World systems theory and institutional economics

Economists have done numerous studies trying to relate the institutions of a country to economic growth there. This has been used to argue that institutional quality of a country matters for its growth. Is a country the relevant unit of analysis? Sociologist Immanuel Wallerstein argues that the world should be taken as one system. Interestingly a spate of recent works by mainstream economists begs us to take this approach seriously.

Colonial impact on institutional set up

A series of recent works in institutional economics have looked at the colonial impact on institutional formation. Based on a dataset of mortality of European soldiers in colonies during 1842-57, these studies point out that there’s a strong correspondence between soldier mortality and growth rates of these economies. The low mortality countries have grown rapidly and the high mortality countries have grown slowly. Following this, they have argued that where colonisers were safe, they set up “good institutions” and where they were dying rapidly, they set up extractive institutions that were not conducive to long term growth.

What is implicit in this argument is that colonial powers were able to form institutions in these countries successfully and without any reference to local context (society, politics, etc.). It is also implicit in this argument that these institutions were put in place for the benefit of the colonisers. The term “extractive” is transparent. But even where “good institutions” were put in place, the argument is that it would enable the colonisers to extract more from the colonies over a long time if these countries were enabled to produce more. These two arguments are essential for the conceptual infrastructure of the studies that looked at the role of soldier mortality.

If colonisers put certain institutions in place in these countries for the benefit of imperial nations, should we not understand the growth of imperial nations by institutions elsewhere as well? In other words, can we understand British growth by looking at institutions within Britain alone? Should not the institutional structure put in place by the British in India and its other colonies be assessed to understand British growth? This is what Wallerstein would argue in his World Systems Approach.

World as Core & Periphery

The world systems theory argues that we should look at world as a system, divided into Core and Periphery. The world has an unequal institutional structure designed in a way that it transfers wealth from the Periphery to the Core. The notion of “extraction” by institutional economists fits squarely into this theory.

The relevance of this distinction can be question by some in the post colonial world. By and large, most of us will agree that the institutional structure today continues to be unequal and this is maintained with military and political strategies (putting puppet regimes in place, restricting the scope of redistributive policies within countries, bribing political elite & supporting their power etc.). While I subscribe to the importance of unequal international relations in understanding economic performance of nations, I feel that it would be a mistake to see them solely from this lens.

Categories & Understanding

Categorising are indispensible in social theories given that comparisons are central to our reasoning. The process of categorising has enormous implications for analysis. For example, merely dividing the world as Core/Periphery structures our understanding of the world and of institutions therein. Dividing the world in terms of nations effectively enables us to ignore the role of imperialism (I do not think that it precludes such analysis, but it does enable us to ignore imperialism and this has been done extensively even by those who have used the soldier mortality argument). All too often in the social sciences, arguments are about which view should be chosen at the expense of others. In my opinion, no categorisation can capture all aspects of reality. A good social scientist will look at the world from different perspectives. While adopting different perspectives increases our understanding, it has an inherent quality of making our understanding and analysis unsure. Such uncertainty undermines the authority of an analysis. In the academia that thrives on a show of authority, there is every incentive to sound sure and be wrong rather than sound unsure and be better informed. It is only likely that the practice of seeing the world in singular perspectives will continue for a while to come.

About Vivek Srinivasan

I work with the Program on Liberation Technology at Stanford University. Before this, I worked with the Right to Food Campaign and other rights based campaigns in India. To learn more, click here.

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