rethinking the sequence of development
TRANSCRIPT
Rethinking the Sequence of Development
World BankBook Discussion
December 16, 2016
Two Universal Themes
1) Rethinking the sequence of development Good governance first? Growth first? Or something
else?
2) Creating the right conditions for adaptation What are these conditions? Can they be created?
Where and at what level should they be created?
My Focus Today
1) Rethinking the sequence of development Good governance first? Growth first? Or something
else?
2) Creating the right conditions for adaptation What are these conditions? Can we create them? In
what places should these conditions be installed?
the chicken-and-egg (endogeneity) problem
of development
Economic Wealth
Good governance/strong
institutions
Economic Growth
Good/strong institutions
#1: Prosperity leads to strong institutions(policy: give generous aid, no strings attached)
Economic Growth
Good/strong institutions
#2: Strong institutions lead to prosperity(policy: replicate suite of strong institutions in poor, weak nations)
The imposition of good governance standards
“has been a root cause of the deep problems
encountered by developing countries.”
(Pritchett & Woolcock)
Economic Growth
Good/Strong Institutions
#3: History bequeathed strong institutions that led to prosperity (aka “path dependence”)
Favorable History
“Once society gets organized in a certain way, this tends to persist... This persistence also explains
why it is so difficult to make poor countries prosperous.”
In short, poor countries are
STUCK.
Conventional wisdom: Development is a linear process.
In reality: Development is a coevolutionary process.
Preview of my approachA simple—but not simplistic—
way of understanding development as a complex
process
Step 1:
Harness existing weak institutions to
build markets
Step 2:
Emerging markets stimulate strong
institutionsStep 3:
Strong institutions
preservemarkets
Spark change in poor societies by leveraging what they
already have…not with what we wish they could have.
THE CASE OF CHINA
Designing Fieldwork to Map Coevolution
Present
Economic reform X
Firm structure X
Investment policy X
Bureaucratic function X
Bureaucratic finances X
Monitoring mechanisms X
T1 T2 T3 Present
Economic reform X X X X
Firm structure X X X X
Investment policy X X X X
Bureaucratic function X X X X
Bureaucratic finances X X X X
Monitoring mechanisms X X X X
Single snapshot Sequence of snapshots
Forest Hill City, Fujian Province
1993: Central government accelerated market liberalization
Establish a specialized, professional investment
agency
Developmental States Require Weberian Agencies
DPM Teo with state-selected and sponsored
EDB scholars
1993: Central government accelerated market liberalization
Adopt en masse,
personalized investment promotion
Establish a specialized, professional investment
agency
OR
Not Specialized (En Masse)
Agencies (partial list only) InvestmentTarget
(Million)
Investment bureau 50
Office of people’s congress (legislature) 10
Department of discipline 10
Health bureau 50
Environmental protection bureau 10
Family planning bureau 50
Handicapped association Encouraged
County document indicating targets assigned to all agencies
Not Impersonal
Local cadres in ALL agencies mobilize personal connections to court investors
High personal stakes: generous bonuses and tough penalties
“Basically we rely on personal networks to attract investors.
Whenever we meet our relatives and friends, we urge: hey, come
to my county!”
The Wrong Bureaucracy?
Plenty of room for corruption and special privilege
Conflict of interest: regulation vs. courting investment
Uncoordinated, low-quality investments
1993: Central government accelerated market liberalization
Adopt en masse,
personalized investment promotion
Establish a specialized, professional investment
agency
OR
GOALS.
CONSTRAINTS.
RESOURCES.
Conditions of a Market-Building Context
1993: Central government accelerated market liberalization
Establish a specialized, professional investment
agency
Adopt en masse,
personalized investment promotion
ORGOAL“In the past, our goal was to
push for rapid economic growth, so we welcomed any
investor.”
1993: Central government accelerated market liberalization
Establish a specialized, professional investment
agency
Adopt en masse,
personalized investment promotion
ORCONSTRAINTS
Bureaucracy left over from Maoist era. Can’t fire anyone.
1993: Central government accelerated market liberalization
Establish a specialized, professional investment
agency
Adopt en masse,
personalized investment promotion
ORRESOURCE“Businesses invest here
because of personal relationships.”
Back then, our commercial parks had no plan. A tofu factory sat beside
another factory making fiberboards. How was that going to work?
Prior to 2003, work reports emphasize
“speed” and “expansion.”
Word “quality” first appeared in 2003
“Quality and quantity” in 2006
“Quality” appeared in first line in 2007
Agencies evaluated by amount of investments…
Then by number of projects that exceeded certain scale
Then by number of projects in state-selected sectors
Investment targets abolished altogether
Evolving Goals of Development at Middle-
Income Stage
Seek to diversify economy
Build services sectors
Major local companies invest outward
Humble County, Hubei Province
“We could not attract investors during the 1990s and early 2000s because nobody knew this place.”
What About Other Parts of China?
Domestic Investment in Central Provinces
Domestic investment in Hubei province
Total domestic investment in five central provinces
(billion yuan)
Total FDI to China(billion yuan)
2008 95 836 1,045
2011 338 1,624 1,706
+355% +194% +163%
For more on the evolution from foreign to domestic investment flows, see Chapter 6 (“Connecting First-Movers and Laggards”)
In essence, what’s the simple—but not simplistic—
story of development?
Step 1:
Harness existing weak institutions to
build markets
Step 2:
Emerging markets stimulate strong
institutionsStep 3:
Strong institutions
preservemarkets
Cross-national extension of theory
Late medieval Europe:
Communalproperty rights
Antebellum United States:
Risky taxless financing schemes
Contemporary Nigeria: Piracy as
distribution channel
For cross-national comparison, see Conclusion (“How Development Actually Happened Beyond China”)
Miraculously, Nigeria produced world’s third largest film industry—Nollywood—within 20 years,
with neither state support nor IPR protection. How did this happen?
Step 1:
Filmmakers leverage piracy as marketing and
distribution network
Step 2:
Emerging markets stimulate demand for quality production +
increased formal funding
Step 3:
Formalization + digital distribution preserves
market
Policy Implications & Connections to World
Development Report 2017
Policy Implications
1. Learn to leverage existing—seemingly weak—institutions to build markets in developing countries. Start by building a bank of concrete case studies, so that we may think
the unthinkable + generate cases/data for comparison.
“Weak” institutions: indigenous, traditional, local norms, low-cost, poor-oriented… piracy, corruption, non-Weberian, non-legal, non-democratic
Policy Implications
2. Distinguish between “market-building” and “market-preserving” institutional bundles. Go beyond single universal benchmark that ignores stages of
development
WDR 2017: “Need to move away from aggregate indicators”
Think about institutions functionally, rather than normatively (think: a hammer is not an inherently better tool than a screwdriver).
Policy Implications
3. Identify key agents of change, and design conditions—meta-institutions—that facilitate adaptation among them Meta-institutions: “Meta-institutions are higher-order structures and
strategies that facilitate adaptive and learning processes” (CH 2, pp. 57).
WDR 2017: “Creating conditions for adaptability.”
For more, see Chapter 2 (“Directed Improvisation”) in my book
Thank You