In the late 1960s, Philippine log exports began to decline; at the same time, Indonesia's timber exports began to soar. By 1973 Indonesia had replaced the Philippines as the world's leading hardwood exporter. Timber also became Indonesia's largest source of foreign exchange, after oil.

The case of Indonesia differs from the others in three important ways. First, its forestry institutions were far weaker. In the Philippines, Sabah, and Sarawak, rent seizing damaged the institutions that fostered sustained-yield forestry. The Indonesian government had no such institutions in the 1960s and early 1970s; there was little to dismantle. But the Indonesian forests had been protected, in part, by nonstate institutions – the institutions of adat, or customary law. Of the four cases in this study, Indonesia and Sabah had made the greatest strides – before their timber booms – toward recognizing the customary land rights of forest dwellers. Shortly after the timber boom began, the Indonesian government rescinded those rights, to boost the size of the windfall.

Second, Indonesia's boom was not triggered by rising international timber prices; rather, it was caused by the government's efforts in 1966 and 1967 to lower the costs of cutting and exporting timber.

CHOICE AS A REFLECTION OF ALTERNATIVES

From the last chapter, it should be clear that the entire issue of choice can be adequately discussed in terms of the problem-solving framework. Choice analysis is a subcase of problem solving; as we have seen, problemsolving also includes unconscious aspects such as following routines when solving old problems and quasi-automatic aspects such as inferential strategies when a new problem first arises. The incorporation of choice into this broader framework is thus theoretically valuable because no separate choice theory is needed. Nevertheless, since the phenomenon of choice has a prominent position in the theoretical social and economic sciences, a more detailed analysis of this exceptional moment of human reflection seems appropriate.

Choice among alternatives always refers to the future. The reflection taking place whenever an individual discovers more than one alternative to attain an aim is always in reference to the future. We have discussed the ultimate motivation in human behavior and have summarized it in the general form of striving to increase one's own utility. In the case of choice, the motivational and cognitive aspects of behavior are strikingly interwoven. The individual seeks to order, on the basis of conjectures about future states, the different alternatives according to the effects that they will have in changing his utility. In other words, he tries to weigh the impact that the different alternatives will have on his utility.

HOW STABLE IS THE SELECTION ENVIRONMENT?

It is clear that the ultimate selection criteria of evolutionary market activities are the preferences or interests of the economic subjects themselves and, more specifically, those of the consumers. These decide in the end which market activities will fail and which will succeed (see Section 11.3). At a first level, though, it is institutions that act as a primary selection criterion of the evolutionary market processes.

To be considered a selection criterion at all, a factor must demonstrate relative stability. The variables that ultimately affect the probability of survival of different problem solutions must remain relatively invariant so that the selection forces can operate. If social institutions are to play the role of those variables, they must remain relatively stable. Following our basic distinction between rules of the game and activities within the rules, our main purpose has been to prove that both levels are subject to evolutionary change.

Since both institutions and markets change, the function of social institutions as a selection environment for the evolutionary change taking place in markets is not self-evident. Moreover, this proposition must itself be proved so that the whole theory can retain its validity. In concrete terms, what must be proved is that the pace of change in institutions is slower than the pace of change in markets. Only in this case might institutions possess the relatively invariant character with regard to market changes and allow for the formulation of satisfactory empirical propositions on economic evolution.

TWO TYPES OF THEORY FOR EXPLAINING DEVELOPMENT

One main argument throughout our survey has been that institutions come first; exchange processes always occur within institutions. The primacy of the institutions is founded both in the cognitive architecture of the human mind, that is, in the way people learn, and in the simple truth that institutions must be shared by all (or almost all) agents. To persuade those still unconvinced of the importance of institutions, one has to answer in a straightforward manner the question: what difference does it make to study institutions before analyzing the economic process?

The best way to answer this question is to provide applications of the institutional theory presented here and to show that one reaches a different set of conclusions when this theory is employed than when the institutions are omitted. Such a series of applications can be easily derived from the theory, the first and most important being that the wealth of a society depends crucially on how institutions channel the economic process. The theory may find another application in the transformation of socialist economies. The institutions of a society cannot be changed overnight because they require a very long time to become anchored in the minds of the people. Therefore, a successful transformation presupposes a long-lasting process of collective learning. Furthermore, the theory can be used on more specific levels, such as antitrust policy or social policy.

THE EVOLUTIONARY PERSPECTIVE

The first condition necessary for an adequate explanation of individual behavior is an account of motivation that was given in the preceding chapter. The second necessary hypothesis refers to the cognitive content of the individual brain. Traditionally, philosophers have devoted much ingenuity to understanding how people perceive, but it was the Lorenz (1941) interpretation of the a priori categories of Kant that caused a radical change in epistemology and laid the foundation stone of evolutionary epistemology. For Lorenz, our a priori categories are nothing more than a natural vessel that has been formed, like our organs, in the process of biological evolution, and these categories have remained with us because they secure our existence and our adaptation to the environment. The main contention of Lorenz was, hence, that human categories of thought have not existed a priori, but phylogenetically a posteriori and they are to be viewed as successful, species-specific information systems. The hypothesis of Lorenz is thus that a distinction between phylogenetic and ontogenetic learning potential must be drawn. Phylogenetic learning is species specific, and sets the framework of possibilities within which every member of the species can acquire his learning history, that is, ontogenetic knowledge.

Lorenz's distinction between phylogenetic and ontogenetic knowledge was much more than another interpretation of Kant's a priori categories. It signaled a new era in the theory of knowledge: the era of evolutionary epistemology.

Sarawak is Malaysia's largest state, and has almost twice Sabah's forested area. Some 17 percent of Sarawak's forests lie along the coasts, and are classified as peat swamp and mangrove forests. The balance lies in the lowlands and uplands of the hilly interior.

The peat swamp forests hold valuable stands of ramin trees, which have been harvested commercially since the late 1940s. But the soils of the hill forests are relatively poor, compared with the rich volcanic soils of the Philippines, Sabah, and East Kalimantan (in Indonesia). Sarawak's hill forests yield less exportable timber per hectare than the other three regions, and was the last to undergo a major logging boom.

On joining the Malaysian Federation in 1963, Sarawak – like Sabah – retained autonomy over its forests. Yet when the timber industries of the Philippines, Sabah, and Indonesia boomed in the 1950s, 1960s, and early 1970s, Sarawak's timber industry remained small, since its less valuable forests could not yet be profitably logged.

But in the late 1970s, both Philippine and Indonesian log exports began to fall, producing a demand for Sarawak logs to feed the plymills of Japan, South Korea, and Taiwan. From 1975 to 1985, Sarawak's share of the international hardwood log market rose from 3.4 percent to 38 percent.

This book began with three puzzles: Why did the governments of the Philippines, Malaysia, and Indonesia squander their forests? Why do most governments in the developing world squander commercially valuable forests? And why do developing states generally mishandle resource windfalls? The book's research design – which emphasizes validity over generality – gives me a good deal of leverage over the first question, but less over the second and third questions. Here I summarize the book's findings, and discuss the implications for both policy analysts and social scientists.

POLICY FAILURES IN THE PHILIPPINES, SABAH, SARAWAK, AND INDONESIA

All four states in this study had exceptionally valuable forests. Three of them (the Philippines, Sabah, and Sarawak) initially had relatively strong forestry institutions, and nominal policies of sustained-yield harvesting. Yet all four governments wound up squandering their forests, by authorizing logging at unsustainable rates, by keeping royalties and taxes low, and by failing to enforce logging regulations.

There were undoubtedly many reasons for these policy failures. This book focuses on a single cause: the rents created by high timber prices. When timber prices rose high enough to generate rents, governments in three of the four states (the Philippines, Sabah, and Sarawak) stripped their forestry departments of much of their authority over the timber sector, and abandoned their policies of restricting logging to sustained-yield levels.

Why do windfalls lead to policy failures? Since the 1950s, scholars have offered two types of explanations: cognitive explanations, which suggest that windfalls induce either laziness or euphoria among policymakers; and societal explanations, which suggest that windfalls encourage nonstate actors – such as interest groups, political clients, and rent seekers – to demand a share of the windfall from the state.

This chapter begins by summarizing these two approaches. It then describes my own explanation, which is that resource booms lead to rent seizing by state actors. It explains some of the assumptions behind the concept of rent seizing, how it may hurt institutions, how it differs from other types of rent seeking, and how it is influenced by a state's regime type. The chapter concludes by explaining how and why I use the cases of the Philippine, Malaysian, and Indonesian timber sectors to illustrate my argument.

COGNITIVE EXPLANATIONS FOR WINDFALL POLICY FAILURES

Cognitive approaches suggest that windfalls produce a type of myopia among public or private actors, which in turn leads to institutional or policy failures. Some observers imply that windfalls lead to myopic sloth; others argue that windfalls produce myopic exuberance. Wallich (1960) and Levin (1960), for example, argued that periodic commodity booms in sugar-exporting states led to careless economic planning, which inhibited export diversification.

We conclude this book with a general remark. The main idea put forth in this inquiry referred to a specific perspective of the social world, its main ingredients being methodological individualism, the assumption of selfinterested behavior, and the idea of channeling human behavior through social institutions. This set of principles characterized the theoretical program of political economy before its gradual transformation into neoclassical economics. These powerful core ideas are not a priori restricted to any particular social sphere or historical period, though. They can, therefore, serve as a general research program for the social sciences.

A genuine political economy that would fill the “cognitive, motivational, and institutional vacuum” of neoclassical economics (Albert, 1979, p. 11) would at the same time provide a platform for the unification and further development of the social sciences. Such a political economy would not be vulnerable to the familiar criticism of “economic imperialism” for two reasons. First, it would integrate the different disciplines of the social sciences in the general project of the study of institutions. The unique vantage point and specialized knowledge of every discipline could be united in the common institutional perspective that seems to be of equal importance in political science, sociology, and economics. Second, it would not adopt neoclassical microeconomics as its microfoundation. The behavioral model of problem solving inspired by cognitive psychology and evolutionary epistemology retains the virtues of the rationalchoice model without neglecting the rule-guided dimension of human behavior.

The 1990s have been a decade of big changes for welfare states. The adaptation process which in the United States and in Britain started in the 1980s has become part of policy-making also in continental European countries. The main objective of reform is to restore the compatibility of social policies with the changing economic and demographic contexts. In most cases, this objective is pursued by retrenching existing social programmes. Welfare retrenchment, thus, is not any longer an Anglo-Saxon idiosyncrasy. Countries such as Sweden, France and Germany, in which social policies are widely praised and contribute to the structure of national identities, have all curtailed their welfare states in the last few years.

In both waves of retrenchment, pension schemes have been a privileged target of governments' attempts to reduce spending on welfare. Pensions generally constitute the largest single item of social expenditure, so that successful cost containment in this area of policy is particularly beneficial to governments' budgets. In addition, pensions are directly exposed to the twin pressures of economic and demographic change. Economic changes, like globalisation, are reducing governments' ability to generate revenues. On the other hand, population ageing is resulting in increased pension expenditure. This is a powerful incentive for governments to take action. It explains why pension reform has been high on the agenda in most advanced industrial countries over the last decade.

In general, however, continental European welfare states are proving to be less vulnerable to cuts than their Anglo-Saxon counterparts. One way to explain this is with reference to their higher degree of middle-class integration.

As far as theory is concerned, France is probably the most interesting case among those covered by this study. Policy-makers unintentionally created ideal conditions for testing hypotheses concerning the determinants of pension policy and the factors that favour or hamper success in pension reform. In the space of only two years, two very similar plans for pension reform were put forward. The first concerned only private sector employees and was successfully transformed into law in summer 1993. The second, in 1995, consisted of the extension of the same measures to public sector employees. It generated a massive wave of strikes, mainly among rail workers, which forced the government to withdraw its plans. This chapter covers both events, and tries to answer the question of why two very similar plans for the reform of pensions generated such different public reactions.

Institutions and patterns of policy-making

Political scientists have generally considered France as a country where policy-making is characterised by a substantial degree of centralisation. Typically, public policy is decided at the top with little or no negotiation with external interests. In his comprehensive study of interest-group politics in France, Wilson points out that, albeit with some exceptions, the relationship between the state and organised interests in France is characterised by ‘a power situation of a state capable of resisting interests and proceeding with its own ends regardless of group pressures’(Wilson 1987: 238). This view is reflected in the literature on corporatism, which typically views France as a counter-example. Lijphart and Crepaz, in their review of expert opinion on the degree of corporatism in various countries, found that France is most often considered as one of the least corporatist countries (1991: 240).

With regard to political institutions and to patterns of exclusion and inclusion in policy-making, Switzerland can be considered as the mirror image of the UK. Because they provide a series of veto points, Swiss institutions allow a significant degree of influence to external groups. Most notably, this is the case of the referendum system, whereby any act passed by parliament can be challenged at the polls if 50,000 signatures are collected supporting a referendum. In addition, well-established decision-making procedures tend to include a wide range of different and often conflicting interests, and to produce compromises that are more or less acceptable to as many actors as possible. This peculiar approach to policy-making constitutes an important limitation to the room for manoeuvre available to the government in virtually all areas of policy.Pension policy, of course, is no exception.

The 1995 Swiss pension reform was adopted after more than a decade of intense negotiations between political parties and the social partners. Despite a series of attempts at reaching a mutually acceptable compromise, a totally consensual solution was not found. Eventually, however, the reform included both expansion and retrenchment elements, a combination that proved instrumental in guaranteeing the final adoption of the pension bill. The retrenchment measures alone would have been at a much higher risk of defeat in a referendum. This strategy has been used in other welfare reforms in the early 1990s, and can be seen as a response to the institutional constraints that limit policy-making. The combination of improvements in provision, on which there was widespread agreement, with controversial retrenchment elements has contributed to the successful adoption of reform also in the areas of unemployment benefits and health insurance (Bonoli 1997b).