Ethnicity and Development: Addressing the Gaps in New Institutional EconomicsBy Shahrukh Rafi KhanRoutledgeISBN: 978-103263083092pp.

Identifying the factors that caused some nations to progress and prosper, while most others continue to struggle in poverty and deprivation, is the holy grail of development economics.

There are a number of theories, ranging from the obvious effects of the gains of colonialism (which essentially involved plunder), to theories on the effects of climate on development (the idea that people work less in hot countries). The only consensus is that there is probably a mix of factors — geography, history, environment and the occasional sagacious ruler — that have, over millennia, shaped the world as it exists now.

Amongst the long list of development economists who have tried to crack the code, so to speak, the name of Douglass North — and his framing of New Institutional Economics (NIE) — has stood out over some decades. North was an economic historian who emphasised the role of institutions in shaping development.

The core idea was simple — that economic agents may well be considered rational, but they lack complete information on markets, and incur costs in investigating potential partners and rivals, as well as market trends in general. However, if countries build institutions that can enforce contracts, ensure basic law and order, and provide reliable information on how markets are operating, then rational economic agents can operate with minimal transaction costs. This gives them an incentive to invest and save and thus drive economic growth. North’s essential premise has been examined further by many academics, notably Daron Acemoglu and James Robinson.

A brief treatise by a well-known Pakistani economist explores the impact of ethnic friction on the success or........

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