This 2008 paper by GMU’s Peter Boettke, Chris Coyne and Peter Leeson (pdf) is one of my all-time favorite studies on institutions, path dependence and economic development. If you think that the title of the paper is catchy, wait and read the full abstract:
Research examining the importance of path dependence and culture for institutions and development tells us that “history matters,” but not how history matters. To provide this missing “how,” we provide a framework for understanding institutional “stickiness” based on the regression theorem. The regression theorem maintains that the stickiness, and therefore likely success, of any proposed institutional change is a function of that institution’s status in relationship to indigenous agents in the previous time period. This framework for analyzing institutional stickiness creates the core of what we call the New Development Economics. Historical cases of postwar reconstruction and transition efforts provide evidence for our claim.
The authors divide institutions in three types: foreign-introduced exogenous institutions (FEX), indigenously introduced exogenous institutions (IEX) and indigenously introduced endogenous institutions (IEN). The core argument is that institutions tend to “stick” when they are built upon the “mẻtis” of a society.
A concept passed down from the ancient Greeks, mẻtis is characterized by local knowledge resulting from practical experience. It includes skills, culture, norms, and conventions, which are shaped by the experiences of the individual. This concept applies to both interactions between people (e.g., interpreting the gestures and actions of others) and the physical environment (e.g., learning to ride a bike). The components of mẻtis cannot be written down neatly as a systematic set of instructions. Instead, knowledge regarding mẻtis is gained only through experience and practice. (…) In fact, mẻtis can be thought of as the glue that gives institutions their stickiness.
I often try to think about how this “mẻtis” looks like in real life, especially in the realm of small enterprise finance. If I think about the Kenyan context, my best guess is that the culture of “chamas” (i.e. self-help groups) is part of the mẻtis and that any new financial, welfare or regulatory institution has a much higher chance of “sticking” if it is built upon them. Kenyan banks understood this many years before me, and they introduced new financial products specifically designed for self-help groups (so-called chama accounts). As far as I know, these accounts have been a big success.