental rationality and to investigate the formation and evolution of the pre-rational traits, which in a substantial part are shared by a community or a group. A microeconomics that admits group generalities necessarily redirects us to certain degrees of holistic analysis and leads us to become interested in cultural systems, their reproduction and their evolution. The shaping process of beliefs and preferences is an entire new world that occurs in a prerational instance in the individual. This instance was treated as given by orthodox economics. This is why economists would do well by attending contributions from sociology, cognitive sciences or anthropology and promote some sort of interdisciplinary communication. The NIE is in a privileged position to bridge the gap between economics and the rest of the social sciences. Therefore, the institutionalist subject must be epistemologically embedded in the institutional context but also in its social and cultural environment. Cultural embeddedness is especially complex and requires a new conception of the individual and the development of new theoretical tools to address its investigation. The chapter showed how this contextualization has a transcendental importance for cooperation, which is not a minor issue both for the performance of market mechanisms and for organized life. Factors widely shared within a community as ideology, legitimacy, civism, attitudes, identity are still little understood and have a transcendental impact on economic life, and the design, change and performance of institutions.

Chapter 3 If chapter 2 formulated the necessity for the study of culture by institutional economics, the chapter 3 showed some recent advances in the understanding of the interrelations between institutions and culture. It presented the progress made in the understanding of their coevolution and the importance of their fit or coherence to promote a functional 168

performance. Firstly, it dealt with the capacity of institutions and culture to coevolve and transform each other. Significant progress has been made in this regard, and more and more comprehensive and elaborated schemes are already being developed to deal with this relationship. Recent empirical works from political economy addressed the historical origins of gender roles, participative and cooperative spirit, attitudes toward democracy, social norms about corruption or national identities. Secondly, this chapter also highlighted the importance of the fit between culture and formal institutions for a society’s performance. It took the formal configuration of open access social orders (OAOs) as starting point for the analysis. The characteristic institutional system of the OAOs grant a broad space of civil, economic and political freedoms and rights but the fit that these institutions may find across cultures may be diverse. This different matching produces different outcomes in terms of political and economic performance. If OAOs need the emergence of a dynamic mesostructure of transactions and organizations, the level of social capital and the coherence with its political culture decisively affect its construction and operation. It covered a number of cultural orientations that favor the performance of open access social orders when they affect two key elements: cooperation and participation. We refer to cooperation in its broadest sense: cooperation with common norms both in unified governance structures and in organized competition with conflicting objectives—values and beliefs promoting civism and integrity, associative tendency, generalized trust, ease for collective decision-making, etc. On the other hand it pointed out the importance of the participative spirit, the individual initiative, the empowerment or the autonomy of the members of a society to carry out projects of social entrepreneurship in any of its forms—companies, legislative initiatives, protests, political parties, NGOs, etc.—or actively participate in any of the processes or organizations—voting, contracts, control of elites, contacts with public representatives, etc. It refers to the cultural recognition of individual empowerment and active participation beyond the granting of a mere space of formal freedom. It is a configuration of intrinsic and extrinsic incentives that motivate the entrepreneurship and the social participation in any of its forms. Among the intrinsic motivations, we find the conviction of one’s relevance and competence as an individual actor, along with the feeling of having the right—or even the imperative— to participate in political, economic or social life. The extrinsic motivations can operate through the cultural denouncement of action/inaction or the positive/negative valuation 169

of individual autonomy. However, all these cultural traits and orientations that have been defined here are key to the specific institutional order from which we had departed—the OAO. If they are located within other political schemes, such as the most typical of the Ancient Regime, it could lead to the dysfunctionality of the system, the prosecution of its bearers or the collapse of the social order itself.

Chapter 4 The empirical chapters—4, 5 and 6—attempted to explore in practice the interaction between institutions and the institutional, social and cultural environment in which they are located. The first of them, Chapter 4, delved on the capacity of a formal political system to affect the cultural system. In particular, it wondered whether the most inclusive political systems could be capable of favoring or encouraging the development of certain cultural traits that are of high interest for the open access institutional system—as discussed in Chapter 3. It has been focused on what was called here political culture of participation, and a set of indicators has been used to account for its interregional variability within Spain: interest in politics, associative participation, participation in unconventional political actions, frequency of conversations on politics, habits of information on politics and the feeling of being informed about the activities of the political representatives. The chapter addressed the origins of these differences and suggested the inclusiveness and the proximity of historical political institutions as principal factors. For that purpose, it delved into Spanish history and exposed the different political paths that regions had followed. As proxies to account for the comparative level of inclusiveness in the political organization and the proximity of the political process, two factors were considered: the capacity of the municipalities to develop a custom-based legal order in the Middle Ages and the constraints on the executive at the top of the State in the Modern Age. Both historical political experiences resulted positively correlated to the distribution of these cultural traits. The OLS regressions showed a significant effect from both facts, but not both of them presented the same robustness to the inclusion of other important determinants of culture, such as economic prosperity, education, inequality or geographic factors. The proxy for State-level inclusiveness—constraints on the executive—proved not to be robust to the inclusion of some of these controls. Moreover, 170

when institutional variables were made to compete in the same regression, the proxy for State-level inclusiveness lost all its significance to the measure of local-level inclusiveness. The result is consistent with previous insights (Putnam et al. 1993; Guiso et al. 2008a) that suggested that prolonged experiences of more horizontal organization and citizens’ empowerment at the local level were the factors that left this persistent legacy in northern Italy. In turn, an inclusive environment for the elites at the top of the political hierarchy may be insufficient to bring about cooperation and participation dynamics in the lower strata of society. The suggestive thesis of this work helps to open an elemental but necessary debate about how inclusive institutions are linked to the development of participative traits. Further work should investigate whether inclusive institutions promote participative traits simply because a) they offer a space of liberty within which they autonomously flourish or, rather, b) it is actually necessary an invitation or demand for participation from the political system.

Chapter 5 Chapter 5 empirically addressed the importance of the coherence between the institutional and cultural systems for the practical performance of economics and politics. In particular, it studied for the Spanish regions the comparative effect of those cultural features that were analyzed in Chapter 4—those that foster social cooperation and participation—on the practical functioning of the open access institutional system. Those regions with greater presence of these cultural traits became the wealthiest and those with less presence in the poorest. On the other hand, it also showed a better performance of the former in terms of corruption and provision of public goods, which were the indicators used to proxy political performance. The chapter investigated if causal conclusions may be drawn. To circumvent reverse causation between current performance and these cultural traits a two-stage least square model was conducted. Since municipal autonomy in the Middle Ages revealed itself a key historical event for the development of this culture of participation and cooperation in Chapter 4, it was found useful as an exogenous source of variation and was thus used as an instrumental variable in the modeling. Results were remarkably consistent with the hypothesis and showed robustness to the inclusion of historical controls on prosperity, human capital or inequality and 171

geographic factors. The analysis, therefore, found empirical evidence that cultural traits favorable to participation and cooperation may contribute to the well-functioning of the characteristic economic and political institutions of the OAO. Additionally, this chapter validates, at least for the case of Spain, the theory that considers culture as the missing link that connects key historical events with current performance, following the line of previous works such as Tabellini (2010) or Guiso et al. (2008a, 2011). As a novelty with regards to the literature, this chapter points out and makes visible that these cultural traits work favorably for performance when they are located within an open access institutional system but not under the institutions of the previous Ancient Regime. The liberal revolution and subsequent progressive changes towards open access triggered a transformation in the regional economic distribution.

Chapter 6 Chapter 6, on the one hand, showed how a formal institutional system—that of the international conventions on civil liability and compensation for oil pollution damage— was able to obtain a very different operative performance across nations. National governance revealed itself a transcendental issue for the proper functioning of international institutions. Through the 10 major oil spills within the 1992 CLC/FC system, the chapter found relevant issues associated with the countries’ reduced capacity for monitoring and enforcement, corruption in public corporations, lack of communication between agencies, weak centralization and coordination in prevention and cleaning, etc. It made clear how countries with good governance were able to mobilize resources and coordinate activities to prevent, minimize and repair the consequences of discharges, ensure timely and adequate compensation for the victims, identify and hold accountable those responsible for the spill and find the judicial or extrajudicial mechanisms for financing the compensations. However, countries with poor governance showed problems to enforce the law, properly monitor vessels, assist victims and prevent or minimize the spill consequences. On the other hand, chapter 6 addressed the consequences of a number of practical issues of the system itself that were frequently highlighted in the literature, such as the channeling of liability, the extent of the financial caps, the conception of damage, the 172

heterogeneous practical functioning across countries, the strict admissibility criteria for compensation and the excessively long process to obtain it. These aspects of the current system threaten its own survival as an international treaty due to the dissatisfaction of some of its contracting states. In this sense, the chapter wondered what hinders the evolution of this international system and what makes it progress towards the integration of the diverse interests and the overcoming of conflicts. This led us to reflect about institutional change and to recall some developments of the institutionalist framework to address this issue. It showed how disasters historically triggered transformations in the system as deficiencies were revealed and explored the role of culture and the international balance of power in its initial design and subsequent transformation. Institutional analysis proved itself to be a good tool to understand the evolution of the system, assess its deficiencies and explore the potential solutions. NIE can provide useful assistance in the tasks of minimizing incidents and their environmental consequences and effectively determining and enforcing compensations. Besides, the case of the CLC/FC system can be extended to problems and solutions of the development of nations with less functional economies and political systems. It is also representative of the problems posed by globalization and the complexity of maintaining international systems with such heterogeneous actors in interests, power and culture.

Some remarks from this dissertation This doctoral dissertation has humbly attempted to contribute to the vast literature of social sciences in various dimensions. It contributed to the NIE in its enterprise to understand institutional change and performance. It also engaged the discussion on social capital and political culture. Some key conclusions contained in this dissertation may however be highlighted.

1. The crucial importance of the institutional, social and cultural environment of an institution for its performance. 173

Regarding economic and political performance, we learned that formal institutional design may not be sufficient. Its coherence with the context plays a determinant role in its survival and functioning in practice. If we start from the social order of open access as a desirable political and economic system, we must ask ourselves what kind of sociocultural system—values, beliefs, distribution of resources, etc.—is compatible to make it yield at full capacity. The data seem to suggest that in a system where trust,— vertical and horizontal—coordination and entrepreneurship are so important, cooperative capacity and participatory spirit become fundamental.

2. Institutions may leave a cultural legacy of relevant traits for performance. To promote the cultural traits that make specific institutions perform well, we must understand the way in which they are created and maintained. We found that formal institutions can be a powerful source of cultural transformation. For instance, institutions grant rights and impose obligations and prohibitions that leave an imprint on the cultural conceptions of good and evil and the legitimate aspirations of individuals or groups; institutions induce behaviors that can acquire the range of customs and traditions; they prescribe by extension how the informal topology of relations between actors must be; and the institutional distribution of roles and status can affect the consolidation of group identities. We must understand how institutions affect the different components of the cultural system. The imprint of political systems on culture can last, as we have seen, in the very long run. In this work, the results suggested thus that the democratic system is not only of interest due to its ability to redistribute power and generate more pluralistic, inclusive and legitimate policies and institutions, it also has a role in the development of desirable cultural traits. Whether due to its internal processes or its underlying principles, democracy seems to promote the development of better levels of social participation and cooperation. The municipal level seems to have been a relevant space for the imprint of these traits in the local culture. However, the process by which this occurred has not been completely resolved. Much has been written and remains to be written on this matter. So far, one of the keys seems to be the range of the decision space that individuals had to determine their private and community life. That is, on how many important issues for everyday life, the bulk of the

174

population had some kind of decision-making power. This should make us reflect on the current state of western democracies.

3. Culture could be the missing link between historical experiences and current economic and political performance. Recent empirical literature has been pointing to culture as the missing link between historical events and some current social phenomena. It is argued that culture is able to bear the factor of persistence and may be behind both institutional path-dependence and current phenomena. In the light of the results of chapters 4 and 5, it is interesting to revisit some important previous works on institutions path-dependence and their role on economic development, like, for instance, Acemoglu et al. (2001). The kind of colonization can affect culture, either by imposing new formal institutions, by transforming the social structure or by directly establishing new foundational myths, attitudes, values or cultural distribution of roles and responsibilities. These cultural traits may be highly persistent and are powerful drivers of social behavior. In this sense, the process of colonization—conquest and repopulation—of the Christian Reconquest in Spain and Portugal can shed light on the material and cultural effects of colonization on the rest of the planet.

4. The institutional, social and cultural environment is also key for institutional design, evolution and survival. Not only becomes performance affected by the context in which institutions are located, but also institutions themselves may be sensitive to it. This insight is present in New Institutional Economics from its inception. A good illustration of this was made clear in chapter 6. A common tradition in maritime law permitted the relatively quick adoption of the international regime of liability and compensation for oil pollution damage. Besides, the global increasing environmental awareness is making this institutional system to evolve to harder penalize oil pollution. In contrast, diverse national interests and the international balance of power is hindering its capability to progress, thereby

175

preventing the entry of other nations such as the US and China and even threatening the survival of the regime. Additionally, extending the considerations of chapter 5, we would do well to resume the original concerns of the line of research on political culture. Right after World War II, its research mainly addressed the reason why apparently well-consolidated democracies collapsed giving rise to authoritarian regimes. We should devote further investigation to the role of these and other traits, not only in the functioning of institutions, but also in the adoption and stability of democratic institutions, market economic institutions and social welfare. History has taught us that we must not take democratic and welfare institutions for granted. NIE is doing a great job in this regard, but, although it leaves room for the cultural factors, we are still far from understanding the role that culture plays on this opening (and closing) process.

5. The same international institutions may have diverse national performances. With regard to the practical functioning of international rules, national governance revealed itself fundamental. The different enforcement capabilities of nations have brought about an irregular effectiveness across countries. Solutions may involve either improving the capabilities of the weakest nation states by helping them equip themselves with the necessary tools or extending the international system towards a joint enforcement of the rules provided for in the conventions.

Further developments This dissertation has provided new advances in the understanding of institutional performance, cultural legacies and governance throughout the analysis of several case studies. Besides, it contributes to the research agenda with a variety of issues that can be investigated in the most immediate future. Some reflections on further developments may be useful. The mechanism that links inclusive institutions to the development of cooperative and participative traits needs to be uncovered: it should be made clear whether these traits 176

emerged because the political system offered a space of liberty within which they autonomously flourished or, rather, because the political system provided some sort of invitation, demand or obligation for participation. We must deepen our understanding on what specific cultural features affect the functioning of what political and economic processes to favor or hinder performance and in what way they operate. Additionally, the role of culture in the different performance of the 1992 CLC/FC system across countries needs further investigation. When chapter 6 addressed its heterogeneity in performance across countries, it only focused on governance issues. There still remains plenty of room for national cultures to affect the practical functioning of the system. Chapter 5 revealed that there exists an intense correlation between some of the cultural traits of cooperation and participation. For example, the relationship between the cultural dimensions of independence or obedience and generalized trust is intriguing. It would be interesting to try to understand the system that unites them, especially the causal relations. Much more research is therefore needed on how concrete traits, cultural systems or social dynamics that are favorable or harmful to the performance of open access institutions are created. We must also continue to investigate the mechanisms of reproduction of these cultural traits: what transmission mechanisms are conscious and which are unconscious; on what and whom depends the conscious transmission; why some traits are reproduced and others are not; what is the role of the institutional and material environment in the persistence and erosion of relevant traits. Another possible line of research corresponds to the compatibility between the cultural system and the social structure. For example, values that promote horizontality in relationships and equity will have problems to subsist in a concentrated distribution of resources and systems of vertical relationships. This reveals another way through which material inequality may be affecting economic and political development. It is therefore also important to try to understand the coherence and incompatibilities of culture with the social structure and of these with the institutional system. There remains thus the hard task of understanding the interrelationships between formal institutions, culture and social structure.

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We still need to develop better indicators on performance, especially for the political system. Interesting indicators could refer in a more sophisticated way to the level of corruption, innovation in legislation and policy, quality management in the production and distribution of public goods and services or the capacity of the political process to include the will and interests of citizens. Additionally, more and better data on culture are needed, especially allowing a greater territorial disaggregation. This work contains proofs of these current deficiencies. It had to deal with big questions using sometimes poor data. Deficient data reduce the confidence on the results and the conclusions drawn in their interpretation. The NIE continues to build a multidisciplinary cosmos of thought for the analysis of economic and organizational phenomena in general. Although the progress has been spectacular, the cultural aspect of this theoretical corpus is still to be developed. Cultural economics is still in its infancy and the NIE, due to its privileged position, should also take a preponderant place in the leadership of its development. In addition to the study of values and beliefs, the NIE must incorporate into its agenda other recently highlighted and poorly understood factors such as human biology and, especially, the place of genetics in its behavior. The fertile field that the NIE has ahead is of course immense but exciting and is expected to continue to bear good fruit as it incorporates new theoretical tools into its intellectual framework. It will continue to contribute to a better understanding of human organization and help to build solutions to the enormous challenges we face as a civilization.

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