The Theory of Institutionalisation and State Building
When looking at achieving political and economic stability through state building, it can be seen that this underlying concept of building the state and the institutions within it is the central theoretical issue for determining how Libya can gain success by largely focusing on institutional reform and stability. This element of the literature review will look specifically at utilising state institutions, i.e.
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state building, as a means of gaining economic success, for countries going through a period of reform, as is the case with Libya. This section of the literature review will firstly look at the link
between the theories of building institutions and achieving peacekeeping and political stability, before going on to discuss the more general theories on state building.
The Need for Institutional Development in Libya
Following the death of Gaddafi, the previous Libyan leader, the region entered into a potentially dynamic yet volatile period of reform where the general feeling both within the country and within neighbouring countries was that of elation and hope for the future. Nevertheless, the death of Gaddafi also created potential political unrest and the need to consider how the country should now be developed and how the institutions within the country could establish the foundations for the future. Prior to the death of its leader, there were concerns that Libya was going to find itself in an autocratic state, with a large amount of civil unrest (Call, and Cousens, 2008). Libya, however, is currently in the potentially interesting position where, in order to develop efficient stability, the country now needs to make use of the natural resources that it has and to create the appropriate level of stability for the future. More specifically, there is a challenge facing the country as to how it makes the most of the resources available to it, primarily from the oil sector, and how this can then be utilised in order to influence infrastructure and services within the region.
It is argued that the key challenges to achieving this is that the region currently has substantially underdeveloped political institutions, with a large degree of rationalisation across the country being dominated by oil companies. The oil industry is hugely influential in Libya, with estimations that 80% of government revenues come from the oil industry and oil accounts for 25% of its gross domestic product. With this in mind, it can be argued that, in Libya, the key challenge facing the government is to develop institutions in such a way that the government can make the most of its earnings from the oil industry, in a way that will create critical and economic stability, in the long run. This will entail not just supporting the oil industry, but also supporting the surrounding industries and public services, e.g. health and education (Crafts, 2000).
The underlying issue which is seen to be relevant here is that having an accountable government when they rely heavily on oil revenue is unlikely to happen. In Libya, for example, 80% of government revenue comes from the oil industry (Crafts, 2000), which immediately brings into question the ability of the government institutions to be swayed by public opinion. Moreover, where such heavy reliance is placed on economic industries, for example, in the oil industry, the institution is now arguably losing importance. Also, issues, e.g. climate and the collection of taxes have become heavily swayed by the demands of the oil industry, rather than the validity of the governmental institutions. Furthermore, it is noted that the current Libyan leaders are placing a heavy emphasis on ensuring freedom and democracy which is likely to be inherently linked to the strength of the institution. Yet, there is no guarantee that, without strong institutional reforms, this would not be the case in the future with different leaders.
Whenever a country has an important natural resource, it also has the potential to provide substantial revenue, and there are potential concerns over political unrest with the risk of coups, as experienced in Libya, in 1969. Interestingly, whilst the current euphoria surrounding the changing government has driven a push towards achieving democracy, it is clear that the position is potentially fragile. This means that establishing robust institutions within the state is seen as a crucial step to take, at this stage, in order to ensure that, even if there is a change of government in the future, democracy remains minimal. An example of how this has worked in other jurisdictions can be seen by looking at Norway. In the 1960s, Norway discovered that it had a substantial natural resource and worked hard to ensure that it did not suffer the same problems that other countries had, upon a similar discovery. Norway recognised that it needed to create an interaction between natural resource profits and political power, so that it would not suffer the same level of political unrest which had been experienced by other jurisdictions. In Norway, restrictions were placed on access to the oilfields and this immediately had the by-product of reducing the impact of currency appreciation (North, 1990). A certain amount of profit was setaside, from the outset, in order to ensure that funds were built up to improve infrastructure and to create new oil facilities (Delacroix, 1980). Crucially, Norway created a national resource fund which is also considered to be a government pension. The government can only access the interest of the funds, so that the government has a limited access to the natural resources. This required the government to continue to seek the individuals’ approval, rather than simply relying on the support of the oil industry to maintain power. Political institutions were established, in such a way that politicians were required to continue to consider the public at large. In this context, Norway did not suffer the same level of disruption as is felt in Libya. This also had the effect of continuing to encourage diversified industries and allowing other companies to be buoyant within the region and make the government itself a less attractive proposition for any takeover attempt. By having this national fund in place, Norway was able to ensure that it invested in infrastructure and prevented commercial entities from simply taking the profits for their own benefits. But, by allowing the government full access to the interest, it still has a degree of freedom, on the understanding that there is a specific requirement to maintain economic stability and this prevents the type of boom and bust attitude that could be very damaging (Daunton, 1998).
In order for this institution itself to be effective, there needs to be a degree of independence from government. Arguably, if it is possible for government institutions to gain access to the fund at any point, this would not then assist in providing the necessary economic stabilisation. Taking this into account, it would be argued that any national resource fund established in Libya would need to become its own independent and transparent entity, something which would require a reasonable degree of state building to offer the framework for this type of independent institution.
By pursuing the creation of institutions of this nature, it will naturally limit political economic power which can be difficult to achieve, as well as being difficult to maintain. More specifically, this type of institution would require the government to accept a reduction in its immediate economic return, in exchange for guaranteeing long-term stability, something which it may not benefit from, if it is long-term. The economyin Libya has experienced shrinkage, in recent times. This means that the temptation is to turn towards its natural resources to rebuild the economy quickly, thus creating institutions that would limit short term gain is likely to prove challenging, regardless of the merits of this type of approach for the long-term stability of the country.
Given the potential difficulty in encouraging these types of institutions to be formed, the research now focuses on where the initiative is likely to emerge from and whether the international community itself has any form of power to encourage this type of state building within Libya. There is some suggestion that direct control, for example, by the US Treasury which still controls $700 million worth of frozen assets from the prior political regime and the fact that Libya is still dependent on foreign aid, to a large extent. As such, the international community will have at least some say in the institutions that are likely to emerge (Cook, 1970).
Regardless of the way in which this is achieved and the level of pressure that the international community may place on the country, there is clear strength in the argument that institutions formed at this stage could be fundamental to establishing long-term stability throughout the country and to ensuring that future governments cannot reverse the good work undertaken.
Building Institutions – Importance with Peace Building
A highly informative definition of state building has just been put forward by Call and Cousens (2008). This definition states that it is the “actions undertaken by international or national actors to establish, reform, or strengthen the institutions of the state which may or may not contribute to peace building” (p.4). This link between building institutions within the state and achieving political and economic gains is potentially very interesting, in that it contributes to the research and is worthy of discussion in this regard, given the volatile position that Libya is currently in. As noted in the 2008 research by Call and Cousens, the theoretical shift has moved away from looking at social and economic relationships between the parties of the conflict and looking more towards ensuring that the state and its institutions are functioning in such a way that this building of institutions is a natural by-product. This was supported by Paris and Sisk (2009), where they noted that the building of institutions within the state should be viewed as a vital part of this building process and the way in which the institutions are developed and state relationships achieved.
State building through the use of institutions has been the focus of discussion in many research papers, with differing suggestions as to why this building is likely to be so high on the political agenda. Kahler (2009) argues that creating institutions within a state is likely to assist when it comes to dealing with humanitarianism and the increasing pressure being placed on states from across the world to behave in a certain manner. Secondly, research by Collier (2007) has indicated that state building is fundamental to long-term political and economic stability and that, in reality, creating political stability should happen at the outset of the recovery process, following the conflict, with a view to preventing future conflict. This is highly relevant to the case in Libya, where there is a degree of euphoria being experienced, at the end of the conflict. Yet, this is arguably the key point at which the agenda should be set, in order to prevent future instances and it is here that the foundations of these institutions should be laid out, without waiting for conflict to emerge. Finally, other researchers including Fukuyama, in 2004, have suggested that developing these types of institutions is a necessity, given the changing ways in which security threats are emerging, on an international basis, especially in the wake of the September 11 crisis. For this reason, it has been suggested that building state institutions is crucial to the agenda of the international community. It could also be argued that, as universal convergence increases, so does the need to have stability within individual states and, as such, institutional state building becomes a matter for the international community, as much as it does for the individual locations.
The Theory of Institutionalisation and State Building
It has already been mentioned that institutions can be formative in establishing a degree of governance and democracy within a country such as Libya. This raises the question as to whether there is any theoretical link between the concepts of establishing stability, both economically and politically, with the notion of using an institution as a means of achieving this end. As argued by Chandler, (2010), there is a new ‘institution first’ approach being taken in a modern economy which has led to an increase in the development of institutional economics as a set of theories in their own right. Although this is a relatively new area of research, many of the foundational theories can be seen to have existed back in the 1920s, where old-style institutional economics suggested that individuals will not always be able to act as rationally as predicted, due to the constraints placed on them when an institution arises. Whilst these theories did not look specifically at how institutions could establish economic stability in the wake of a crisis, they did look at the way in which the institution impacted upon decision-making, with a high degree of influence being placed on subjectivity within institutions.
According to North (1990), who was instrumental in developing this new area of institutional economics, there is a direct link between theories of institutions and economic capabilities. By taking on board this new approach, the traditional notion that the market is the perfect way in which resourcesshould be allocated is flawed. Instead, the markets should ideally be viewed as a means of training and encouraging certain social behaviours. Harris et al., (1995) contended that the market has, incomplete and asymmetric information which creates a reasonable degree of uncertainty when it comes to allocating resources. This establishes a transaction cost for every decision that is made; so, effective institutions can look towards reducing this cost by drawing upon the neoclassical economics theory that individuals will typically pursue the goal that is rational. Consequently, by maximising its own position, an institution can place constraints on the variety of options available to the individual, so that they are still behaving in a rational manner, but within the constraints of the institution.
The definition of an institution as put forward by North (1995) as “the humanly devised constraints that structure human interaction” p.23, introduced the idea that the institution can act as a means of reducing uncertainty, thus reducing potential transaction costs while making the overall market more efficient. Despite this, it was also argued by North that institutional change rarely happens immediately and, in fact, is more likely to be part of several smaller interactions and incremental changes. Crucially, it is the performance, as well as the indirect and direct consequences of the institution and their mechanism that would ultimately dictate how effective it is, when it comes to building a stake in creating an efficient market.
By looking at the above, it can be argued that there is a strong relational link between the notion that under-development of the market and the economy can be blamed on some form of institutional blockage. This suggestion that it is the institutional framework within a country that is most likely to lead to economic success was established by Bates, in 1995, who stated: “[a]n older generation, who had emphasised the importance of market failure in development economics, finds in the new institutionalism new justification for their interventionist beliefs. And a new generation, seeking a middle ground between the champions of the market and the defenders of the state, finds in the new institutionalism a justification for basing development efforts on community action and civic engagement.” P.27
It can be seen from looking at the theories of the state and the institutions within, that the current thinking is moving more towards the notion that the stateis changing in its role so that the relationship between the state and the markets are inter-linked, rather than being distinct. Modern theories indicate that it is accepted that the state is not opposing the way in which free markets work, but rather an important force that will enable the market to then create rules within which it operates. Essentially, not only does this suggest that the institutions of the state are in fact rule makers by which the markets will then operate, but it is also often the case that the boundaries break down between the state and the economics around them which can create blurred lines. The need to deal with these situations and recognise that they are interlinked, is the subject of considerable literature, in recent years, not least that of Pugh (2011). Recognising where there are economic failures within the state institution can often be a consequence of informal reactions against particular controls that may have emanated from the state institution, in the first place. It was noted in the research by Pugh that as state institutions become stronger, this can sometimes create greater corruption and those looking to behave in that way need to become more sophisticated and deliver new ways of behaving in a corrupt manner, which in itself manifests difficulties that the state then struggles to address.
Institutional Development = Good Governance?
Another area of the literature which is extremely important in the context of how institutional development commences in jurisdictions, such as Libya, in developing new systems is whether institutional development will automatically lead to good governance, where there is slightly more complexity within the arrangement. This is worthy of further discussion, most notably in terms of mapping out how institutional development could be used as a means of achieving strong governance.
International financial institutions, in particular, have focused heavily on the need to get the structure and governance of institutions correct as a means of ensuring stability and growth in the future. Furthermore, there is a body of research which is focusing specifically on the governance of institutions in the United States. This research argues that every country should work to set standards for their institutions, as this seems to be best practice, with these standards often being linked to those used by US organisations (Aron, 2000). Despite the fact that concepts of good governance have yet to be harmonised, on a global level, typical recommendations include such factors as ensuring a strong approach to bureaucracy of the judiciary, as well as the protection of personal rights, so that individuals are encouraged to develop new products and services. Transparency is also perceived to be vitally important within the public social welfare and labour institutions, to ensure that workers standards or other social elements are managed within states (Aron, 2000).
It is argued by individuals, such as Kapur & Webber (2000), that the international financial institutions are fundamental to the development of institutions and their use in order to improve economic sustainability, especially in developing regions like Libya. Although it was recognised in this research that international financial institutions offer a vitally important set of rules and government suggestions, it was also found that institutions in the developed countries, when placed as a requirement on the developing regions, can be too demanding and difficult to actually use on a practical level. The human resources and financing of these types of institutions cannot be beyond the developing country during the initial stage of development. Merely having institutional best practices in place is simply not practical. Indeed, it may even be the case that trying to establish financial institutions of this nature would go against social development within the region and could be so far against the norms and cultures of the countries concerned that they themselves would end up being a formative part of any conflict in the future. Whilst it is intended here that this argument is both relevant and has merit attached to it, it is still necessary to develop ideas as to which institutions should be established in which local region as well as it being necessary to look at institutional reform, in order to support a country that is likely to involve relatively rapidly. Consider, for example, the current situation in Libya where the region is recovering from economic collapse, the institutions will need to develop at a relatively rapid pace if the country is likely to undergo relatively sharp curves of recovery in a way that the more developed countries are likely to see steady improvement rather than rapid changes. All of this indicates that the use of institutions cannot be uniform across the globe (Kauffman et al., 1999).
As a result of this train of thought, it is unsurprising that a body of research has emerged suggesting that developing countries should simply wait for the institutions to evolve spontaneously. This is in order to ensure that the institutions being developed are in keeping with local conditions and demands and allowing spontaneous evolution is likely to be the best way of achieving this. In reality, there are often time limitations which require a slightly quicker response; so, simply allowing spontaneous evolution is not an appropriate method of institutional development, particularly in countries like Libya where there is a need for immediate reform and to provide foundations for long-term development.
Methods of Institutional Development
In order to understand the way in which institutional development can potentially impact on the opportunities for economic reform and the ways in which institutional development can be managed in a variety of different jurisdictions, both developed and developing. Interestingly, the issue of democracy and development of institutional reform has created discourse in a variety of jurisdictions, including those that are now perceived to be developed. Take, for example, the situation in France where voting was initially introduced for men only over the age of 30 who pay at least a minimum amount in taxes, meaning that voting was restricted to an extremely small portion of the 32 million population being able to vote and it took a prolonged period of time for this fundamental element of the political institutions to be dealt with in such a way that true democracy was perceived to be achieved. Similar examples can be seen elsewhere, with Germany also taking nearly a century between all men being allowed to vote and all men and women being able to vote (Uphan, 2000). Consequently, although it can be seen that political institutions have developed in many of these countries, this has not happened in a short period of time. This needs to be borne in mind when tackling issues within the developing regions and when looking at institutional reform which needs to be done over a much longer time horizon than may be seen as desirable when looking at countries such as Libya and the need to establish strong institutions, relatively rapidly, to navigate a post-conflict period.
A similar situation can be seen when looking at issues relating to bureaucracy and the judiciary. The judiciary, in particular, has been the subject of much debate in terms of how an institution should provide good governance. Having the judiciary as an independent institution is often seen as vitally important for the social and economic development of the country. Yet, it is cited by Upham (2000) that there are instances, for example, in Germany and Japan, whereby an entirely politically independent judiciary can create its own difficulties. This means that there needs to be an element of political control over it, in order to operate effectively.
It was suggested by Upham that the effectiveness of the judiciary as an institution depends not only on its independence from the political arena, but also on a much broader variety of factors, including the level of professionalism shown by members of the judiciary. Although the research by Brogan (1985) focused on the judiciary as an institution and how it should establish itself for true effectiveness, many of these factors are seen to be relevant to the general issue of institutional development. This indicates that, when looking at institutional development as a whole, several factors need to be drawn upon and not simply whether or not it is politically independent and able to take a stable, robust stance, but whether it has the internal professional mechanism available to undertake these activities, in the first place (Brogan, 1985).
Taking on board this background understanding, the next stage of the analysis is to consider the role of the financial institution. It is intended here that, in Libya, financial institutions are likely to be a fundamental part of economic development and will receive a large amount of political attention. For this reason, financial institutions and the nature of their impact warrant their own discussion. When looking at the more developed countries and how they currently utilise financial institutions, it can be seen that the banks themselves became fashionable lending institutions relatively late on, typically in the 20th century (Lamoreaux, 1994). In the early years, banks, dating back to the 18th century were typically run as self-help associations, when merchants were able to offer credit to each other rather than being a banking system itself. Recognised institutions took a relatively long period of time to develop with the UK only achieving financial integration in the 1920s, suggesting that financial institutions are somewhat behind many of the economic developments elsewhere, for instance in the judiciary and democratic state institutions (Lamoreaux, 1994).
As well as being relatively slow to develop, banking institutions have also experienced difficulties when it comes to gaining robust banking regulations and this has been a perceived weakness within these financial institutions for many countries, not least the UK and the US in the wake of the recent financial crisis. The role of the central bank has become fundamental to the development of financial institutions and offers a strong potential route for countries like Libya when looking to create a central institution that can then support the development of the surrounding institutions (Lamoreaux, 1994).
The Central Bank of England was established back in 1694 and became an institution viewed as the lender of last resort, during the 18th century. Therefore, although this institution has a long history, it only became a central institution capable of having a dramatic economic impact on the country in its entirety in relatively recent years (Lamoreaux, 1994). Arguably, the Central Bank institution took on a powerful position when it had the monopoly over note issuing although this was several decades, if not centuries, after the banks establishment in the first place in most countries; for example, in the UK, the Central Bank was established in 1694, but only gained the monopoly of issuing notes in 1844 (Crafts, 2000).
This suggests that the institution itself is not a critical factor, but rather the powers and opportunities that are given to the institution. Arguably, it is the structure of regulation which actually has the definitive argument as to whether or not the institution is an important development factor. Therefore, it can be stated that it is the legislation surrounding institutions which ultimately determines the effectiveness when it comes to achieving economic stability (Carnes, 2000). As well as the Central Bank, public financial institutions have also emerged, over the years, which play an important role when dealing with recovery and development within a particular country such as Libya.
The developed countries during their history have also had periods of hardship, e.g. through lack of monetary capability; for example, they had a limited power to tax individuals, thus making it difficult for the government to be effective when it comes to making monetary decisions (Larsson, 1993).
Social Welfare Institutions
Where social welfare and economic developments are concerned, there is clearly a potential argument for a link between social welfare institutions and the likely increase basic stability in the country as a whole, especially where individuals find themselves in the position of being unable to look after their own basic needs. Although their remains a substantial debate about the role of social welfare institutions which go far beyond the discussion in this paper, the basic notion that social welfare institutions will create a level of stability to prevent any group of individuals failing to have their basic needs met and thus create a situation whereby they may turn to criminal behaviour. The link between having a balanced social institutions and a well-balanced nation has far-reaching consequences, particularly when these are linked to political and economic reform, for example where the institution is refusing to let political democracy take place and restricting voting rights, based on financial assets (Pierson, 1998).
Recognising the role that social welfare institutions play has been central to many research projects, most notably the research undertaken by Pierson. The research by Pierson suggests that by establishing regulations in terms of how the social welfare institutions operate will have a direct impact on other institutions and, crucially on the financial stability of the region. As noted by Marx, (1976), the regulation of working practices, e.g. placing a maximum working hours for adults and children, can have a dramatic impact on the operation of the economy, as a whole. Merely being aware of the link between financial institutions and other institutions, as well as general nexus of institutions, in terms of how the markets within the state then operate is as important as looking at the minutiae of the management of financial institutions, alone.
By looking at the various avenues of research which deal specifically with institutional needs or, indeed, with more general issues of economic development and stability, one factor which has become very apparent is that regulatory standards on a global level will simply not be effective for achieving strong economic development. Furthermore, researchers have also indicated that the theories of institutional operations indicate that it is the combined efforts of all of the institutions which are likely to have the biggest impact on the overall economic and social stability of a region or country. When looking at issues faced by Libya, as well as the way in which other jurisdictions have dealt with issues, the importance of the institution has becomes even more obvious. What remains unclear is just how institutional development should be managed, because simply to allow institutions to develop organically is unlikely to present a suitable solution, in a country like Libya which has undergone a dramatic period of difficulty, in recent years.
The key learning from this element of the literature review is that different institutions have different roles to play and it is their combined effect that needs to be explored in more detail when looking to develop regulatory policies, as this will ultimately allow the underlying aims of the region to be achieved. Regulation and management of these institutions is almost as crucial as the institution itself, and it is this combination of factors which needs to be borne in mind when looking at how institutional development is likely to influence the Libyan state.
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