Institutional Evolution and Economic Development in Iran and Turkey

Iran and Turkey historically had outwardly similar politoconomic experiences. Particularly after the World War I there were both similar institutional reform programs on the two countries’ agendas and convergence in their economic growth and development levels. However, this convergence came to a standstill with their picking of totally diverse economic institutions in 1980s. This study attempts to provide an analysis of this diverse transformation of economic institutions in Iran and Turkey. It is generally assumed in the paper that institutions are not typically chosen for the general benefit of the society, but are rather imposed by groups with political power for their economic consequences. It is proposed that the 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 that societies adopt that create informal constraints on cognitive and relational patterns. The ‘formal’ and the ‘informal’ constraints are argued to evolve in interaction with external institutional paths that a country’s path clashes with. They are thus analyzed in light of the new approach proposed: The Clash of Paths (CoP). In the study we also construct a simple bargaining game to integrate macro aspects of institutional evolution drawn under CoP to a micro-level explanation of the emergence and change of institutions. Given above-mentioned macro-level dynamics, the micro-level analysis suggests that if domestic hegemonic classes solve the problem of credibility in order for their commitments or threats to be strategically effective, they usually shape and reshape economic institutions in accordance with their interests.