Institutional Stagnation

Institutional Stagnation

Published on August 17, 2020 / Leer en español

Sergio portrait
Policy Director

In 1948 Puerto Rico’s net income per capita was $256 per person. The road, electricity and telecommunications’ infrastructure was rudimentary, not to say artisanal. That year a lot happened on the island. And believe it or not, on November 2 of that same year a general election was held. The votes were counted and the results reported, relatively quickly, taking into account the limitations of the time.

In 2020 the net income per capita in Puerto Rico is approximately $17,500 per person. The road, electricity and telecommunications’ infrastructure has its flaws but it is much better than that of 1948. And believe it or not, on August 9, an attempt was made to hold a primary election, but the votes could not be counted and the results were not reported. In fact, in more than half of the electoral precincts the voting could not even take place.

How is it possible that our grandparents’ generation was able to execute and implement all kinds of public projects, but our generation of government officials cannot even open polling places for an election? I think the answer lies, in part, in the underdevelopment, or rather, the stagnation of Puerto Rico’s institutions. In simple terms, in 1948 we had less money but better institutions.

Over the past two decades, social scientists have noted that countries with similar capital and labor stocks may follow very different trajectories in terms of social and economic development, even after taking into account differences in investment levels and patterns of investment, commercial exchange and technological changes. This conundrum has led some scholars to propose that the diversity in levels of socioeconomic and political development observed in different countries is caused by disparities in institutional structures.

The “institutionalist school” has recently gained popularity due to the work of Douglass North, Avner Greif, and Daron Acemoglu, among others. However, as professor Francisco Catalá reminds us in his book, Promesa Rota: una mirada institucionalista a partir de Tugwell (Ed. Callejón, 2013), the intellectual origins of the institutional perspective go back to the work of Thorstein Veblen and the publication of his Theory of the Leisure Class (1899).

Institutionalists, Catalá tells us, “place institutions at the center of analytical attention as factors that shape the beliefs and preferences of individuals.” They use a broad definition of what constitutes an institution, including language, money, laws, rules, formal and informal norms, customs, private and public social organizations, and behavior patterns, among others. Defined this way, according to Catalá, “institutions shape human behavior and, simultaneously, are shaped by it. Thus, human subjects and the normative structure are linked in an interactive network.”

Douglass North, the 1993 Nobel Prize winner in Economics, uses a sports analogy to explain this abstract concept. Take professional baseball as an example. The game is played subject to a set of formal rules (like three strikes and you’re out), informal rules (you’re not supposed to throw a fastball at the head of the other team’s best hitter), and umpires who enforce rules and norms.

The way the game is actually played depends not only on the formal rules that define the incentive structure for players and the strength of the informal norms, but also on the effectiveness of the application of these rules and norms. Changing the rules will alter the way the game is played, but also, as anyone who has seen a professional baseball game knows, it is often worth avoiding the rules and norms (and deliberately hitting the best batter of the opposing team with a fastball to the head to get him out of the game). The same is true of the behavior of actors in any modern society.

Catalá’s thesis is that in Puerto Rico in the mid-20th century, specifically during the Tugwell administration between 1941 and 1946, an impressive process of institutional creation and change took place. Catalá refers to this relatively brief period as an institutionalist parenthesis, an interregnum between “the ‘sovereignty’ of the sugar enclave followed by the ‘sovereignty’ of the manufacturing enclave.”

This brief period of institutional creativity was “possible thanks to the coincidence of four factors: the policies of the New Deal, the relative isolation and revenues caused by the Second World War, the dominance of the Legislative Assembly by a party that was at the time reformist, and the appointment of an institutionalist economist and planner as governor.”

Then again, institutions that are good for one period are not necessarily good for another. The problem, unfortunately, is that institutional change is a slow process, which requires both the political will and the good faith of different social actors to reach an agreement, or preferably a consensus, on how laws, rules and regulations, and the formal and informal norms that govern certain economic, social or political activities, should be modified.

In the case of the primaries last Sunday, the diagnosis of the problem is obvious: the clumsy and hasty change of Puerto Rico’s electoral institutions, meaning the laws, regulations and formal and informal norms that govern the voting process, generated, correctly in our opinion, the resistance of various groups and sectors that did not agree with those changes imposed in a unilateral, not to say authoritarian manner.

The lesson is that institutional changes cannot be imposed, they are negotiated in what Professor Catalá calls “the institutional design table.” If we want to get out of the labyrinth in which we find ourselves, it is imperative to end the stagnation of institutional development in Puerto Rico.

The Spanish version of this column was originally published in El Nuevo Día on August 16, 2020.