Why do economic institutions in different countries not follow a common pattern which proved to be more growth- and distribution-enhancing? There are different approaches in the Institutional Economics framework to the formation of diverse economic institutions across countries. The key mechanisms identified in the literature include the concepts of efficiency from a utilitarian perspective; belief differences from the viewpoint of sociological institutionalism; increasing returns, self-reinforcing processes, institutional complementarities and lock-in from structuralists’ and functionalists’ stance; and finally political power balances from the political institutionalists’ point of view. The current study, presuming that institutions emerge, change, or persist in accordance with hegemonic groups and classes of a given country, proposes an extension to the political power balances view with the Clash of Paths approach. It is proposed that establishment, reformation and transformation of economic institutional structures in different countries are endogenous to two important determinants: First, diverse political institutional structures that determine formal constraints on political power relations and second, diverse mental models different societies adopt that create informal constraints on cognitive and relational patterns. Furthermore with the Clash of Paths approach we put forward that these formal and informal constraints may change at different critical junctures depending on the co-evolutionary interaction of different institutional paths. Consequently, as demonstrated in the below schema, institutional restructuring appears as a cyclical process of converting from one hegemonic project to another during the continuous course of institutional building.
Schema 1: Institutional Emergence, Persistence and Change from Macro to Micro Grounds
In view of that the diverse formation of economic institutions in Turkey and Iran on the eve of 1980s is analysed on the Clash of Paths grounds. The main motivation for choosing Iran and Turkey, is that despite today these two states are on totally different points in terms of political institutional structures and of economic policies practiced, there are indeed many appearing historical similarities between them. For example, historically, Turkey and Iran both originated two of the major ancient civilisations. They both greatly contributed to the formation of Islamic society and culture. Both countries had a Constitutional Revolution experience in the beginning of the twentieth century (Mesrutah of 1906 and Mesrutiyet of 1908) and what followed the Constitutional Revolution in both countries paradoxically appeared outwardly similar. That is, between the two World Wars relatively authoritarian regime of Reza Pahlavi rose in Iran and the one-party system predominated in Turkey. Beginning with the reign of the two leaders, Reza Khan; the commander of the Cossack Brigades and Mustafa Kemal Pasha; the leader of the Turkish War of Independence, both states would be characterized by military, modern state bureaucracy and state patronage. In the course of capital accumulation, furthermore, both Iranian and the Turkish states played an effective role in not only redistributing incomes but also creating totally new economic classes. Moreover, they both had a deep and indeed parallel institutional transformation programs on their agendas.
In terms of economic growth, per capita income in Iran grew faster than in Turkey and kept pace with Korea during the two decades before 1975 (Karshenas and Hakimian, 2000). As a result, by 1960s Iran caught up with Turkey in terms of GDP levels. By 1970s, Iran even outpaced Turkey. For instance, as Figure X demonstrates, by 1975 the level of per capita GDP in Iran was almost the double of those attained in Turkey. However, this progress was interrupted in Iran due to interruption in the institutional development process which resulted in a relative isolation from the world economic order. Turkey on the other hand experienced an institutional shift in which the ideas of global capitalism, global economic integration and the market economy were largely approved. Thus, since the late 1970s income per head in Iran had declined by half, almost down to the levels prevalent in the early 1960s and falling behind Turkey. Last but not least, even the volume of trade in Iran fell behind of the trade volume of Turkey in spite of the rising world oil demand and Iran’s gigantic oil reserves.
Source: Angus Maddison, 2007, World Population, GDP and Per Capita GDP
Source: TURKSTAT and Central Bank of Iran
We propose the World War II as one of the critical junctures leading the divergence, because subsequent to the end of the War, the political institutional structures of Turkey and Iran differed drastically. As demonstrated above via the POLITY IV[i] dataset, the administrative system in Turkey, despite occasionally interrupted by military interventions, had turned to be a democratic one by the second half of the century. In Iran, in contrast, in spite of the 1941-53 episode of highly free politics and the rise of a noticeably powerful left- and right-wing parties, the Tudeh Party and the National Front, and a Prime Minister, Mr. Musaddiq known as the leader of the popular Oil Nationalization Movement of Iran, what happened was the continuation of the authoritarian regime with the rise of Muhammad Riza Shah. More interestingly, in Iran the same politically powerful group, the high ulama, supporting the Mesrutah and later the fall of Shah Reza Pahlavi in 1941 was paradoxically the one who chose autocracy under the Reza Pahlavi’s son Mohammed Reza Pahlavi rather than the war-period free-politics environment. These restructurings, via leading to different attitudes towards economic policy making on the governments’ side – idea of re-election triggering populism for instance –, in turn, had profound effects on the choice of totally diverse economic institutional paths on the eve of 1980s.
This is a quite important difference because we assume that economic institutions are highly correlated with political institutions and we propose that establishment, reformation and transformation of economic institutional structures in different countries are related to diverse political institutional structures that determine formal constraints on political power relations. However, when this divergence between the political institutional structures of the two countries is analysed on the basis of the Clash of Paths approach, roots, from which the two countries’ hegemonic classes’ objectives have stemmed from, appears vital.
As it is demonstrated by the schema above, politically powerful actors, whose source of power intricately depends on previous institutional structures all of which do not have to be formal rules, have their objectives subject to constraints from either formal or informal channels or both. Under such constraints the actors also have strategies that they design in order for maximizing their objectives. Consequently, prevailing institutions are maintained, modified or replaced by completely new institutions as a result of dynamic interaction among these three factors.
Therefore, in the paper we dig deeper to reach the roots of power of the hegemonic groups and classes of Iran and Turkey because as power balances approach maintains similar formal institutional structures may function considerably differently depending on the characteristics and the objectives of the power holders. This is what happened in our case countries: While the Constitutional Revolution occurred almost at the same time in the two countries, it had completely different implications for the power balances. The Table below demonstrates occupational classification of parliament representation in the two countries and hence underlines important information on the developments in domestic de jure political power balances in the period analysed.
Although occupational classification of parliament representation cannot provide us with clear-cut results due to different fragments of both societies generally used to be from more than one occupational category (e.g. the ulama in Iran in some instances belong both to the ‘clerics’ and to the ‘landowners’ categories), the table still has the ability to demonstrate some basic facts about transformation in power balances among certain classes.
Table 1: Parliament Representation since the Constitutional Revolution in Iran and Turkey: Comparison of Occupations (in percentage)
Sources: 1) Cumhuriyet Dönemi Türkiye Ansiklopedisi; 2) Encyclopaedia Iranica 3) Bill, J.A. (1972) 4) Ahmad, F and Dankwart A. Rustow (1976)
a) Data for the Turkey’s 1908-18 period cover only the fifty percent of the parliament representatives due to lack of data on non-Muslim delegates. According to Ahmad and Dankward (1976) if this data could be obtained, the ratio of merchants would probably be higher. This applies also to the ratios of professionals.
Accordingly, we can describe each politically powerful actor/group and their objective functions along the following lines:
In Iran, we have first the Shah with his objectives of increasing power, raising and preserving control over resources and thus the society, and finally and interestingly to be a commemorated person with his achievements in Iran’s history. Second, the high Ulama appears as the next powerful group with their similar objectives of boosting power, improving control over the society and thus gaining more social backing. Third comes the Bazaar, needless to say, with a goal of profit maximization which was in turn dependent on their share from resource distribution and on their reputation in the eyes of customers and trade partners. Fourth politically powerful group is the big landowners with their objective of promoting agricultural income and thus regional power on rural areas.
In Turkey, from a similar vein, among the politically powerful groups and classes, the Civil and Soldier Bureaucratic Elite comes the first, with their objectives of increasing power, raising and preserving control over society and spreading modernization nationwide. Second, the local notables appear as another hegemonic group with their objectives of gaining and preserving local power, local control and local support. Third comes the state created capitalist class, with their typical objective of profit maximization that was in turn dependent on general economic environment including for instance external credit mechanism and the trade policy. Finally, we see both powerful big landowners in the Eastern part of the country with similar objectives with their Iranian counterparts and more importantly, independent peasantry with an objective of becoming market-integrated petty commodity producers and the strategy of determining the dimensions of political contestation. However, it is important to note that the small landowner peasant enters the picture indirectly and with a subsidiary role. Yet their inclusion into the general picture appears very important in order for a thorough analysis of institutional evolution in the two case countries, because comparatively politically more powerful peasant/labour determine extent of populism in the two countries.
As it is modelled above, the objectives of the political power holder groups and classes are related to their specific characteristics that have roots in history. Therefore, in order to understand different post-World War II outcomes resulted from these similar pre-WW II political institutional structurings in the two countries, we have to dig deeper, towards institutional establishment during the Ottoman Empire and its coeval, the Safavid State so as to detect important differences that lie behind the appearing similarities. Thus, we explore some important pre-20th century features of the case countries that we believe were the most effectual in first, their different picking among alternative political institutional pathways after the World War II and second, their resulting entrance in dissimilar paths in terms of integration with the world economic order on the continuing course of institutional evolution. Accordingly, we identify a major difference between these countries, which has its roots in as deep as the tribal structures: that is the state structure. In view of that, a major aspect that distinguishes the pre-twentieth century Ottoman Empire political system from the Iranian political structure is that; a continuous state tradition was one of the Ottoman’s main qualities whereas Iran had long been governed by “changing and kaleidoscopic array of dynasties that appeared and disappeared with amazing rapidity” (James Bill, 1972:5). Such an analysis is crucial because here we propose that the relative strength of the patrimonial state vis-à-vis the landowning classes the Ulama and the entrepreneur capitalists in the two countries was one of the most important factors leading to traditional versus modern ways and methods of production and accumulation practices, and hence attitudes towards integration with the rest of the world.
In view of that, we propose that relatively strong Ottoman state versus the rather weaker Persian Monarchies vis-à-vis the landowning factions, the Ulama, and the capital owners stands as the major basis for diverse institutional building in spite of a period of convergence during the first half of the twentieth century.
In sum, diverse selection of political institutional pathways in Iran and Turkey in the 1950s, that is multi-party election system in Turkey versus monocracy in Iran has roots in different characteristics of power holders which in turn stems from different relative power of the state vis-à-vis these groups and classes. The diverse political institutional restructuring in the two countries had tremendous effects on the evolution of economic institutional structures. More exactly, in Iran on the eve of 1979, depending on the relative power balances, particular groups with de facto political power stemming from their economic might and ability to solve collective action problem, wanted to convert it to de jure political power which is considered to be more persistent compared to de facto power. When they managed, the economic institutional structure was also intended to be transformed in a way which would facilitate the sustainability of the newly formed political institutional structure that was the base of those hegemonic groups’ de jure power. In Turkey on the other hand, the multi-party election system led institutional shifts rather than complete institutional switches via providing the hegemonic groups and classes with ways to form consensus and impeding the fights for interests go to the extremes and lead the boat to rock, or worse to sink.
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Esra Çeviker Gürakar, Marmara University, Department of Economics – esragurakar@marun.edu.tr
[i] The Polity conceptual scheme examines concomitant qualities of democratic and autocratic authority in governing institutions. It envisions a spectrum of governing authority that spans from fully institutionalized autocracies to fully institutionalized democracies. The competition between democratic and autocratic authority systems was reflected in a focus on “transitions” from one mode of authority to another in particular countries and in the attendant problem of “incomplete transitions” and the appearance of “incoherent” polities, or “anocracies,” in which odd combinations of democratic and autocratic authority patterns could be observed. The "Polity Score" captures this regime authority spectrum on a 21-point scale ranging from -10 (hereditary monarchy) to +10 (consolidated democracy). The Polity scores are converted to regime categories in line with a three-part categorization of -10 to -6 for autocracies, -5 to +5 for anocracies and +6 to +10 for democracies. There are also special polity scores of -66, -77 and -88 for the cases of foreign interruption, of interregnum or anarchy, and of transition respectively. For more detail on the POLITY2 dataset, http://www.systemicpeace.org/polity/polity4.htm