StateandDevelopment:TheNeedfora
ReappraisaloftheCurrentLiterature1
PranabBardhan
[forthcomingintheJournalofEconomicLiterature]
Abstract:
Thisessaytriestobringoutsomeofthecomplexitiesthatare
overlookedintheusualtreatmentofthestateintheinstitutional
economicsliteratureandsupplementthelatterwithadiscussion
ofsomealternativeapproachestolookingatthepossible
developmentalroleofthestate.Itreferstoabroaderrangeof
developmentgoals(includingthestructuraltransformationof
theeconomy)andfocusesonproblemsliketheresolutionof
coordinationfailuresandcollectiveactionproblems,the
conflictingissuesofcommitmentandaccountabilityandthe
needforbalancingthetrade‐offstheygenerate,some
1 I am grateful to the Editor and four referees, and to Masahiko Aoki, Vijay Joshi, Kalle Moene, Dilip Mookherjee, and Gerard Roland for comments on an earlier draft. 1 ingredientsofstatecapacityandpoliticalcoalition‐building
usuallymissedintheliterature,thepossibleimportanceofrent‐
sharinginapoliticalequilibrium,theadvantagesandproblems
ofpoliticalcentralizationanddecentralization,andthemulti‐
dimensionalityofstatefunctionswhichmaynotbeaddressedby
marketsorprivatefirms.(JEL,H11,O10,O25,O43)
IIntroduction
Sincetheflourishingofinstitutionaleconomicsinthe1990’s,
someideasontheroleofthestatehavecometodominatethe
developmentliterature.Althoughdifferentwriters—say,North
andWeingast(1989,2000),BesleyandPersson(2011),
AcemogluandRobinson(2012)‐‐havedifferentpointsof
emphasis,thereissomecommonalityinthisliteratureonthe
roleofthestate.Thestatehastobestrongenoughtoprovidea
solidminimumframeworkoflawandorder,enforcementof
contractsandotherbasicinstitutionsunderpinningthemarket,
whileatthesametimethestateexecutivehastobeconstrained
nottointerferewithsecurityofpropertyrights.Thereisno
doubtthatthispointstosomeimportantfeaturesofthestate
thatareconducivetotheincentiveframeworkofinvestment,
enterpriseanddevelopment.Weshalltrytocapturesomeof
2 thenuancesofthisapproachasdiscussedinthemorerecent
literature,butwe’llalsoconsidercaseswhereitmayactually
limitourperspectiveinunderstandingthediversityof
developmentexperienceindifferentpartsoftheworldand
pointtoaspectsofstate‐relateddevelopmentthatare
overlookedorunder‐emphasizedinthisnow‐dominant
tradition.Inparticularweshallrefertoabroaderrangeof
developmentgoals(includingthestructuraltransformationof
aneconomy)andmulti‐dimensionalityofstatefunctions
comparedtothosethathavebeenusuallyconsideredinthe
institutionaleconomicsliterature.
Astrongstatemayhelpeconomicgrowth,butwhatdoesone
meanbyastrongstate?Inthedifferentstrandsoftheliterature
onecandecipherdefiningissueslikeacertaincommitment
abilityofthestatetotranscendnarrowsectarianinterestsand
thatofpoliticalcentralizationthatallowsthestatetotranscend
diffuselocalinterests.Buttheabilitytotranscendnarrow
interestsmaynotnecessarilybeaccompaniedbywillingnessto
doso,andthusconstraintsonexecutivepowerareconsidered
necessarytorestrainpanderingtonarrowinterestsorself‐
aggrandizementonthepartoftheleadership(hencethe
frequentcallforstrongbut‘limited’government).
3 Butifthesocialgoalisbroad‐baseddevelopment,such
essentiallynegativebarsrestraininggovernmentarenot
enough.Inmanycasesitmaybeimperativeforthestatetoplay
amorepositiverole.Pluralisticinstitutions,inthesenseof
beingrespectfulofdiversityofinterestsandgoals,may
facilitatesuchapositiveroleofthestate.Butinstitutional
economistswhoseetheneedforpluralism,donotalwayspay
attentiontothepossibletensionbetweenpluralismandthe
abilitytocarryoutcollectiveactiontowarddevelopmentgoals
oreventosecurepropertyrights;similarlythosewhoadvocate
politicalcentralizationdonotgiveenoughweighttoitstrade‐
offwithlocalaccountability,orthetrade‐offbetween
commitmentandflexibility.Democraticaccountability
mechanismsinthisliteraturemainlytaketheformof
constraintsontheexecutiveorchecksandbalances;butthere
areotheraspectsofthedemocraticprocesswhichformintegral
partsofthedevelopmentprocess—forexample,popular
participationanddemocraticdeliberationlendlegitimacyand
sustainabilitytodevelopment.Ontheotherhand,thepolitical
competitionofdemocracycanoccasionallyleadtoa‘racetothe
bottom’and,insteadoffocusingtheleadership’sattentionto
broad‐basedinterests,mayinsomecasesencouragepolitical
clientelismtowinelections.Incontrastwiththegeneral
4 impressionintheliteraturethat‘allgoodthingsgotogether’,
we’llpointtothesekindsofantinomiesandtrade‐offsthatare
largelymissinginthediscussion.
Thereisnowaburgeoningliteratureonstatecapacity
contributingtotheaforementionedstate‘strength’,spellingout
thevariousingredients,particularlyfiscal,legalandmilitary
aspectsofcapacity.Forexample,theroleofwarsinforging
suchcapacity,andthatofaWeberianbureaucracy,its
autonomyfromthepoliticalprocess,itscareerpathsand
incentivepaymentshavebeendiscussedinthiscontext.Less
oftendiscussedisthenatureofpoliticalcoaltionamong
differentinterestoridentitygroupsand‘socialpacts’andinter‐
temporalbargainsthatmakethekeydifferenceandthe
underlyingproblemsofcollectiveactionthathavetobe
overcomeinbuildingtheall‐importantpoliticalcapacityofthe
state.
Thefocusonsecurityofpropertyrightsandmarketinstitutions
hasalsodivertedattentionfromtheimportantissueof
developingstatecapacityinresolvingcoordinationfailures.
Thisissueusedtobeattheforefrontofdiscussionintheearly
developmentliterature,particularlywhenstructural
transformationusedtoberegardedasthecoreofdevelopment.
5 Inthemorerecentliteraturetherehasbeensomeparallel
discussionofstatepromotionofindustrialpolicy,andthe
lessonsonecanlearnfromitsexperienceinseveralEastAsian
countries.Inpoliticalsociologytherehasbeenactive
discussionontheso‐calleddevelopmentalstateinthiscontext.
Muchofthishasbeensidelinedintheinstitutionaleconomics
discussiononpropertyrightsandstatecapacity,mainly
drawingexamplesfrompre‐modernEuropeanandAtlantic
economy,andmorerecentlyfrominstitutionalfailuresinLatin
AmericaandAfrica,largelyoverlookingtheanalyticallessons
fromtheexperienceofEastandSouthAsia.Itistimetojointhe
streamoftheliteratureonindustrialpolicywiththe
mainstreamonstatecapacityformarket‐supporting
institutions,anddiscusstheproblemsandprospectsof
industrialpolicyinthislargercontext,particularlyifitcanbe
movedawayfromitsoldprotectionistassociationandoriented
toimprovingproductivityratherthandistortingprices.Of
course,targetingofsectorsandfirmswillgeneraterental
opportunities,butincontrastwiththestricturesonrent‐
seekingintheearlierliteratureonthestate,thenewliterature
hasemphasizedhowinsecond‐bestsituations,particularlyin
earlystagesofdevelopmentwhenentrepreneurshipand
capitalarethebindingconstraints,someamountofrent
6 generationwithinbroadlimitsofmarketdisciplinecanprovide
dynamicincentivesfornewinvestmentsandlearning
processes.Rent‐sharingmayalsobeimportantinforging
politicalcoalitionsbehindstructuralchange.
Ingeneralthepurposeofthisessaywillbetoopenuptherole
ofthestateinthedevelopmentcontextbeyondthenarrow
confinestowhichmuchoftheinstitutionaleconomics
literaturehaslimitedit,apartfrompointingtothevarious
trade‐offsamongthetypesofrolealreadyenvisaged.Beyond
beinga‘nightwatchman’ofpropertyrightsandmarkets,the
stateoftenneedstobeaguide,coordinator,stimulator,anda
catalyticagentforeconomicactivitiesinsituationswherefor
varioushistoricalandstructuralreasonsthedevelopment
processhasbeenatrophiedandthepathforwardisdarkened
byallkindsofmissinginformationandincompletemarkets.
Thetrade‐offsbetweendifferentaspectsdiscussedherealso
suggesttheneedforsomebalanceinworkingtowardmulti‐
faceteddevelopmentgoals,andapre‐fixedone‐sidedformulae
maynotbedesirable.Themultiplefunctionsofthestateand
themulti‐dimensionalityofitsagenda(comparedtothoseof
privatefirmsormarkets)alsoimply,aswe’lldiscuss,thateven
whenastateenterpriseisinefficientincarryingoutits
functionsprivatizationneednotalwaysbeabettersolution,
7 particularlywhencontractsarenecessarilyincomplete.Our
focusonabroaderroleofthestate,multi‐dimensionalityofits
functionsandthattooatdifferentlevelsofthepoliticalsystem,
andthetrade‐offsanddissonancesbetweenobjectivesor
mechanismdesignsdoesnotmakeiteasyforaunifiedtheory
ortidyunambiguousconclusions.ButasWilliamson(2000)
saidinaJELsurveyofinstitutionaleconomics,“therebeing
manyinstructivelensesforstudyingcomplexinstitutions,
pluralismiswhatholdspromiseforovercomingour
ignorance”.
Theroadmapinthisessayisasfollows.InSectionIIwestart
withtheideaofa‘strongbutlimited’governmentandits
variousramifications.WeconcentrateinSectionIIAontwo
relatedaspectsofstatestrengthsuggestedintheliterature,one
oncommitmentabilityandtheotherispoliticalcentralization.
InthecontextofstatestrengthweshallcommentinSectionIIB
onthedifferentingredientsofstatecapacitydiscussedina
growingliterature.Inconnectionwithlimitedgovernmentwe
discussinSectionIICtheconstraintsontheexecutiveandthe
roleofotheraccountabilitymechanisms.InsectionIIIweshall
startourcritiqueoftheviewdiscussedinthepreviousSection,
bypointingtotensionsandtrade‐offsbetweendifferent
aspectsofgovernancerecommendedintheliterature.In
8 sectionIVwewadeintoasmallpartofthelargeliteratureon
democracyanddevelopment,keepingourattentiononhowthe
democraticaccountabilitymechanismsdiscussedearlierhelp
inthedevelopmentprocessandatthesametimepointto
featuresofpoliticalcompetitioninademocracythatmay
actuallyhinderdevelopment.InSectionVweshalldrawupon
thegrowingliteratureondecentralizationandaccountability
downwardandshowhowthelattermayprovidea
counterweighttotheadvantagesofpoliticalcentralization
discussedinSectionII,whileatthesametimedrawattentionto
trade‐offsintermsofspecialproblemsthatafflictdecentralized
governanceinpursuitofdevelopmentgoals.Inthiscontextwe
shalldiscusstheuniquecombinationofpoliticalcentralization
andeconomicdecentralizationthattherecentlysuccessfulcase
oftheChinesestaterepresents,andalsothepitfallsofthe
Chinesestatemodel.InSectionVIwediscussthebroaderrole
ofthestateincoordinatinginvestmentactivitiesandlearning
processes,andhowthepotentialdynamicroleofrental
opportunitiesthatsectoraltargetinginindustrialpolicy
generatesneedstobetamedbymarketdiscipline.InSection
VIIwediscussthespecial,oftenmulti‐dimensional,functionsof
publicenterprisesandtheuncertaintyoftheirroleinfostering
necessaryinnovationsoncethedevelopmentalcatch‐up
9 processintechnologyisover.InthefinalSectionVIIIwehave
someconcludingcommentsandbriefsuggestionsonunder‐
researchedareas.
Muchoftheanalysisinthisessay,asintheliterature
discussed,iscomparativeandhistorical‐institutional.Although
weshalloftenrefertothequantitative‐empiricalliterature
available,thelatterisasyetrelativelyscanty,scattered,and
notalwayssatisfactoryintermsoftheidentificationstrategies
applied.Forexample,asthegrowtheconometricsliterature2
makesitamplyclear,thecross‐countryregressionsofthe
literatureonthestateareriddledwithproblemsincausal
interpretation3.Inaddition,unlikeinthecaseofsomemacro‐
economicpolicies,itmattersagreatdealmoreinthisliterature
thattheeffectivenessofthestatevariesenormouslyacross
localitiesandadministrativelevelswithinthesamecountryin
theireffectonthedevelopmentprocess,notatallcapturedin
datathattakeawholecountryaverageasthepointof
observation,whichisparticularlyproblematicforcountries
withamediumtolarge‐sizedpopulation.Ontopofallthisthere
2 See, for example, Durlauf et al (2005). 3 In this essay, while we have not refrained from referring to some cross‐country empirical exercises, the purpose is mainly to illustrate findings suggestive of interesting correlation, not causation. 10 areinherentdifficultiesofmeasuringqualityofpublicgoods
andservices.Thereareafewmicroexperimentalstudiesnow
available,butasusualtherelevanceoftheconclusionsfaces
problemsinscalinguporin‘externalvalidity’.Therehave,
however,beensomehopefulbeginningsofcollaboration
betweenthepolicy‐makingandresearchcommunityin
carryingoutquasi‐experimentalevaluationofmicroaspectsof
statepoliciescoveringlargesegmentsofthepopulation.
Sincethisessayisnotprimarilyontheprocessofstate
formationassuch,weshalllargelyconfineourselvestostates
thathavesomeminimumcoherenceinstrivingfor
development,andthusleaveoutmanyimportantcaseswhere
internecineviolenceandextremesocialfragmentationhave
notyetallowedtheminimumconditionsforstatebuilding.
Whilekeepinginmindthatthedifferencesintherelevantstate
capacityareoftenamatterofdegreeratherthankind,weshall
bypassthelargeandgrowingliteratureon‘failedstates’and
civilconflicts.ForarelativelyrecentoverviewpieceinJELon
civilconflicts4,whichareoftenassociatedwithfragilestates,
seeBlattmanandMiguel(2010).
4 For my own take on civil conflicts, see Bardhan (2005), chapter 9. 11 IITheCallforaStrongbutLimitedGovernment
Theideaofastrongbutlimitedgovernmentintheinstitutional
economicsliteraturefollowsalongtraditionofAnglo‐American
politicalphilosophydatingbackatleasttoHobbesandLocke
(theformeremphasizingastrongstatetoprevent‘warofall
againstall’,andthelatteremphasizinglimitstogovernmentat
leastforsecuringpropertyrights)5.Thisisactuallyakinto
mucholderideasfamiliarfromtheclassicaltextsofsome
ancientcivilizations6.
Amajorpropositionintherecentinstitutionaleconomics
literatureassociatedwithNorthandWeingast(1989,2000),
andothersisthatforthepurposeofeconomicdevelopmentthe
5 Alexander Hamilton in Federalist Papers expressed it this way: “In framing a government….you must first enable the government to control the governed; and in the next place oblige it to control itself.” 6 For example, much more than a millennium before Hobbes, the theory of the state as enunciated in ancient Indian texts spelled out a variant of the social contract theory of the origin of the state, where the coercive authority (dandaniti) has to be combined with rajadharma (good governance). The relevant texts are the Buddhist text of Digha Nikaya (1st century BCE to 1st century CE), Arthashastra of Kautilya (4th century BCE) and Chapter 67 of Shanti‐parva of the epic Mahabharata (1st century CE). For a discussion of these theories of the state, see Sharma (1996) and Thapar (1984). 12 statehastobestrongenoughtoprotectpropertyrightsand
otherinstitutionsunderpinningmarketsandcontracts,butnot
toostrongtobeconfiscatory,hencetheneedfordemocratic
checksandbalances7.Theyhavecitedthelandmarkhistorical
caseoftheGloriousRevolutioninEnglandin1688,whichby
strengtheningpoliticalinstitutionsthatconstrainedtheking
enhancedhiscommitmenttosecuringprivatepropertyrights
andthusfosteredeconomicgrowth(amajormechanismhas
beenthroughloweringthecostofcapital).Acemogluand
Robinson(2012)intheirrecentremarkablebook8alsocitethe
caseoftheGloriousRevolution,resultinginapolitical
pluralism,whichalongwithcentralizationinEnglandhelpedto
secureprivatepropertyrightsagainststatepredationand
allowedprivateenterpriseandcapitalmarketstoflourish.
7 A referee has rightly pointed out that there is a distinction between a ‘limited’ government and a ‘constrained’ one. North and Weingast do talk about a limited government, that has strict limits on interfering with private property rights and markets. Scholars in the Public Choice tradition also explicitly talk about limited government. Acemoglu and Robinson also emphasize security of property rights, but I presume they are more open to a more active role of the government. 8 Even though the book is meant primarily for a non‐specialist readership and their various technical articles at the background provide the theoretical and empirical underpinnings, we pay more attention to the book in this essay as it provides in one place a coherent framework for their understanding of institutions and development. 13 BesleyandPersson(2011)takeacloselyrelatedapproach,
citingAdamSmiththat“peace,easytaxes9,andatolerable
administrationofjustice”arethepillarsofthewealthof
nations.
IIAStateStrength
The‘strength’ofastateinthedevelopmentcontexthas,of
course,tobedefinedinanon‐circularway(withoutreference
tothedevelopmentoutcome).Asearchoftheliterature
suggeststwo(somewhatoverlapping)componentsofa
definitionofstrength,withoutbeingjustareflectionofthe
successoftheeconomy:(a)politicalcentralization,and(b)
capacitytocommit.
AcemogluandRobinson(2012)arethemostemphaticin
stressingtheimportanceofpoliticalcentralization.Intheir
viewnationssucceedorfailindevelopmentaccordingtohow
“inclusive”10theirpoliticalandeconomicinstitutionsare,and
9 The idea of ‘easy taxes’ was explicit in the Indian epic Mahabharata, where it was suggested that taxes should be gathered in the manner of ‘ the bee taking honey from the flower’. 10 Acemoglu and Robinson keep the definition of ‘inclusive’ somewhat vague. One presumes an inclusive political institution is one where large numbers (possibly a majority) of people are included in the 14 politicalcentralization(awell‐functioningstateestablishinga
cohesiveorderacrosslocaljurisdictions)isoneoftheir
essentialinclusivepoliticalinstitutions.Itcaninternalize
externalitiesgeneratedbypolicyactionsofdifferentlocal
authorities,enablinganencompassingorganizationtooverride
variouspressuresoflocalclientelism.Thisalsoprovides
incentivesforincumbentpoliticalleaderstoinvestinthe
creationoffiscalandlegalcapacity,assuggestedbyBesleyand
Persson(2011)11.Empirically,Osafo‐KwaakoandRobinson
(2013)citeevidencefromacross‐culturalsampleforastrong
positivecorrelationbetweenpoliticalcentralization(inthe
senseof‘jurisdictionalhierarchybeyondlocalcommunity’)and
differentmeasuresofpublicgoodsanddevelopmentoutcomes.
FordifferentAfricanpolitiesBandyopadhayandGreen(2012)
andMichalopoulosandPapaioannon(2013)providedirect
econometricevidenceofpositiveimpactofhistoricalmeasures
process of governance. Similarly, an inclusive economic institution expands economic rights to large numbers of people. 11 The theoretical model of Besley and Persson is that of a contest between an incumbent ruler and a challenger. Aoki (forthcoming) has a model of a more complex 3‐person game, played by the ruler, the challenger and the opportunist (say, the local gentry) who chooses a strategic position between them, applied to interpret the transition out of the pre‐modern states of Tokugawa Japan and Qing China. 15 ofpoliticalcentralizationoncontemporaryeconomic
development.
Whilepoliticalcentralizationreferstoencompassingthe
divergentlocalinterestsanddecisions,amoregeneral
characteristicofastrongandeffectivestateisthecapacityto
makecrediblecommitmentsinthefaceofpressuresfrom
diverseinterestgroups12.Onecandepicttherelationship
betweentherulerandtheruledinsuchastrongstateinterms
ofasimpleprincipal‐agentmodel.
SupposetherulerprovidesapublicinputG(say,some
infrastructuralfacility),whichalongwithL,thelaborputinby
theruledorthecitizens,producesthenationaloutput.The
rulermaximizeshisnetrevenue[τF(G,L)‐G]whereτisalinear
taxrateandFisaproductionfunctionwithusualproperties.
Buttheprincipal/rulercannotobserveorcontrolthelabor
effortputinbytheagent/ruled.ThelatterdecidesonL,taking
τandGasgiven,tomaximize[(1‐τ)F(G,L)+W(1‐L)],where
letussupposetheagenthastheopportunitytousepartofhis
orherlaboreffort(thetotalisfixedatunity)inthe
undergroundorinformaleconomy(whichthelongarmofthe
12 For expositions of the strong state in these terms, see Rodrik (1992), Bardhan (1990), and Bardhan and Udry (1999), Chapter 17. 16 rulerdoesnotreach)atagivencompensationrateofW.Ifmis
themarginalproductoflaborintheFfunction,thefirst‐order
maximizingconditionfortheagentisthengivenby
(1‐τ)m(G,L)‐W=0,
whichdefinesanimplicitfunction,L*(τ,G).Thisequation
suggeststheusualdistortiononlaborsupplyasaresultofthe
taximposition:themarginalproductoflaborislargerthanits
opportunitycost.
Wecannowwritetheprincipal/ruler’sobjectiveas
maximizing[τF(G,L)‐G]withrespecttoτandG,
subjecttoL=L*(τ,G)
Fromthefirst‐orderconditionofmaximizationwithrespectto
τandwithdiminishingmarginalproductivity,itcanbeeasily
seenthatδL*/δτisnegative.Onecanalsoseethatsincethe
rulertakesintoaccountthedistortionaryeffectofthetaxrate
onlaborsupplyhischosentaxrateislessthanthemaximum
possiblerate.
IfthemarginalproductoflaborincreasesinG,whichis
reasonable,thenδL*/δGispositive.Thismeanstherulerwill
inthiscaseprovidemoreofthepublicinputGthanifhewere
17 totakeLasaparameteranddidnottakeintoaccountthe
complementaritybetweenGandL.
Thusinthissimplemodeltherulerofastrongstatemaximizes
hisownobjectivefunctionsubjecttothereactionfunctionof
theruledandsointheprocesstherulerinternalizesthe
economiccostsandbenefitsofhisactionsinaccordancewith
thatreactionfunction.Inotherwordstheruleristakentobea
Stackelbergleader.Incontrast,onecansaythattheweakor
the'soft'stateisaStackelbergfollower;itcannotcommittoa
particularpolicyandmerelyreactstotheindependentactions
oftheprivateactorslikespecial‐interestgroups.Thuswecan
nowsaythatcomparedtothe'strong'state,the'soft'statewill
havetoomuchofundesirableintervention(creatingdistortions
intheprocessofgeneratingrentforthelobbyinggroups),as
theinstitutionaleconomists(aswellastheearlierpublicchoice
theoristsonrent‐seeking)usuallyemphasize.Buttheydonot
usuallynotethatbythesamelogic,the‘soft’statewillhavetoo
littleofdesirableintervention(asinthecaseofprovisionof
publicinputsintheexampleabove),sincethestatedoesnot
takeintoaccountorinternalizetheeffectsofitsownpolicies.
Sothedistinctionbetweena'strong'state(say,inmuchofEast
Asia)anda'soft'state(say,inmuchofAfricaorSouthAsia)is
notnecessarilyintheextentofintervention,butinitsquality
18 (i.e.itdependsinthismodelonifitisthroughdistortionof
laborsupplyorenablingapositivecomplementarityeffectof
publicinput).
Animportantexampleofthestrongstate'sabilitytopre‐
commitliketheStackelbergleaderarisesinthecaseofthe
popularinfant‐industryargumentforprotection.Inthelasttwo
hundredyearsthisargumenthasbeenappliedbythestatein
manycountriesintheearlystagesofindustrialization,witha
fewsuccessesandnumerousfailures,whichhaspartlytodo
withthestrengthofthestateorlackofit.Atthetimewhensuch
protectionisinitiated,bytheverynatureofthisargumentfor
temporaryprotection,itisgrantedforashortperioduntilthe
industrialinfantstandsuponitsfeet.Butinmostcountries
infantindustryprotectioninevitablyfacesthe‘time
inconsistency’problem:whentheinitialperiodofprotection
nearsitscompletionthepoliticalpressuresforitsrenewal
fromthevestedinterestsbecomeinexorable,andinthisway
theinfantindustryinaweakstatecandegenerateintoa
geriatricprotectionlobby(thehistoryofimport‐substituting
industrializationindevelopingcountriesislitteredwith
examplesofthis).
19 IntherecenthistoryofthestrongstatesofEastAsia,however,
therehavebeensomeremarkableinstancesofthegovernment
keepingitscommitment,withdrawingprotectionfroman
industryifitdoesnotshapeupafterthelapseofa
preannouncedduration,lettingtheindustrysinkorswimin
internationalcompetition13.Intermsofpoliticalpre‐conditions
forcommitmentElster(1994)hasarguedthattobecredible
andeffective,commitmentrequiresdemocracy.Thepromises
ofarulerareconsideredmuchmorecredibleifwell‐
establishedproceduresexistforthrowingtheruleroutofoffice
forfailuretokeepthosepromises;thisisacentralthemeof
muchoftheliteratureonconstitutionalpoliticaleconomy.But
someofthosestrongregimesinEastAsiawerenotatthattime
democratic,butovertimetheyhadestablishedreputational
alternativestoformalcommitmentdevices.Ontheotherhand,
indemocracieswhentheso‐calledinfant‐industryprotectionis
prolongedviolatingearliercommitments,thereislittlepopular
pressureorganizedagainstit.Noconnivingleaderfaces
dismissalonthisground,makingconstitutionalprovisionsfor
throwingouttherulerlargelyirrelevanthere.
13 For some examples of this, see Wade (1990). 20 Acloselyrelatedcommitmentissueisthatofenforcingahard
budgetconstraintinpublic‐sectorrunorfundedprojects.A
strongstateshouldbebetteratresistingtheinevitablebail‐out
pressuresfrominterestsinvolvedinfailingprojects.Aweak
stateisunabletomakeacrediblecommitmenttoterminatea
badpublicproject,sincesunkcostsinearlierperiodsof
investmentmakeitsequentiallyrationaltorefinanceprojects
evenwhenonerealizesdownthelinethattheyhadnegative
netpresentvalueinitially14.
Anotherimportantaspectofthequalityofstateinterventionin
EastAsianrecenthistoryhadtodowiththeuse,byandlarge,of
clear,well‐defined,pre‐announcedrulesofperformance
criteria.InSouthKorea,forexample,theheavyinvolvementof
thestateindirectinginvestmentthroughsubsidizedcredit
allocationhasbeenlargelysuccessfulbecauseofitsstrict
adherencetothecriterionofexportperformance.Throughthis
pre‐commitmentdevicethestrongKoreanstatehasusedthe
vitaldiscipliningfunctionofforeigncompetitionin
encouragingquicklearningandcostandqualityconsciousness
amongdomesticenterprises,somethingthathasbeen
conspicuouslyabsentinmanyotherinterventionistregimes
14 For the micro‐foundations of such ‘soft’ financing problems, see Dewatripont and Maskin (1995). 21 (eventhoughtheKoreanstateatleastuntilthe1980’sshared
withthelatterregimesmanyoftherestrictivepolicieson
importsandforeigninvestment).We’llcomebacktothisissue
ofcombiningsectoralcommitmentwithcompetitioninSection
VIonindustrialpolicy.
Somewhatparadoxically,theideaofthe‘weak’statebuffeted
bypressuresfrominterestgroups,whichisastapleofPublic
Choicetheoryandtheliteratureon‘rent‐seeking’bylobbying
groups,hasfamilyresemblancetotheolderMarxisttheoryof
thestateontheotherendofthepoliticalspectrum.But
mainstreameconomistsareoftenunawarethatquitesome
decadesbackthelattertheorywentbeyondthisandadopteda
theorythatemphasizedstatestrength.OrthodoxMarxistsused
toconsiderthestateasatoolof,ordancingtothetuneof,the
dominantinterestgroup,i.e.thecapitalistclass15.Theninthe
1960’sand70’sagroupofneo‐Marxistpoliticalwriters
developedtheideaofwhattheycalledthe‘relativeautonomy’
ofthestate,wherebythestatesupersedesthenarrowor
particularisticinterestsofthecapitalistsandtakes
independentdecisionsandpolicies,eventhoughitbyandlarge
safeguardstheirlong‐termsystemicinterests.(Innon‐Marxist
15 There is clear evidence that Marx himself essentially abandoned this view after 1850. For an elaboration on this see Elster (1985). 22 literatureduringDepressionorfinancialcrisesthissometimes
appearsintheformofacallforthestateto‘savecapitalism
fromcapitalists’)16.Latermanypoliticalsociologistsinand
outsidethisgroupwentevenbeyondthis,andrecognized
severalhistoricalinstancesoftheclearlyvitalroleofthestrong
state.Forexample,Skocpol(1982)refersto‘theexplanatory
centralityofstatesaspotentandautonomousorganizational
actors’.Thereare,ofcourse,seriousconstraintsposedbythe
imperativesofthedominantproprietaryclasses(afterallthey
providethemainsourceofpublicrevenue),butthesewriters
recognizedthattofocusexclusivelyonthoseconstraintsis
oftentoignorethelargerangeofchoicesingoalformulation,
agendasettingandpolicyexecutionthatthestateleadership
usuallyhas.Thestrongstatethusactsneitheratthebehestof,
noronbehalfof,thedominantclasses.
Ofcourseinmostactualsituationsthestateisneithera
StackelbergleadernoraStackelbergfollower;neitherthestate
actorsnortheprivateinterestgroupsusuallyhavethepower
todefineunilaterallytheparametersoftheiraction.Bothmay
16 Marx in Capital vol I, when discussing the English Factory Acts, deduces the necessity of the state as a particular form ‘alongside and outside bourgeois society’, protecting capital from its own ‘unrestrainable passion, its werewolf hunger for surplus labor’. 23 bestrategicactorswithsomepowertoinfluencetheterms,and
theoutcomeofthebargaininggamewilldependontheir
varyingbargainingstrengthsindifferentsituations.Thispoints
toamajorinadequacyoftheprincipal‐agentruler‐ruledmodel
ofearlierinthisSection.Inthatmodel,forexample,thepower
oftherulertocollecttaxesorrentsisinvariantwithrespectto
policiestopromoteproductivity.Butsomeofthelatterpolicies
maychangethedisagreementpayoffsoftheruledifonethinks
ofitasabargaininggame:anincreaseinGmayendup
weakeningthepoweroftherulertoimposeτ—thisisthe
standardstoryoftherulerintroducingroadsorrailways
enablingthepeasantsfromthecountrysidetoeasilycometo
thecityandaggregatetheirprotestagainsttheruler’srent
extractions.
IIBIngredientsofStateCapacity
BesleyandPersson(2011)associateaweakstatewithalackof
statecapacity,particularlyfiscal,legalandmilitarycapacity,to
beabletoprovidepublicgoodsandservices(includinglawand
order).Intheburgeoningliteratureonstatecapacitydifferent
writershaveemphasizeddifferentaspects.Awell‐knownline
ofthinkingassociatedwithTilly(1985)linksthehistorical
24 makingofthefiscal‐militarystateinearlymodernEuropewith
inter‐statewars.Levi(1988)associatedstate‐makingwith
inducingcitizencomplianceinprovidingrevenueand
conscriptsforwar.Others17,however,havesuggestedthatin
morerecenttimesandoutsideEurope,stateshavebeenformed
withoutwars,andtherehavebeencaseswherewarshave
unraveledpre‐existingstates.
InexaminingtheingredientsofstatecapacityEvansandRauch
(1999)stressedtheimportanceofcertainWeberian
characteristicsofthestatebureaucracylikemeritocratic
recruitmentandlong‐termcareerrewardsforofficials.Thereis
alsoacumulativelogicofbureaucraticfunctioning.Along
historyofcontinuousbureaucraticstructureinplacemay
fosterahelpfulbureaucraticculture18orespritdecorpsthat
cancontributetostateeffectiveness.Bockstette,Chandaand
Putterman(2002)havecomputedanindexofstateantiquity
(continuousterritory‐widestatestructureabovethetribal
domainsoverthelasttwomillennia).Itshowsthatamong
developingcountriesthisindexismuchlowerforsub‐Saharan
17 See, for example, Leander (2004), and Taylor and Botea (2008). 18 Analogous to the term ‘democratic capital’ that Persson and Tabellini (2009) have used, one may call this historical experience of bureaucracy a kind of ‘bureaucratic capital’, though one should be careful in not stretching the definition of capital too far. 25 AfricaandLatinAmericathanforAsia,andeveninAsiathe
indexforKoreaisseveraltimesthatforthePhilippines(a
countrythatlackedanencompassingstatebeforethe16th
centurycolonizationbySpain).Across‐countrystatistical
exercise19showsasignificantpositiveassociationbetweenthis
stateantiquityindexandthatfortheruleoflawcurrentlyin
thecountry.
Theeffectivenessofabureaucracy,ofcourse,dependsonthe
compensationstructureandincentives.DalBoetal(2013)
provideexperimentalevidencefromMexicothatnotmerely
higherwagesattracthigher‐qualityrecruitstothegovernment
(evenindifficultlocations),buttheyalsodonot‘crowdout’the
intrinsicnon‐pecuniarymotivations20thatareimportantin
publicservice.
Cornick(2013)hasclassifiedthedifferenttypesofstate
capacityintotechnical,organizationalandpolitical.Technical
capacityisparticularlyrelevant,forexample,inthecontextof
screeningworthwhilepublicprojectsormonitoringthe
deliverytointendedbeneficiariesinsocialprograms.
19 See Bardhan (2005), Chapter 1. 20 Ashraf et al (forthcoming) find experimental evidence in Zambia that financial incentives augment, rather than crowd out, public service motivation. 26 Informationtechnologyhasexpandedtherealmofpossibilities
here.Muralidharanetal(2014)evaluatetheimpactofa
biometrically‐authenticatedpaymentsinfrastructureonpublic
employmentandpensionprogramsinIndia,usingalarge‐scale
experimentthatrandomizedtherolloutofthenewsystemover
158sub‐districtsand19millionpeople.Theyfindthatthenew
systemdeliveredafaster,morepredictable,andlesscorrupt
paymentsprocesswithoutadverselyaffectingprogramaccess.
Theseresultssuggestthatinvestinginsecureauthentication
andpaymentsinfrastructurecansignificantlyaddtostate
capacityineffectiveimplementationofsocialprogramsin
developingcountries.Similarissuesariseinthecontextof
buildingcapacitiesinjudicial,auditingandregulatorybodies.
Organizationalcapacityofastateisoftencrudelymeasuredin
theempiricalliteratureintermsoftax‐GDPratio.But,asis
usuallyrecognized,thisratiomayberelativelyhighinanatural
resourceabundantcountryonaccountoftheresourcerents,
notnecessarilyorganizationalcapacity,orlowinapoor
countrywhereforindependentreasons(say,thenatureof
factormarketimperfections)theinformalsectorislarge.
Organizationalcapacityisalsorelatedtomodesofgovernance.
Forexample,Bandieraetal(2009)show(fromapolicy
experimentassociatedwithanationalprocurementagencyin
27 Italy)thatmuchofthesheerwastageinpublicprocurement
arisesfromsomeorganizationalmodes(‘top‐down’governance
modesinpublicbodiesperformtheworst).Organizational
capacity,ofcourse,variesbetweendifferenttypesofstate
functions.TheIndianstateshowsextraordinarycapacityin
somelargeepisodicmatters,likeorganizingthecomplex
logisticsoftheworld’slargestelectionsortheworld’ssecond
largestCensus.Butitdisplayspoorcapacityin,forexample,
someregularessentialactivitieslikecost‐effectivepricingand
distributionofelectricity.Thisispartlybecauselocalpolitical
considerationsinterfereinmatterslikeunder‐recoveryofcosts
fromalargeandpoliticallysensitivecustomerbase.
Politicalcapacityisoftenlargelyanissueofcommitmentand
resistingpressuresforshort‐termismandsoftbudget
constraints,aswehavediscussedabove.InmanypartsofIndia
andAfricathepoliceandbureaucracyarehighlypoliticized
anddeliberatelyincapacitatedtoserveshort‐termpolitical
goalsofleaders.Insuchcontextsmeasurestoimprove
bureaucraticautonomymayenhanceperformance.Inastudy
of4700publicsectorprojectsimplementedbytheNigerian
civilservice,RasulandRogger(2013)findthatonestandard
deviationincreaseinautonomyforbureaucratscorrespondsto
significantlyhigherprojectcompletionratesof18percent.In
28 general,asAghionandTirole(1997)havepointedoutinthe
contextofallocationofauthorityinevenprivatefirms,in
complexprojectsautonomyforanagent(thebureaucrat)who
maybebetterinformedthantheprincipal(thepolitician)is
calledfor.
IICLimitstogovernment
Aswehavementionedbefore,theinstitutionaleconomics
literatureemphasizesthatthestatehastobestrongbutlimited
forhelpingdevelopment,i.e.notmerelyitshouldbeinsulated
fromthepoliticalpressuresfromspecialinterestgroups,butit
shouldhaveenoughconstraintsonitspowerssothatprivate
propertyrightsaresecurefromits‘grabbinghand’21,andthe
state‐providedinstitutionsforsupportingmarketsand
contractscanoperateunhindered.Forthisvariouskindsof
checksandbalances,includingconstitutionalconstraintson
executivepower,separationofpowers,electoralrules,
independentjudiciary,freemedia,andothersuch
accountabilitymechanismsforthestateleadershiphavebeen
regardedasnecessary.Apartfromsecuringpropertyrights
fromunduestateencroachment,thesechecksandbalances
mayalsolimittheruler’sattemptsatpushingfornarrow‐based
21 This is the title of the book by Shleifer and Vishny (2002). 29 orparticulargroup‐favoringprograms.InBesleyandPersson
(2011)stateswithweakconstraintsaredescribedashaving
ratherweakcompulsionsontherulinggroupstosupply
common‐interestservices.Weshallcomebacktothe
accountabilitymechanismswhenwediscussdemocracyand
developmentinSectionIV.
IIIAcritiqueofthedominantinstitutionalview
Afterourdiscussionofthedifferentelementsofstrengthand
limitstogovernment,bothofwhichareclearlyimportantinthe
processofdevelopment,weshallnowprovideacritiqueof
someofthebasicideasinthisliterature.Letusstartwith
politicalcentralization.AcemogluandRobinson(2012)regard
thisasakey‘inclusive’politicalinstitutionalongwitha
pluralisticdistributionofpoliticalpower.Buttheideathat
politicalcentralizationisanelementofpoliticalinclusiveness
isratherpuzzling.Mosthistoricalinstancesofpolitical
centralization,eitherintheempirestatesofthepastorinthe
modernnationstates(suchasMeijiJapan,Ataturk’sTurkey,
andMao’sChina),havebeenassociatedwithlesspolitical
inclusivenessinimportantrespects.Secondly,andasarelated
point,thereisactuallyadegreeofpotentialconflictbetween
30 thosetwokeypoliticalinstitutionsstressedbyAcemogluand
Robinson.Tobesure,acertaindegreeofpoliticalunificationis
necessarytobuildacoherentinstitutionalframeworkforlong‐
termdevelopmentpolicies.Butcentralizationandpluralism
maynotbealwayscompatible.Pluralisminthesenseofa
socialideathatencouragesdiversityofgoalsandinterestsofa
varietyofsocialgroupscaninhibitcentralizationandsociety’s
collectiveactiononlong‐rundecisionsandprojects.Indiahas
beenamajorexampleofintensivepluralismandpolitical
competitionresulting,aswehavesuggestedabove,ingeneral
inweakpoliticalcentralizationorcollectiveaction.This
suggeststheneedformoreattentiontobepaidinthis
literaturetothetheoryofthedeterminantsofcollectiveaction.
Thirdly,economicinclusionintheworldofAcemogluand
Robinsonrequiressecurepropertyrights.Butpolitical
inclusion,withitspluralisticdistributionofpoliticalpowerand
broadpopularparticipation,maynotalwayssecurethe
propertyrightsofthefewagainstthenumerousencroachers
andsquattersoragainsthightaxes.Similarly,intheworldof
BesleyandPerssonallgoodthingsgotogether(likepluralism
andsecurityofpropertyrights),andthustheyignorethe
possibletensionbetweenthosefactors.Or,totakeanother
example,theruleoflaw—partofpoliticalinclusion—isoftenan
31 instrumentusedtoprotectthepropertiedfromthe
propertyless,thusenforcingeconomicexclusion22.English
enclosurelawsfamouslyturnedthepoorusersofthevillage
commonsintopoachers.Ofcourse,theruleoflawmaybe,on
balance,averygoodthing,evenifitissometimesatoddswith
economicinclusion.23
Thereisalsoadefinitionalproblem.AcemogluandRobinson
saytheywill“refertopoliticalinstitutionsthataresufficiently
centralizedandpluralisticasinclusivepoliticalinstitutions”
22 “Civil government, so far as it is instituted for the security of property, is in reality instituted for the defense of the rich against the poor, or of those who have some property against those who have none at all”—this is a quote not from Marx, but from Adam Smith in the Wealth of Nations. 23 The nature of the tension involved in the rule of law is captured well in the nuanced conclusion of Whigs and Hunters (1975), by the Marxist historian E. P. Thompson: “We reach, then, not a simple conclusion (law = class power) but a complex and contradictory one. On the one hand, it is true that the law did mediate existent class relations to the advantage of the rulers . . . . On the other hand, the law mediated these class relations through legal forms, which imposed, again and again, inhibitions upon the actions of the rulers. . . . In a context of gross class inequalities, the equity of the law must always be in some part sham. . . . We ought to expose the shams and inequities which may be concealed beneath this law. But the rule of law itself, the imposing of effective inhibitions upon power and the defense of the citizen from power’s all‐intrusive claims, seems to me to be an unqualified human good.” 32 (italicsadded).Thisisunsatisfactorywithoutanindependent
measureofsufficiency,since“sufficiently”leavesthedooropen
forcircularity.Clearlywedonotwanttocallinstitutions
‘politicallyinclusive’whentheyareinclusiveenoughtoyield
development,andstillclaimthatinclusiveinstitutionsfoster
development.
Historically,however,Englandhasindeedbeenasuccessful
casewherepoliticalcentralizationandpluralismhavefitted
together.But,contrarytoNorth,Weingast,Acemogluand
Robinson,economichistorianslikeEpstein(2000),Clark
(2007)andAllen(2009)haveexpresseddoubtsiftheeconomic
successofEnglandcanbemostlyattributedtothe
constitutionalchangesthatcamewiththeGloriousRevolution.
EvensomeofthemorerecentdefendersofNorthandWeingast,
likeCox(2012)andPincusandRobinson(2011),agreethat
neithercostofcapitalnorenforcementofpropertyrights
improvedsignificantlyafterthatRevolution,eventhoughit
representsanimportantconstitutionalwatershed(Cox)oran
institutionalchangeshiftingthebalanceofpowerfromtheking
tothenewmanufacturingclasses(PincusandRobinson).Nor
33 diditleadtoaparticularlylimitedgovernment:infacttaxes
andpublicdebtincreasedsharplyaftertheRevolution24.
Onthestate’sabilitytocommit,itisimportanttokeepinmind
thatinsomecasesofstateeffectivenesscommitmenthasnot
beennecessary;aswehaveindicatedbefore,reputational
substitutesforformalcommitmentdevicesestablishedovera
periodhaveworked.Moreimportantly,therearecostsof
commitment,sayintermsofsacrificeofflexibilityindealing
withchangingtechnicalandmarketconditionsandin
correctingwrongdecisions.Aspartoftheflexibility,some
politicalsociologists,likeEvans(1995),haveemphasizedthe
needforaWeberianbureaucraticstructurewithmeritocratic
recruitmenttobecombinedwithchannelsofdeliberative
processesinvolvingtheimportantpoliticalstakeholdersinthe
developmentprocess—whathecalls‘embeddedautonomy’
prominentinhisaccountofSouthKorea.Butweknowthatnot
allstakeholderswereincluded‐‐theautonomousKoreanstate
24 Outside England, across early modern Europe Stasavage (2011) cites evidence how the government’s ability to raise long‐term credit depended on assemblies where merchant representatives looking after lenders’ interests had some political control over fiscal affairs. Dinsecco (2011) show how across countries in Europe in the period 1650‐1913 political centralization combined with parliamentary oversight of the executive helped develop fiscal structures. 34 forsomedecadeshadalsoensuredpoliticalsuppressionofthe
labormovementsothattheprofitsofthebusinessstakeholders
werenotthreatenedtoomuch.Inadifferentpoliticalcontext,
theIndianexperiencehasshownhowthepoliticalprocesscan
erodethecommitmentcapacityofameritocraticallyrecruited
bureaucracy,particularlyaspoliticianscanmanipulate
transfersandpromotionofofficers.25
Ingeneralourdiscussionofpoliticalcapacityintheprevious
Sectionneedstobelinkedwiththeabilitytoform‘socialpacts’
amongimportantpoliticalstakeholdersandthenatureof
distributionofpowerandpoliticalcoalitions.TheKorean
politicalcoalitionintheearlydecadesofdevelopmentinvolved
atightintegrationbetweenamilitarybureaucracyand
conglomeratebusiness,whichwasclearlyoutofboundsforthe
elitetoaccomplishindemocraticIndia.Butwithina
democraticframeworktherelativeweaknessofstatecapacity
inIndiahasbeenmoreasymptomoftheunderlyingpolitical
25 For evidence on manipulative transfers of Indian administrative officers, see Iyer and Mani (2012). A randomized experimental study in the police department in Rajasthan, India by Banerjee et al (2012) showed that a freeze on transfer of police staff increased police effectiveness. 35 difficultyoforganizingcollectiveactionforthelongterm26
(evenamongitsdividedelite),notbecausethecountrylacks
administrativelycapablepeople.Consistentwiththetheoryof
collectiveaction27,India’slargeheterogeneouspopulation,
fragmentedpolity,andhighsocialandeconomicinequality
makeithardtoagreeonlong‐termcommongoalsand,even
whenthelatterisachieved,togetitsacttogetherinpursuitof
thosegoals.Moreover,inrecentyearsinmanydeveloping
countries(includingIndia)short‐termconsiderationshave
sometimespredominatedintheinterestconflictsbetween
rentierandentrepreneurialcapitalism‐‐asthepriceofland
(andothernaturalresources)shotupwitheconomicgrowth,a
growingnexusbetweenpoliticiansandrentierinterestslike
realestatemagnates,buildersandcontractorshasoften
workedtounderminestatecapacityforgoodgovernanceand
long‐termproductiveenterprise.Ingeneral,dividedsocieties
andpolitieswillhaveweakercommoninterests,andasBesley
andPersson(2011)havepointedout,insuchcasesthe
26 For an analysis of the difficulty of collective action in India in terms of the large numbers and heterogeneity of influential socio‐economic groups, see Bardhan (1984). 27 See, for example, Bardhan (2005) chapters 10 and 11 for a general theoretical and empirical analysis of collective action, in particular the impact on it of inequality. 36 incentivetoinvestinstatecapacitywillbeless28.Incontrast,in
thepost‐Wardecadesinnorth‐eastAsiaandnorth‐west
(particularlyNordic)Europerelativesocialhomogeneityand
lessunequaldistributionofwealthandhumancapitalmay
havemadeitsomewhatlessdifficulttoenlistthesupportof
mostsocialgroupsinmakingshort‐runsacrificesand
coordinatingongrowth‐promotingpolicies.Thisalsomeans
thatintermsofourearlierdiscussionthe‘strength’ofthestate
isultimatelysustainablebythebreadthofsupportinthe
generalpopulation.
Thesemattersareobviouslyhelpedif,assomecultural
theoristspointout29,thepredominantcultureinsocietyis
‘collectivist’(whenindividualsinternalizegroupinterests),
whichisprominentinsomedescriptionofEastAsiansocieties,
asopposedto‘individualist’.Goingintotheculturalissuesis
beyondthescopeofthispaper,exceptonlytonotethatthe
issueofcultureisawelcomereminderthatsomeinstitutionsof
28 For some cross‐country evidence on the relation between ethno‐
linguistic fragmentation and governance, see Alesina et al (2003). The experimental evidence for Uganda in Habyarimana et al (2007) suggests that ethnic homogeneity facilitates coordination on public goods provision. 29 On this see some references cited in Gorodnichenko and Roland (2013). 37 statecapacitymaynotbeeasilytransplantedinanalien
culturalcontext.
Animportantbutcomplicatedquestionrelatingtothe
prevailingpoliticalcoalitionandhencethepoliticalcapacityof
thestate,seldomdiscussedinthiscontext,isitslinkwith
globalization,evenapartfromtheusualconstraintsonstate
powerinaglobaleconomyposedbyvolatilecapitalflowsand
internationalcreditratings.Ontheonehand,international
competitionandintegrationmaystrengthendomesticpolitical
accountabilityprocessesandmakethepoliticalcoalition
somewhatmorebroad‐based–‐historically,Acemoglu,
Johnson,andRobinson(2005)showthattheriseof
internationaltradeintheAtlanticeconomiesduringtheearly
modernperiodpromotedademandforinstitutionalreforms;
inmorerecentperiodstheEuropeaneconomicintegrationhas
beenreportedtohaveimprovedsomegovernanceinstitutions
inEurope’ssouthernandeasternperiphery.Ontheotherhand,
muchdependsontheinitialconditions,thetypeofgoods
internationallytradedandthenatureofpoliticalandeconomic
competition.Inmanyhistoricalcasestradeexpansionin
naturalresource‐intensiveproducts(likeoil,sugar,bananas,
timber,diamonds),forexample,hasstrengthenedthepolitical
powerofplantationelitesandotherlargeexporterswhoraised
38 domesticbarrierstoentryandpromotedoligarchicdominance
overthestate.30Morerecently,globalizationinthecontextof
asymmetricinternationalmobilityofcapitalrelativetolabor
hasweakenedlabororganizationsandpracticesinmany
countriesandalteredthepoliticalequilibriuminfavorof
capital31.Thefallincustomsrevenueandcapitaltaxesina
moreopeneconomymayalsoaffectstatefiscalcapacity.
IVPoliticalDecentralizationandLocalAccountability
Therearetrade‐offsbetweencommitmentstructuresand
accountabilityprocesses.Politicalcentralization,forexample,
oftenleadstodistantinsulatedbureaucraciesthatare
insensitivetolocalneedsandconcernsandthatfailtotaplocal
information,initiativeandingenuity.Thecentralgovernment,
ofcourse,mayalsocareaboutwinningelectionslocally,but
electoralsanctionsareusuallymoreeffectiveatthelocal
elections,thanatnationalorevenprovincialelections,sinceat
thelatterforumsmultiplicityofelectoralissuesdilutes
responsibilitycomparedtothenarroweragendaoflocal
elections32.Asopposedtotheinter‐jurisdictional
30 For a recent survey of these issues see Nunn and Trefler (2014), section 5. 31 For a discussion of these issues see, for example, Rodrik (2011). 32 See on this Seabright (1996). 39 encompassingadvantageofcentralization,therearemanywho
argueforthelocalaccountabilityandotheradvantagesof
decentralization—theseincludepeer‐monitoring,easeof
citizenparticipationandrelativetransparencyofdecision‐
makingandprogrambenefitsatthelocallevel.Brazilnowhasa
ParticipatoryBudgetary(PB)process(withcitizens’direct
inputinbudgetingandinvestmentpriorities)inasubstantial
fractionofmunicipalities.Fromapaneldatasetfromall
Brazilianmunicipalitiesover1990‐2004,Gonçalvez(2014)
showthatmunicipalitiesadoptingPBincreasedspendingon
healthandsanitationsignificantlymorethanthosethatdidnot,
andthisalreadyhadsizeableeffectsonoutcomeslikeinfant
mortality.
Contrarytotheearlierfiscalfederalismliterature,themore
recentliterature33ondecentralizationanddevelopmenthas
pointedoutthepolitical‐economyandinstitutionalissues(like
33 We are somewhat cryptic in our discussion here of the growing literature, as we want to confine ourselves only to issues that are directly relevant in the contrast with the earlier discussion of political centralization that is supposed to be associated with better state capacity. The reader interested in more detail may refer to surveys of this literature in Bardhan (2002) and Mookherjee (2014), and to case studies from developing countries in different continents in Bardhan and Mookherjee (2006). 40 malfeasance,rent‐seeking,shirkingandabsenteeismandother
agencyproblemsofgovernance)involvedinpolitical
centralization.Decentralizationalsoenablescompetition
amongregionalgovernmentsformobileprivatecapital,which
maykeepthemontheirtoesandoffexcessiverentextraction.
Insomedevelopingcountries—say,Brazil,SouthAfricaand
Indonesia‐‐decentralizationhasbeenanintegralpartofthe
democratictransitionitselfandhassignificantlyaffectedthe
structureofsubsequentdevelopmentpolicy,particularlyinthe
deliveryofsocialservices.
Onthecontrary,decentralizedgovernanceisoftenproneto
localcapturebyacollusiveelite(landedoligarchyinsome
agrariancontexts),proximitymakingcollusioneasier,asJames
Madisonworriedmorethan200yearsbackintheFederalist
Papers.Thewell‐knownsafeguardinthefiscalfederalism
literatureintheformoftheTiebout(1956)mechanism,by
whichfullyinformedandmobilecitizensvotewiththeirfeetin
responsetodifferentialpublicperformance,isoflimited
applicabilityinthecontextofmanypoorsocieties(largelyon
accountofvarioustypesoffactormarketimperfections).The
41 empiricalliterature34oncapturesuggeststhatthepre‐
conditionsoflocalcapturedependon
(a) initialsocialandeconomicinequalityinthelocalarea
(b) degreeofpoliticalcompetitioninthearea
(c) howregularandwell‐functioningarethedeliberative
processesoflocaldemocracy(publichearings,townhall
meetings,etc.)
(d) howfreeistheflowofinformationaboutthe
functioningofgovernments,andabouttheentitlements
andallocationsatthelocallevel‐‐‐heretheimportance
ofinformationcampaigns(andmediaexposure)about
resourcesallocatedtolocalgovernmentsandhowthey
havebeenspentandaudited(ifthereareprovisionsof
periodicindependentauditsofaccounts)areclear.
Apartfromtryingtoimprovemattersrelatingto(a)‐(d),
attemptsatmitigationoftheeffectsofcapturehaveincluded
politicalreservationofseatsatlocalcouncilsandtheir
headshipsfordisadvantagedsocialgroups—likemandatory
reservationsforlowercastes,tribesandwomeninIndia.There
34 See, for example, Galasso and Ravallion (2005) for Bangladesh, Araujo et al (2008) for Ecuador, Ferraz and Finan (2009) for Brazil, Bardhan and Mookherjee (2010) for West Bengal, India, Bjorkman and Svensson (2010) for Uganda, and de Janvry et al (2012) for Brazil. 42 isnowagrowingempiricalliteratureonitsimpactontargeting
ofbenefits,startingwiththepapersbyChattopadhyayand
Duflo(2004)whichfoundsignificantpositiveeffectsof
reservationofthepositionofvillagecouncilheadforwomen.
Thesubsequentliterature,includingourownwork—see
Bardhan,Mookherjee,andTorrado(2010)andtheliterature
citedthere‐‐hasnotconfirmedthisforthecaseofwomen,
althoughthereisevidenceforpoliticalreservationforsome
ethnicminoritygroupsinimprovingtargetingofsomebenefits.
Ofcourse,evenapartfromimmediatebenefitstargeting,the
moreimportantconsiderationmaybethatpoliticalreservation
mayhaveeffectsinempoweringandconfidence‐buildingin
potentialleadersfromdisadvantagedgroupsoveralonger
period,asshowninthecaseofwomenbyBeamanetal(2009).
Bhavnani(2009)inanexperimentalstudyofthelong‐term
impactofwomen’sreservationsinmunicipalcouncilsin
Mumbaifindsthatwomen’schancesofwinningwardelections
weremorethanquintupledbyreservationseveninelections
whenthereservationswerediscontinued.Thewaytoreconcile
thecontrastingempiricalfindingsinthisliteraturemaybeto
recognizetheinitialhandicapstheleadersfromdisadvantaged
groupsinreservedpositionssufferfrom,particularlyinterms
ofinformation,networks,contactswithhigher‐upauthorities
43 andadministrativeexperience,inallofwhichthoseleaders
maygainovertimeandgenerateinthemselves(andothers)
confidenceintheirleadership.
Apartfromcapturedistortinglocalgovernancewithina
community,decentralizationcanalsohavemorewidespread
adverseeffects,if(a)regionalcompetitionleadstoa‘raceto
thebottom’35,provincialprotectionismcorrodingthefederal
state,ashasbeenthecaseinRussiaimmediatelybeforePutin’s
centralizationofpower36‐‐broadlysimilaraccountsofrent
extractionbyprovincialpoliticiansinArgentinaareavailable
inGervasoni(2010);or(b)ifitaccentuatesregionalinequality
onaccountofvaryinglocalendowmentsandinstitutionsand
richerareashavingmorecloutwithauthoritiesabovewho
allocateresources37.InBoliviaandSouthAfrica,however,
35 A different example of adverse effects of jurisdictional competition is given by Burgess et al (2012), who show evidence of how an increase in the number of political jurisdictions in Indonesian decentralization has been associated with increased deforestation. 36 See, for example, Cai and Treisman (2004) and Slinko et al (2005). 37 Galiani, Gertler, and Schargrodsky (2008) study the distributional effects of decentralization across municipalities on educational quality in Argentine secondary schools, and find that schools in poorer municipalities fell further behind, while those in better‐off areas improved. 44 decentralizationimprovedregionalequalitybyimprovingthe
criteriaofallocationoffederaltransferstoregions38.
Inmanyareasthereisalsoaconsiderablegapbetweendejure
anddefactodecentralization.Higherlevelgovernmentsoften
devolveresponsibilitiesforsocialservicestothelowerlevel,
withoutcorrespondingdevolutionoffundsorpersonnel—the
notoriousbutfrequentcaseof‘unfundedmandates’.Ingeneral
thepoliticalandinstitutionalcontextandthedesignand
implementationofdecentralizationvarywidelyacrossareas,
anditisnotsurprisingthatthelimitednumberofempirical
studiesontheeffectsofdecentralizationindifferent
developingcountriesshowmixedresults(evenafter
accountingfortheendogeneityofthedecentralization
decision).Itisalsothecasethatwhileinsomematterslocal
knowledgeandinformationworkinginfavorof
decentralizationareimportant(asinfindingappropriate
technologyorintappingindigenousnaturalandhuman
resources),inothermatterssupra‐localexpertiseismore
important(forexample,onissueslikepublichealthand
sanitation,riversystemsorwaterqualityoroncurriculum
developmentforschoolsorapplicationofmethodsof
38 See the chapters on Bolivia and South Africa in Bardhan and Mookherjee (2006). 45 monitoringlikeauditing).Agglomerationeconomiesalsowork
sometimesindrainingawaytalentfromlocalgovernmentsto
centralbureaucraciesandprofessions,andsosupra‐local
expertisemaycometoweighmore.Accordingly,comparative
advantageofdecentralizationwillvaryfromcasetocaseand
overtime.
Inthedebatesoncentralizationvs.decentralizationitis
importanttonotethatChina,arecentdramaticallysuccessful
stateinachievinghighgrowth,hasbeeninthisrespecta
uniquehybridinstitutionalcase,withahighdegreeofpolitical
centralization,meritocraticrecruitmentandpersonnelcontrol
underanauthoritarianParty,atthesametimecombinedwitha
greatdealofregionaldecentralization,competitionand
experimentation.Xu(2011)hasdescribedthesystemas
‘regionallydecentralizedauthoritarianism’,incontrastwith
mostauthoritariansystemsthatarehighlycentralized.
Particularlyinthefirsttwodecadesaftereconomicreform
started,decentralizationhashelpedlocalbusiness
developmentinruralChinathroughregionalcompetitionanda
somewhathardbudgetconstraintenforcedonfailinglocal
businessenterprises.Theseweretheessentialsoftheso‐called
market‐preservingfederalism—see,forexample,Qianand
Weingast(1997)andQianandRoland(1998).But,asRodden
46 andRose‐Ackerman(1997)havepointedoutinageneral
critiqueofmarket‐preservingfederalism,theinstitutional
milieudetermineswhetherpoliticalleadersofalocal
governmentrespondpositivelytohighlymobileinvestorsor
insteadpaymoreattentiontothedemandsofstrong
distributivecoalitionsdominatedbylessmobilefactors.Itis
possiblethatthehighlyegalitariandistributionofland
cultivationrightsfollowingde‐collectivizationofagriculturein
ruralChinameantthatthelocalcapturebyoligarchicownersof
immobilefactorslikeland,familiarinmanydeveloping
countries,wasunimportantforChina,atleastintheinitial
yearsafterreform.
ButtheChineseauthoritariansystemwithoutsufficiently
independentsourcesofcollectinginformationhasfromtimeto
timemadecatastrophicmistakes(GreatLeapForward,Cultural
Revolution,etc.inthepast),andthelackofinstitutionsof
accountabilitymakescoursecorrectioneveninthecaseof
lessermistakesdelayedanddifficult.Similarly,theabsenceof
checksandbalancesinChinaallowsthetightpolitical‐business
relationsbothatthecentralandthelocallevelstoeasily
degenerateintomassivecorruptionandabuseofpower
(resultinginrecentyearsinhighinequality,arbitraryland
grabs,unsafeworkingconditionsandfoodsupplychainsand
47 toxicpollution).Therearealsofewerchecksonover‐
investmentandexcesscapacityinstate‐controlledorpolitically
connectedfirms.Allthisbringsustothegeneralquestionofthe
relationshipbetweendemocraticgovernanceand
development,anissuethathasbeenprominentinthe
discussiononthecomparativeperformanceofthetwolargest
developingcountries,ChinaandIndia39.Inviewoftheclearly
superiorover‐alleconomicperformanceofChinacomparedto
Indiaoverthelast3decadesorso, ithasbeentheconvictionof
theeliteinChinaaswellassomeoutsideChina(oftentermed
as‘theBeijingConsensus’)thatauthoritarianismisgoodfor
development.AswediscussinthenextSection,thisisafalse
andperniciousgeneralization,butoneshouldbecarefulinnot
jumpingtotheequallyfacilebutoppositegeneralitiesabout
theunambiguouslypositiveeffectsofdemocracyon
development.
VDemocracyandDevelopment
Theliteratureondemocracyanddevelopmentisbynowlarge,
andwewanttowadeintoonlyasmallpartofitthatisrelevant
39 For a detailed discussion of this relationship in the context of China and India, see Bardhan (2013), Chapter 10. 48 toourdiscussionofthetrade‐offbetweenpolitical
centralizationofpowerandaccountability.Iagreewith
AcemogluandRobinsonthateconomicperformancecrucially
dependsonpoliticalstructures,butthepoliticalandthe
economicinstitutionsmaysometimesco‐evolveandtheremay
bestrategicinteractionsbetweenthemwhichmaynotallowus
tounambiguouslyprivilegeoneovertheother.Inparticular,
therelationshipbetweendemocracyorpluralism(politically
‘inclusive’institutionsingeneral)anddevelopmentisactually
rathercomplex,acomplexitynotcapturedintheusualcross‐
countryregressionsintheliteratureonthesubject.AsDurlauf
(2005)andBrockandDurlauf(2001)indicate,thedemocracy‐
growthrelationintheseregressionsisnotrobust,the
identificationstrategiesarenotcredible,anddifferentpapers
intheliteraturehavedifferentresultsbecauseofdifferent
choicesofcontrolvariablesandotherformsofmodel
uncertainty.Forourpresentpurposewhatisimportantisthat
theregressionsdonothelpusinunderstandingthemechanism
inthecomplexprocessinvolved.
Democracyis,ofcourse,slowbutitsdeliberativeandelectoral
processesmanagesocialconflictsbetterandlendsome
stabilizinglegitimacytopolicydecisionsthatgrowoutofthe
49 ‘conditionalconsent’ofcitizens40‐‐‐apartfromenriching
individualautonomyandfreedom,participationand
deliberation,whichsomewouldregardasanimportantpartof
developmentitself41.Democracyalsotendstocurbtheexcesses
ofcapitalismandthusrenderdevelopmentmoresustainable,
by,forexample,encouragingsocialmovementsaswatchdogs
againstenvironmentaldespoliation.Totheautocratpoweris
toovaluabletolose,andhenceviolenceandtheattendant
potentialshatteringofeconomicstabilityandthesocialfabric
areneververyfaroff.Itisalsogenerallythecasethatthe
varianceineconomicperformanceislargeramongautocratic
regimesthanamongdemocraticones,asthechecksand
balancesinthelatterweedoutsomeoftheworstleadersand
outcomes42.
Ontheotherside,therearemanycasesofelectoral
democraciesfunctioningwithoutregularinstitutionalized
proceduresofaccountability,andtherearesomeobviouscases
40 This is emphasized by Levi (2006). 41 See, for example, Sen (1999). 42 This may not always be the case when weakly institutionalized democracies perform quite badly. On the other hand, even in the case of the best autocrats there is no inherent institutional guarantee that they will continue to be so. 50 of‘illiberaldemocracy’43.Eveninliberaldemocracies
accountabilityprocessestothegeneralpublicareseriously
underminedbytheinfluenceofmoneyprotectingand
promotingtheinterestsofthewealthyandpowerful.Besides,
whileinanalogywithmarketcompetitionpoliticalcompetition
isusuallyassumedtobeagoodthing,therearecases,aswe
havenotedbefore,whencompetitioncanleadtoaracetothe
bottom44.Withoutpoliticalcentralizationpoliticalcompetition
underdemocracycanencouragecompetitivepopulismor
short‐termism:comeelectiontime,Indianpoliticians,for
example,oftenpromisefreeelectricityandwater,whichcan
wrecktheprospectsoflong‐terminvestmentsinthem,orbank
loanwaiversforfarmers,whichcanwreckthebankingsystem.
Manyscarceresourcesarethusfritteredawayinshort‐run
subsidiesandhandouts,whichhurtthecauseoflong‐runpro‐
poorinvestments(likeinroads,irrigation,waterand
43 For a popular‐level discussion of these cases see Zakaria (2004). It also involves a definitional issue: in our judgment democracy should not be identified with just regular elections even where the incumbent has a chance of being defeated, but some accountability processes in day‐to‐day administration and respect for basic human rights should also be essential parts of the definition of democracy. 44 This is related to the proposition in Persson et al (1997) that separation of powers can make citizens worse off by creating a common‐pool problem in public decision‐making. 51 electricity).Bates(2008)givesexamplesfromAfricahow
competitivedemocracycouldinducetherulingpartytouseits
powertolootthepublicresourcesforshort‐termgain.Bardhan
andYang(2004)constructsomemodelstoshowthatwhile
politicalcompetitioncanyieldallocativebenefitsforthepublic,
itcanalsogenerateaggregatewelfarecostsbyconstrictingthe
setofpoliticallyfeasiblepublicinvestments.Ofcourse,insocial
servicedeliverypoliticalcompetitioncanworkbetterwhen
executiveactioniseasilyverifiable(forexample,verifiabilityin
theloweringofschoolfeesiseasierthanintheimprovementof
schoolquality).Consistentwiththis,HardingandStasavage
(2012)citeevidencethatinAfricademocracieshavehigher
ratesofschoolattendancethaninnon‐democracies.Fujiwara
(2014)findsthatchangesinvotingtechnologyinBrazilthat
enabledthepoliticalparticipationofthepoorandtheilliterate
resultedingreaterhealthspendingandimprovedchildhealth
outcomes.
Insomecases,insteadofprovidingbroad‐basedpublicgoods,
thepoliticalleaderscanworkoutaclientelisticsystemfor
dispensingselectivebenefits(privateorclubgoods)atleastto
agroupofswingvoterstowinelections—anecdotesonthisare
easytofind,butfortheoreticalandempiricalanalysesofsuch
systems,seeBardhanandMookherjee(2012),andRobinson
52 andVerdier(2013).InahouseholdsurveyinruralWestBengal
Bardhanetal(2009)findevidencethatvotingbehavioris
significantlyinfluencedmorebyrecurringbenefitsarrangedby
localgovernments(likesubsidizedcreditoragricultural
inputs,employmentonpublicworks,helpinpersonal
emergencies,etc.)thanbyevenlargeone‐timebenefits(like
landreforms,orprovisionofhousesandlatrines),suggesting
politicalclientelism.Also,insituationsofsocialandethnic
heterogeneitywherevotemobilizationgetsorganizedon
sectarianlines,theremaybemoreselectivepatronage
distributionandlesspoliticalinterestininvestingingeneral‐
purposepublicgoods.Wantchekon(2003)conductedafield
experimentinBenininwhichpoliticalcandidateswere
persuadedtorandomlyvarytheirelectoralplatformsbetween
aclientelisticprogramprovidingcashtospecificethnicgroups
andadevelopmentallocalpublicgoodorientedprogram—the
formerplatformendedupgeneratinghighervotes.Such
politicalclientelism,evenwhilehelpingsomepoorpeople,can
harmthecauseofgeneralpro‐poorpublicinvestments.
FujiwaraandWantchekon(2013)citesomeexperimental
evidencefromBeninthatshowshowinformedpublic
deliberationintownhallmeetingscanreduceclientelism.
53 Theincidenceofclientelismmayingeneraldependonthe
stageofdevelopment.Asincomesriseandmarketsdevelop,the
needforpoliticalconnectionsforjobsorpersonalizedhelpmay
decline(thoughratherslowly,asmanycasesinsouthernItaly
suggestevennow).Withthespreadofeducationand
information,theimportanceofthelocalvotemobilizerwho
providesselectivebenefits(theproverbialwardcaptainin
Chicagoprecincts)diminishes,herdingofvotersbyethnicityor
regionalaffinitymayalsodecline.Withthedevelopmentof
transportandcommunication,thereductionofterritorial
insulationallowsforsupra‐localaffinitieswhichmaydiminish
theimportanceofthelocalpatron.
Myerson(2013)hasstressedhowdemocraticdecentralization
canimproveopportunitiesandincentivesforlocalleadersto
buildreputationforusingpublicfundsresponsibly,andmay
evenreducepoliticalentrybarriersfortheminnational
elections.Someofthesereputationincentiveslinkedwithlocal
developmenthavebeenbuiltintothecareerpromotion
schemesinChina,evenwithoutdemocracy.Ingeneral,onthe
relationbetweenpoliticalsystemsanddevelopmentagreat
dealofinstitutionalconditionsandcontingenciesareinvolved,
andunderthecircumstancesitiseasytoseethatdemocracy
(orthelackofit,forthatmatter)isneithernecessarynor
54 sufficientforeconomicdevelopment.Atthesametime,going
backtotheChina‐Indiacase,onecannotdenyabasic
comparativepoliticalfeaturerelatedtothesourceof
legitimacy.ThepragmaticandprofessionalChineseleadership
oftenshowtheabilitytotakequickanddecisiveactionsmore
thantheelectedIndianleaders,butinthefaceofcrisisor
politicalshockstheformeroftenover‐react,suppress
informationandactheavy‐handedly,whichraisethechancesof
goingofftherailsorthedangerofinstability.Foralltheir
apparentmessinesstheIndiandemocraticgovernmentsarein
adeepersenselessfragile,astheydrawtheirstrengthfrom
legitimacyderivedfromdemocraticpluralism.
VITheRoleoftheStateinResolvingCoordinationFailures
Theinstitutionaleconomicsliteraturepreoccupiedwiththe
capacityofthestatetosecurepropertyrightsleavesoutavery
importantaspectofthenecessarystatecapacityinearlystages
ofindustrialization,thatofresolvingcoordinationfailures,
whichtheearlydevelopmentliteratureusedtoemphasize.In
thisrespecttheEastAsianstatehasbeenhistorically
distinctive.EastAsiangrowthwasnotsimplyaproductofthe
statesecuringpropertyrightsandprovidingsomemarket‐
55 supportinginstitutions.Analogoustothe‘varietiesof
capitalism’literaturewhereHallandSoskice(2001)pointedto
thequalitativedifferencesbetweenAnglo‐American‘liberal
marketeconomies’andthe‘coordinatedmarketeconomies’of
GermanyandScandinavia,itmaybeimportanttobringoutthe
varietiesofdevelopmentalrolesofthestateintermsofliberal
marketsupportvis‐a‐viscoordination.
Thelargepoliticalsociologyliteratureontheso‐called
developmentalstateofEastAsiaissuggestiveanddescriptive
but—withexceptionslikeEvans(1995)‐‐notalways
analyticallyclearaboutthemechanismsinvolved.Aokietal
(1997)havemorefruitfullydescribedthedealbetweenthe
stateandlargebusinessconglomeratesinSouthKoreaand
Japanasassuringsomeformof“cooperation‐contingentrent”
thatwillaccruetothelatterinexchangeofplayingaroleinthe
statecoordinationefforts.Inthisperspective45,economic
developmentinthesecountrieswasnotfoundedjuston
institutionsthatsecurepropertyrightsandenforcecontracts—
nodoubtveryimportantforlong‐terminvestment—butona
statethathelpedtofostercoordination,particularlyin
financialmarketsinearlystagesofindustrialization,facilitate
45 This is consistent with the well‐known 1993 World Bank Report on The East Asian Miracle. 56 interdependentinvestmentdecisionsinorchestratednetworks
ofproducersandsuppliers,establishpublicdevelopment
banksandotherinstitutionsforlong‐termindustrialfinance,
andnudgefirmstoupgradetheirtechnologyandmoveinto
sectorsthatfitwithanationalvisionofdevelopmentgoals.
Enablingandencouragingsuchcoordinationisfundamentally
differentfromprotectingpropertyrights.
Therecentliteratureonindustrialpolicyhasthevirtueof
recognizingthis.Butindustrialpolicyhastobedissociated
fromtheold‐fashionedsupportforblanketprotectionist
policies,whicharenowparticularlyill‐suitedtoindustriesthat
canthriveonlyintheworldofglobalsupply‐chainnetworks.
HausmannandRodrik(2003)haveemphasizedthatindustrial
policyshouldhavelesstodowiththeimpossibletaskof
‘pickingwinners’—theusualargumentagainstindustrial
policy‐‐butmorewithawayof‘discovering’acountry’srange
ofpotentialcomparativeadvantageinacoherentwayina
worldofuncertaintiesandmissinginformation.Therewillbe
privateunderinvestmentinanysuchdiscoveryprocess,since
thepositiveresultsarelikelytobeappropriatedbyothersin
thebusiness.Stateinvolvementinhelpingandcoordinating
suchexplorationintoneweconomicactivitiesinevitably
impliesmanytrial‐and‐errorexperiments,someofwhichare
57 boundtofail.Themainstatecapacityissuehereisnotthatof
pickingwinnersbutmoreoflettinglosersgo,whichis
politicallydifficult,aswehavediscussedearlieronthe
questionofsoftbudgetconstraints.
Aswithmanyotherimportantdevelopmentpolicyquestions,
theunderlyingissuesinvolvedhere—capitalconstraintsand
creditmarketimperfections,learningspillovers,lumpy
interdependentinvestmentsrequiringcoordination‐‐areeasy
toconceptualizebutdifficulttoquantify46.Onlearning
processesinnewexportableactivitiestherehavebeenmany
casestudies,evenoutsideEastAsia.Sutton(2012)showshow
intheIndian(asintheChinese)carindustrywithinafewyears
afterthearrivalofinternationalcarmakers,thedomestic
producersofcarcomponentsinIndiaattained‘worldclass’
standards(asmeasured,say,byconventionaldefectratesin
thepartssupplied).Theprocessinvolvedthestateatthattime
providingmanykindsofsupportincludinglocal‐content
protectionism(whichis,ofcourse,nowWTO‐illegal).Sabeletal
(2012)reportmanycasestudiesofpublic‐supportedexport
pioneersfromLatinAmerica–forexample,floriculturein
Colombia,furniture‐makingandcommercialaircraftsinBrazil,
46 Rodrik (2008) discusses the difficulties involved in statistical inference on this topic, particularly when policy adoptions are endogenous. 58 avocadosinMexico,veterinaryvaccinesinUruguay,etc.—
whereanensembleofpublicsupportpoliciesfacilitated
coordination,providedindustry‐specificpublicorclubgoods
(sayintheformofspecializedservicesliketechnical
assistance,helpinmeetingphyto‐sanitaryandotherquality
standards,etc.),andenabledexportproductionactivitiesto
gainfromsubstantialagglomerationeconomiesinclustersofa
largenumberofspecializedfirms.Thestudiesalsogarner
insightsfrom‘counterfactuals’offailedeffortsinbroadly
similarcases.
Ofcourse,empirically,evencarefulcasestudiesofexport
pioneersfromdevelopingcountriessufferfromreplicability
issues,apartfromafrequentselectionbias(successfulcases
survivingtogetdiscussed).Thereisasizeableempirical
literatureon‘learningbyexporting’,butmuchofitismarred
bythepossibilitythatmoreproductivefirmsmayselectinto
exportingandbymeasurementissuesintheabsenceof
detailedfirm‐levelperformancedata.Apaperthatislargely
freeofbothproblemsisthatofAtkinetal(2014),which,onthe
basisofarandomizedcontroltrialthatgeneratesexogenous
variationintheaccesstoforeignmarketsforrug‐makingfirms
inEgypt,findssubstantiallearningeffects.
59 HarrisonandRodriguez‐Clare(2010)haverecommendeda
wholerangeof‘soft’industrialpolicies,notincompatiblewith
WTOregulations(likeencouragingR&D,extensionservices,
vocationaltraining,supportingcollectiveactionforself‐helpin
businessclusters,improvingregulationsandinfrastructure,
andsoon),wherethegoalistodevelopdomesticpoliciesof
coordinationthatimproveproductivitymorethan
interventionsthatdistortprices.Aghionetal(forthcoming)
citepaneldatafrommediumandlargeChineseenterprises
over1998to2007toshowthatindustrialpoliciestargetedto
competitivesectorsorthatfostercompetition(say,policies
thataremoredispersedacrossfirmsinasectorormeasures
thatencourageyoungerandmoreproductiveenterprisesina
sector)increaseproductivitygrowth.Furtheradvancesinthe
industrialpolicyliteraturehavetoexploretheparticular
institutionalcombinationsofdomesticpoliticalcoalitionsand
marketstructureandthedesignofparticularpolicieswhich
makethedifferencebetweensuccessandfailure,alongwith
rigorousempiricalandexperimentalstudiestodiscernthelink
betweenpolicyandoutcome.
Inthenearfuturetheissueofstatecoordinationmayalso
becomeimportantininducinginvestmentin‘green’technology
thatreducesnegativeexternalities,or,assomedeveloping
60 countriesgraduatetothemiddle‐incomestage,infostering
frontierinnovations47beyondthesimplecatch‐upprocess(of
learningandimitatingoff‐the‐shelftechnology),orinfinding
somealternative48tothecurrentintellectualpropertyrights
regime,whichsometimestransferstoohighamonopolyrentto
theinnovator,attheexpenseofpoorconsumersandfuture
innovatorstryingtobuildonthecurrentinnovation.
Industrialpolicyisitselfoftensuspectedofgeneratingrent‐
seekingopportunities.Theemphasisoncombiningsectoral
targetingwithsomeformofmarketdisciplineistherefore
necessarytocurbexcessiverentcreation.ButasRodrik(2008)
haspointedout,someamountofrentgenerationmaybe
indispensabletopreservewhathecalls‘second‐best’
institutions,whenfirst‐bestinstitutionalrulesorbestpractices
arenotfeasibleintheusualpolitical‐economycontextof
developingcountries.Ifentrepreneurialactivityisabinding
constraintrentsmayprovidedynamicincentives(asinsome
Schumpeteriangrowthmodels),orwhenthemainchallengeis
47 In this context Aghion (2014) calls for a ‘strategic state’ that “acts as a catalyst using selective and properly governed support to the market‐
driven innovation process”. 48 Alternatives like the state buying the patent and putting it in the public domain have been suggested. This is, of course, subject to the arbitrariness and moral hazard in the pricing of the patent by the state. 61 tostimulateinvestmentinaweakcapitalmarketrents
sustainedbymoderateamountsofentryrestrictionsmay
providethenecessaryfinance.AcemogluandRobinson(2013)
showmoregenerallyhowrentsareoftennecessaryfora
balanceofpoliticalpowerorpreservationofapolitical
equilibrium,andhowinsistenceonfirst‐bestrulestoeliminate
rentsmayhaveunintendedorcounter‐productivepolitical
consequences.InasomewhatdifferentcontextNorth,Willis
andWeingast(2009)considerthecreationofrentsasthekey
tocontrollingviolenceinwhattheycall“limitedaccesssocial
order”oftenprevalentindevelopingcountries.Particularlyin
weakorfragilestates,wherethereisan‘oligopoly’ofviolence
incontrasttotheWeberian‘monopolyofviolence’vestedinthe
state,theyconsiderrent‐sharingasimportantinpreserving
order.
Butrent‐sharingasawayofpoliticalcoalition‐buildingcanbe
andhasbeenanimportantfeatureofthepoliticalequilibrium
eveninwell‐functioningstates.TheEastAsiancasessuggest
thattechnologicaldynamisminlargeconglomerateshasco‐
existedwithrent‐sharing,withpoliticalpartiesdeeply
implicatedinrent‐seeking(ofwhichtheJapaneseLDPisanold
62 anddurableexample).49Aswehavementionedbefore,itis
possiblethatalongandcontinuoushistoryofstateinstitutions
overmanycenturiesthatEastAsiancountriesingeneralhave,
incontrastwiththoseinAfricaandLatinAmerica,helpsin
buildingabureaucraticculture,whichalongwithadense
networkoftiesbetweenpublicofficialsandprivate
entrepreneurs,maymoderatetheexcessesofrent‐seeking.
Possiblymoreimportantly,thestate‐directedpressureof
exportsuccessinanopeneconomyinEastAsiahasdisciplined
theseexcessesandtheneedforcostandqualityconsciousness
inglobalcompetitionhaskeptcollusion‐pronefirmsand
bureaucratsontheirtoes.Intheabsenceofstrictmarket
discipline,thereisplentyofevidenceindevelopingcountriesof
dysfunctionalindustrialpolicieswithpoliticallyconnected
firmsinkleptocraticstatesmakingmoneywhilethe
developmentprocessisatrophied.
49 Even in early modern west European history, there are cases where patrimonial, rather than Weberian impersonal rule‐bound, arrangements between ruling families, civil servants and merchant capitalists have been important in fostering the growth process—see Adams (2005) for an example from the 17th‐century Netherlands. 63 VIIPublicEnterprisesandStateEffectiveness
AswehaveindicatedinSectionIVinrecentdecadesthe
Chinesecasehasbeendistinctiveindecentralized
development,withlocalgovernmentsplayinganactiverolenot
justindeliveringsocialservices,butinvigorouslypursuing
localbusinessdevelopment,someofthemostsuccessful
companiesbeingrunandfundedbymunicipalgovernments.
Evenbeyondthelocallevel,theChinesestatehasbeen
remarkableinpresidingoverareinvigoratedmodelofwhat
usedtobecalledStateCapitalism50(wherestate‐runorguided
enterprisespursueprofitsorsurplus).Inrecentyearswehave
seenaspectsofitinBrazilandRussiaaswell,butnowhereas
prominentlyandinaslargeascaleasinChina.Largestate‐
ownedcompanies(SOE’s)dominateintransport,energy,basic
metals,financeandtelecominChina.SomeoftheChineseSOE’s
arenowimportantplayersintheglobalmarketcompetition.
Theyareoftenhighlycommercialized:inrecruiting
professionalmanagers,broadeningtheirinvestorbase,and
sheddingtheirearlierbloatedlaborforceandtraditionalsocial
andpoliticalobligations,manyChineseSOE’sdonotconformto
theusualstereotypesaboutSOE’s.Theirlistinginforeignstock
50 This term originated in its negative use by anarchists and other socialists, but with more positive use by Lenin and his followers. 64 marketsoftensubjectsthemtointernationalrulesofcorporate
governance.TherearealsosomesuccessfulChineseprivate
companies(Lenovo,Huawei,Haier,Geely,Alibaba,etc.),
heraldedasnationalchampions,buttheyoftenoperateinthe
shadowofthestate,withthestateifnotowningsharesactively
guidingandhelpingthem.Thestate‐ownedorsupported
companieshavetheadvantageofdeeppocketstobackthemor
easieraccesstobankloansandland,usuallycantakealonger‐
runperspectivecomparedtomostpurelyprivatecompanies
(thatareanxiouslywatchingshort‐runsharepricesand
quarterlyearningsreports),andcanridethebusinesscyclea
bitbetter.Ontheotherhand,theirprofitabilityisoftenbased
onmonopolisticpower51andpoliticalconnections(givingrise
tothefrequentchargeofcronycapitalism);theymaythrivein
thecatch‐upphaseofdevelopment,butsome‐–forexample,
AcemogluandRobinson(2012)‐‐doubtiftheywillperform
whenitcomestoinnovationsand‘creativedestruction’.52
51 Li, Liu, and Wang (2012) suggest that the Chinese economy is largely dualistic in a vertical economic structure, with the state deriving profits and political rent from its monopolistic control in the upstream sectors that provide capital and inputs and services to the successful downstream largely private (including joint‐venture) or hybrid sectors. 52 A ‘collectivist’ culture encouraging conformity, rather than creativity, may also be not very conducive to innovations. For general evidence on 65 Thisraisesageneralquestionabouttherelationbetweenlarge
conglomerates(privateorpublic)anddifferenttypesof
innovations.Theroleoftheselargeorganizationsin
stimulatingR&Dandtheinnovationprocessmayvary
dependingonthetypeofinnovationonehasinmind,whether
itisofthe‘disruptive’kindthatchallengesincumbentfirms
(whichtheUSprivateinnovatorsincollaborationwithventure
capitalistsaregoodatandalargeentrenchedorganization
usuallyisn’t),orthesteady‘incremental’kindwhichaddsupto
significantgains(theJapanesecallitkaizen)whichsomelarge
organizationsinGermanyandEastAsiahaveexcelledin.Itis,
ofcourse,hardtodenythatinbothkindsofinnovationsin
mostcountriessomeformofbackground(ifnotalwayspro‐
active)supportofthestatehasbeensignificant.Butthereis
alwaysadangerthattoo‐big‐to‐failorganizations(privateor
public)mayultimatelyturnintorentalhavens.
Withoutmoreempiricalstudies,notjustanecdotes,thisdebate
aboutinnovationsunderStateCapitalismisdifficulttosettle.
ErnstandNaughton(2012)citeexamplesofnewdirectionsof
the positive link between ‘individualist’ culture and innovations, see Gorodnichenko and Roland (2013). This may also suggest that in collectivist societies the state may have a special role in stimulating individual creativity and innovation. But if the state is autocratic, it may dampen the creative and free spirit often important for innovation. 66 Chineseinnovationsfromtheintegratedcircuitdesign
industry.Awayfromthegovernment‐sponsoredattemptsat
‘indigenousinnovations’,Chinaseemstobemoresuccessfulin
innovatinginareasthatinvolveglobaltechnologysourcingand
quicklyrespondingtochangesintheincreasinglyfinedivisions
oftheglobalvaluechain.Atthesametimethereisevidenceto
believethatlargeSOE’sandpolitically‐connectedprivatefirms
inChinamayhavespawnedaseriousmisallocationofcapital
(andmanagerialtalent)andbuild‐upofexcesscapacity.Such
misallocationmayhavemorebiteinfutureasChinesesaving
andinvestmentrates(aswellastheunpopularlandgrabbing
bythestate)comedown.Meanwhileentrenchedvested
interestsofthepoliticalelitewithstakeinincumbentfirms
maymakeresistancetochangestronger.
Finally,itshouldbestressedthatingeneraltheperformanceof
stateenterprisesinanycountryisoftendiscussedinthe
literatureinakindofpoliticalandorganizationalvacuumand
intermsofasingleandsimplemetricofnarrowly‐defined
efficiency.Questionsliketherelativeefficiencyofdeliveryof
publicservicesbystateorprivateorganizationsaboundinthe
publiceconomicsliterature.Standardcomparisonsofefficiency
offirmsareoftenvitiatedbyfrequentcasesofprivate
monopolysubstitutingforpublicmonopolyafterprivatization,
67 orbypoliticalagendaandsoftbudgetconstraintsforpublic
firmsreplacedbyregulatorycapturebyprivatefirms.Still,
muchoftheempiricalliterature53showssuperiorefficiencyof
privatefirms,whereastheliteratureonprivatizationofpublic
utilitiesgivesmixedresults54.Inbuildinginfrastructurepublic‐
privatepartnerships(PPP’s)areincreasinglyinvogue.While
thesemayusefullyharnesstheservicesofprofit‐seeking
privatefinanceandexpertise,inactualcasesquiteoftenthe
downsiderisksareonthepublicsectoreitherthrough
opportunisticrenegotiationoftermsorbadloansinpublic
sectorbankswhichthetaxpayershavetore‐capitalize.
AcemogluandRobinson(2013)emphasizethepolitical
consequencesofprivatization:well‐intentionedefficiency‐
mindedprivatizationprogramssometimesupsetoldrentaland
politicalarrangementsandmaybecounter‐productive.An
53 There are quite a few survey articles; see, for example, Parker and Kirkpatrick (2005). JEL published an overview on the effects of privatization in transition economies by Estrin et al (2009). 54 For example, in privatization of water supply, Galiani, Gertler and Schargrodsky (2005) show in a panel data framework that in Argentine municipalities where water services were privatized, there is indirect evidence that access and water quality improved. Using an almost similar method, Borraz et al (2013) find direct evidence that nationalization of water companies in Uruguay, after a period of privatization, delivered progress in terms of both access and water quality relative to companies that were consistently publicly owned. 68 obviousexampleisinthecaseofthepoliticalconsequencesof
Russianprivatizationinthe1990’s‐‐redistributingassets
extremelyunequallyinfavorofaplunderingoligarchy,the
backlashtowhichpavingthewayforPutin’sauthoritarian
crony‐capitalistregime.
Therearealsoorganizationalcounterfactualstowhichthe
publicsectorreformdebatesoftendonotpayenoughattention.
Inassessingtheinefficiencyofapublicutility,forexample,we
havetokeepinmindthesimultaneousandconflicting
objectivesitisrequiredtoserve(likecostrecovery,cross‐
subsidizationasinthecaseofcommercialfreightsvis‐à‐vis
passengerfaresinrailways,providingcheapservicetothe
weakersectionsofthepopulationandremoteareas,etc.).In
suchausualcontextofmultiplemandates,multi‐dimensional
goals,conflictingpoliticalprincipalsfacingagents,multiplicity
oftasksandimpreciselymeasuredandincompletely
contractibleoutcomesthatsuchanagencyoftenfaces,allofthe
inefficiencyofthestateagencymaynotbe‘remediable’inthe
senseofWilliamson(1996)inasimplewaybyalternative
organizationaldeviceslikethemarketortheprivatefirm.As
Dixit(2012)hasargued,whilestateagenciesobviouslyhave
somecrassinefficiencies(particularlywhenbudgetconstraints
arepolitically‘soft’)remediablebyorganizationalreformsand
69 incentivedesigns,theyareoftencalledupontoundertake
functionsthataretoocomplexfortheprivatesectorto
perform.Privatizingthesefunctionsmayevenmakethings
worse,asprivatefirmsarenotcapableofcopingwiththe
transactionandgovernancecostsofthecomplexandmulti‐
dimensionalissuesthatstateagenciesmusthandle.Hart,
ShleiferandVishny(1997)giveanexamplefromtheissueof
prisonprivatizationtomakethegeneralpointthatwhena
governmentcontractsoutaservicetoaprivateproviderthe
non‐contractibleaspectsoftheservicequalityarelikelyto
suffer.Thedilemmainpublicsectoradministrativereformis
thatinthecontextofmulti‐dimensionalityofgoalsandtasksit
isdifficulttodevisehigh‐poweredincentivecontractsforcivil
servants;ontheotherhand,withlow‐poweredincentivesthey
arepronetocorruptionandcapturebyspecialinterest
groups.55
VIIIConcludingComments
Ingeneral,differenttypesofgovernancemechanismsare
appropriatefordifferenttasks.Takethegeneraltaskof
55 For a discussion of incentive and organizational reforms to fight corruption, see Bardhan (2005), chapter 8. 70 coordination.Economiesatearlystagesofdevelopmentare
besetwithcoordinationfailuresofvariouskinds,and
alternativecoordinationmechanisms—thestate,themarket,
thecommunityorganizations‐‐allplaydifferentroles,
sometimesconflictingandsometimescomplementary,in
overcomingthesefailures,andtheseroleschangeinvarious
stagesofdevelopmentinhighlycontext‐specificandpath‐
dependentways.Toproclaimtheuniversalsuperiorityofone
coordinationmechanismoveranotherissimplisticand
ahistorical.Marketsaresuperbcoordinationmechanismsin
harmonizingnumerousnon‐cooperativeinteractions,in
disciplininginefficiency,andinrewardinghigh‐valued
performance.Butwhenresidualclaimancyandcontrolrights
aremisaligned(say,onaccountofinitialassetownership
differencesthatconstraincontractualopportunities)andthere
areimportantstrategiccomplementaritiesinlong‐term
investmentdecisions,marketsfailtocoordinateefficiently.In
particular,theimplicationsof‘imperfections’andcontract
‘incompleteness’increditandinsurancemarketsareseverefor
thepoor,sharplyreducingasociety’spotentialforproductive
investment,innovation,andhuman‐resourcedevelopment.The
statecanprovideleadership(andofferselectiveincentivesand
disincentives)tostimulateindividualstointeractcooperatively
71 insituationswherenon‐cooperativeinteractionsare
inefficient.Butthestateofficialsmayhaveneitherthe
informationnorthemotivationtocarryoutthisrole.Theymay
beineptorcorrupt,andthepoliticalaccountability
mechanismsareoftenmuchtooweaktodisciplinethem.We
thusneedawholevarietyandintermixtureofinstitutional
arrangementstocopewiththestrengthsandweaknessesof
differentcoordinationmechanisms,andthenatureofoptimal
intermixturechangesinthedevelopmentprocess.
Thepurposeofthisessayhasbeentobringoutsomeofthe
complexitiesthatareoverlookedintheusualinstitutional
economicsliteratureandsupplementthelatterwitha
discussionofsomeofthealternativeapproachestolookingat
thepossibledevelopmentalroleofthestate‐‐particularly
involvingresolutionofcoordinationfailuresandcollective
actionproblems,theconflictingissuesofcommitmentand
accountabilityandtheneedforbalancingthetrade‐offsthey
generate,someingredientsofstatecapacityandpolitical
coalition‐buildingusuallymissedintheliterature,the
advantagesandproblemsofpoliticalcentralizationand
decentralization,thepossibleimportanceofrent‐sharingina
politicalequilibrium,andthemulti‐dimensionalityofstate
72 functionswhichmaynotbeaddressedbymarketsorprivate
firms.
Theexplorationoftheseproblemssuggestsseveralunder‐
researchedareasintheliterature,andweendwithabrief
enumerationofonlyasmallsubsetofthem.
(a) Theliteratureisasyetinitsinfancyinunderstandingthe
forcesandmotivationsbehindformationsofpolitical
coalitionsanddifferentkindsofelitebargainsindifferent
historicalcontexts.Notmerelyshouldthetheorybelinked
upwiththegeneralliteratureoncoalitions56,butmore
empiricalanalysisandhistoricalcasestudiesonformation
andbreakdownsofpoliticalcoalitionswillbevaluable.
Thedecliningroleoforganizationsofunskilledlaborin
politicalcoalitions,giventhenatureoftechnological
progressandglobalizationinrecentyears,anditsimpact
onstatepolicyand(thealreadyweak)welfareregimesin
poorcountriesisaneglectedareathatneedstobe
discussedinthiscontext.
(b) Thetheoryofcollectiveactionanditsvarious
determinantsneedtobefarricherthanthefree‐rider
issuesemphasizedoriginallybyOlson(1965).For
56 See, for example, Ray and Vohra (2014). 73 example,collectiveactionmaybreakdownifthereisa
bargainingimpasseontheperceivedfairnessof
distributionofgainsamongdifferentgroups,andthisand
otherdistributiveconflictsarelikelytoplayaroleinthe
politicalcoalitionformationissuesmentionedin(a).
(c) Aswehavenotedinthecontextofindustrialpolicyin
SectionVI,moreempiricalandexperimentalstudiesare
neededinunderstandingthepreciselinkbetweenpolicy
andoutcome,andabetterinsightintotheparticular
institutionalcombinationsofdomesticpoliticalcoalitions
andmarketstructureandthedesignofparticular
industrialpolicies.
(d) AsindicatedinSectionVII,therelationbetweenlarge
publicfirmsandtheinnovationprocessparticularlyin
medium‐incomedevelopingcountriesisarelatively
unexploredresearcharea.Wedonothaveyetenough
empiricalstudiesinthosecountriesonhowentrenched
incumbentfirmshindertheinnovationprocessorhowthe
incrementalinnovationsassociatedwiththosefirms
(particularlyifthereisworkplacedemocracyencouraging
exchangeofideasbetweenworkersandmanagers)can
delaytheset‐inofdiminishingreturnsintechnological
advance.
74 (e) Similarly,theexperienceinthemanyrecentcasesof
public‐privatepartnershipsinlargeinfrastructural
projectsneedstobecriticallyexamined,inthelightof
initialenthusiasmandrecentonsetofdisillusioninsome
cases.
(f)
Inthediscussionofpoliticalaccountabilitytheoriginal
hopefromdecentralizationanddevolutionofpowertried
inmanydevelopingcountrieshasfadedsomewhaton
accountofthevariouscaptureanddysfunctionalityissues
raisedinSectionIV.Theempiricalfindingsaremixed,
primarilybecausethepoliticalandinstitutionalcontextof
decentralizationandhencethedesignand
implementationofdevolutionprojectsarewidely
divergent.Itistimewedigalittledeeperandtryto
decipherfrommicroempiricalandexperimentalstudiesif
thereareanypatternsinthejumble.
(g) Animportant,yetlargelyunresolved,issueistofindclear
directionsfromempiricaldataaboutwhendemocratic
processesleadtolong‐terminvestmentsinpublicgoods
servingthepoorandwhentheyinsteaddegenerateinto
short‐termpopulismandclientelisticpatronage
distribution.
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