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date: 19 March 2018

Development: Institutional Perspectives

Summary and Keywords

There are three key literatures on the political economy of development that all emphasize the importance of institutions, but in different and somewhat contradictory ways. These literatures focus on developmental states, good governance, and political economic pathways. The developmental states literature is based largely on case studies of East Asian countries that have, since about 1950, largely “caught up” to the already developed nations in Europe, North America, and the Antipodes. The central conclusion of this literature has been that successful late development requires a competent, committed state bureaucracy, independent enough to be capable of imposing its will on domestic businesspeople, but also sufficiently connected to them so as to make good decisions about what will to impose. The literature focusing on good governance, based largely in economics, also sees state actions and characteristics as keys to positive development outcomes. But while the developmental states literature argues that states need to play an interventionist role in “governing” markets (including not infrequently restricting them), the good governance literature usually looks more favorably on free markets. Finally, research in the political economic pathways literature tends to examine much longer periods of time than the other two literatures, and typically emphasizes economic and political developmental outcomes as joint products of differences in the historical trajectories followed by different countries. The key explanatory variables for this literature are a country’s circumstances in the colonial period, and levels and types of social inequality.

Keywords: political economy of development, economic development, institutionalism, developmental states, good governance, political economic pathways, political development


As the name implies, the basic premise of research on “the political economy of development” is that the character and results of processes of economic development are heavily conditioned by the forms and outcomes of struggles among collective actors. The field’s primary goal is to explain temporally and spatially variable levels of development across different human populations, and in particular to assess how and how much this variation has been conditioned by a number of key political factors. A range of specifically institutional perspectives on development have emerged since the 1980s as some of the most influential in the field of political economy.

“Development” generally refers to economic transformations that take place over time, leading to growth in average standards of living at the national level or for some other identifiable population. This process of economic change and expanding incomes is only typically referred to as “development” for large collectivities (not single individuals or households), and only in poor countries or when referring to historical transformations in currently wealthy countries well before they became wealthy. The most common measure of a society’s level of development is Gross Domestic Product (GDP) per capita. This is an imperfect measure for a variety of reasons, the most basic being that GDP/capita says nothing about distribution. Thus, in principle, increases in some population’s GDP/capita could signify nothing more than the expansion of the income of a tiny elite (or only of men, a single ethnic group, etc.). Yet cross-sectional and temporal differences in GDP/capita do tend to reflect broad differences in typical residents’ incomes (and material standards of living), and so it is widely accepted as a meaningful and serviceable measure, despite its crudeness. The usefulness of GDP/capita is validated by its strong correlation with other widely desired things, like long life and education, though the lack of perfect correlation with these other variables has inspired the creation of alternatives to GDP/capita, most notably the Human Development Index (HDI) of the United Nations Development Programme (UNDP). Despite the availability of the HDI, however, GDP/capita, particularly adjusted for inflation (over time) and purchasing power parity (across nations), remains the dominant measure of economic development.

Among contemporary scholars of development, there is widespread support, across a number of disciplines, for the proposition that institutions are key determinants of national development outcomes – that, as Rodrik et al. (2004) put it, “institutions rule.” But even institutionalists disagree somewhat about what institutions are, how they shape behavior, and which kinds are important for development. Some scholars do also express reservations about the causal relevance of institutions vis-à-vis other influences on development processes. This article reviews three key literatures on the political economy of development that all emphasize the importance of institutions, but in different and somewhat contradictory ways. I refer to these three literatures as those on (1) developmental states, (2) good governance, and (3) political economic pathways. This review will describe these three categories of perspectives (including key studies from each), and discuss the similarities and differences among them.

Aside from the literatures on political economy and development specifically, “institutionalism” is an important approach in the social sciences more generally. As with the three institutional perspectives on the political economy of development, institutionalism in general has three variants: rational choice, organizational, and historical. Each one has a particular, though far from exclusive, disciplinary home – in economics, sociology, and political science, respectively. This review essay will argue that each of the three institutionalisms in development research specifically can be understood as a rough hybrid of two of these institutionalisms in social science in general. The developmental states literature applies a hybrid of the sociological and historical institutionalist approaches; good governance is a mix of rational choice and sociological institutionalism; and research on political economic pathways melds the historical and rational choice institutionalisms. Although each branch of institutionalism possesses deep roots in classical social science (such as works by Veblen, Durkheim, and Weber), modern institutionalism rose to prominence only over the course of the 1980s. Consequently, this essay’s discussion of institutional perspectives on development concentrates heavily on relatively recent literature, dating from the 1990s to the present.

To preview the longer discussion below, the developmental states literature has been based largely on case studies of East Asian countries that have, since about 1950, largely “caught up” to the already developed nations in Europe, North America, and the Antipodes. The central conclusion of this literature has been that successful late development requires a competent, committed state bureaucracy, independent enough to be capable of imposing its will on domestic businesspeople, but also sufficiently connected to them so as to make good decisions about what will to impose. The “institutional” emphasis of this literature is twofold: first, on the formal and informal rules defining the state’s internal organizational practices (how it recruits and retains its staff, fosters a constructive or destructive professional culture, and thus is or isn’t a coherent and effective actor); second, on the rules governing its external relationships (how it is connected to, and protected from capture by, societal actors outside the state).

Second, the good governance literature, based largely in economics, also sees state actions and characteristics as keys to positive development outcomes. But while the developmental states literature argues that states need to play an interventionist role in “governing” markets (including not infrequently restricting them), the good governance literature usually looks more favorably on free markets. In contrast to a purely laissez-faire or neoliberal approach, however, this literature emphasizes that markets require a variety of institutions, which only states can provide: nonmarket foundations that are necessary for successful market-driven development. Therefore, while the scope of state economic intervention must be constrained, the state must nonetheless also have sufficient capacity (competence, resources) to provide the institutional “governance” that markets need in the first place. This research therefore emphasizes cross-national variation in public sector corruption and in the provision and quality of key economic institutions, such as property rights, judicial systems, and rules ensuring the provision of public goods.

Third, research in the political economic pathways literature tends to examine much longer periods of time than the other two literatures, and typically emphasizes economic and political developmental outcomes as joint products of differences in the historical trajectories followed by different countries. The key explanatory variables for this literature are a country’s circumstances in the colonial period, and levels and types of social inequality. Countries that have grown economically wealthy and politically democratic (since the onset of the Industrial Revolution in about the year 1800) have been those with relatively egalitarian prior distributions of income and power in society. In relatively egalitarian societies, this literature suggests, economic and political institutions tend to be more beneficial for the mass of the population (rather than just a narrow elite), and such institutions tend to be better for economic development in the long run. This literature’s signature historical argument is that the United States and Canada are much wealthier than the rest of the Americas today largely because, by the late 1700s, their populations were much more equal than others elsewhere in the Western Hemisphere – even though their per capita incomes were, at that time, no higher.

A word about scale. As should be clear from these summary accounts, political economy research on development often focuses on the national level. Yet development processes can vary across locations within single nations (think of South Africa under apartheid), and clearly – given international economic integration, cross-border flows of policy advice, and the power of many international organizations – key influences on the development process can transcend national borders. Institutionalist scholars nevertheless continue to emphasize national-level, comparative research, for at least three reasons. First, many of the most important development-related processes occur at the national level – from the abolition of slavery to the removal of trade barriers. Second, key data, from GDP/capita to maternal mortality rates, are often most reliable and/or widely available at the national level. And third, national borders continue to demarcate major geographical differences in levels of economic and political development.

Institutionalism in Social Science Generally

The basic idea behind the concept of institutions is that human behavior tends to follow rules. The rules can be either formal (as in the case of criminal laws written down and defined as binding within a certain geographical territory) or informal (as when middle-class people invited to dinner parties routinely contribute gifts like wine or flowers, even though there is no specific agreement that they will do so, nor an authority ready to apply an explicit penalty if they don’t). Rules are certainly sometimes broken, but their power is nonetheless substantial, as evidenced by the enormous patterning and regularity of human behavior. For example, people in certain jobs consistently show up for work at 9:00 a.m. And the dying consistently bequeath their possessions to their relatives, rather than taking them to the grave.

As these examples make clear, however, the rules that people live by can change over time, and can vary across space – sometimes to dramatic extents. Both formal and informal rules are thus socially constructed, in the sense that they are not given from nature – even from humans’ own, biologically hard-wired nature. (Science shows that psychobiological differences across human populations are minuscule.) Some human societies may torture anyone caught thieving; others opt for execution, or incarceration; still others may have no clear concept of theft at all. Again, these examples illustrate an important point: though the idea of “social construction” may make societal rules sound flimsy (as opposed, for example, to ideas of transcendent natural laws, or of universal psychobiological instincts), socially constructed rules can have deadly serious adherents and consequences.

Any form of institutionalism in social science, then, is premised on the idea that human behavior is heavily structured (patterned) by temporally, spatially, culturally variable institutions (rules). The two crucial questions are what institutions come to be established in different societies at different times, and what are the consequences of those variable institutions for individual human behavior and collective social, political, and economic conditions and processes – including outcomes such as economic development. It is at this point that the common thread of institutionalism in social science begins to unravel, as different schools focus on different kinds of institutions, seek to assess different kinds of causes and consequences thereof, and operate on the basis of different premises about human behavior and social life (for discussions, see Campbell and Pedersen 2001; Finnemore 1996; Hall and Taylor 1996; and/or Scott 2001).

Rational choice institutionalism draws on an “economic” approach to human behavior, not surprisingly given this perspective’s close relationship to the new institutional economics associated with scholars such as North (1990; 2005), O. Williamson (1975; 1985; 2000), and Greif (1998; 2006), inspired by Coase (1937). This approach privileges the individual as the unit of analysis, and predicts that individuals will act according to their interests – that is, according to the externally identifiable, material consequences for them of different possible courses of action. Given its intentionally simplifying utilitarian premises about both preferences and how people make decisions, the rational choice paradigm (institutional or otherwise) values and relies heavily on parsimonious, often mathematized theoretical models of actors’ strategic interactions (Friedman 1953). Rational choice research becomes specifically institutionalist when it recognizes, and incorporates into such models, rules constraining and/or incentivizing certain kinds of behavior rather than others. In other words, for the rational choice approach, institutions are rules constituting the broader strategic context in which action takes place (Grindle 2001; North 2005). Moreover, insofar as institutions shape actors’ behavior, they also have knock-on effects by shaping how actors expect other actors to behave. Rational choice research tends to look favorably on markets, but does not see individually selfish, strategic behavior as inevitably the source of collectively desirable outcomes (as it is in stereotyped versions of Adam Smith’s “invisible hand”). Such behavior can be quite undesirable, as for example when actors’ most personally profitable course of action is collusion or corruption, or when actors face disincentives to innovate, save, specialize, and/or invest for the future – behaviors essential for growth over time (Romer 2007). For this reason, rational choice institutionalists are very interested in the institutional circumstances under which individuals’ strategic, selfish behavior leads to constructive or destructive consequences for the larger social groups of which they are members (Olson 1965). This perspective stresses the importance of institutions such as property rights, the enforcement of contracts, social constructions facilitating exchange, restrictions on monopolies, mechanisms to ensure the accountability of bureaucrats, and rules setting out the governance of collective goods like physical infrastructure and natural resources (North 2005; Shirley 2005). Some variants of this literature suggest that institutions often exist specifically because they are functional – for instance, they may lower “transaction costs” and thus facilitate mutually beneficial exchange (e.g. the institution of money) – while others study institutions as reflections of previous strategic, selfish behaviors.

In contrast, organizational institutionalism de-emphasizes the strategic, selfish, “logic of consequences” approach of rational choice research, and stresses instead a “logic of appropriateness” wherein people act less according to their interests than according to what they understand and believe to be natural, correct, and reasonable under the circumstances (March and Olsen 1989). From this perspective, the utilitarian premises of rational choice research are wrong at least some of the time and/or under many circumstances; arguably, the whole approach is flawed because it simplistically extrapolates a very particular kind of human behavior – the selfish, calculative behavior of individuals participating in modern markets – to all spheres of human activity in all societies throughout all of history. Organizational institutionalists identify a range of ways in which human behavior contradicts the logic of consequences. For example, organizations are often uncertain about how best to achieve their goals, and so they simply copy the forms or practices of apparently successful peers (“mimetic isomorphism”); or they come to feel that only if they adopt certain specific goals or practices will they be professional, modern, and/or appropriate (“normative isomorphism”) (DiMaggio and Powell 1983). In each case, behaviors are shaped by the broader fields, cultures, communities, and/or networks in which social actors are “embedded” (see Granovetter 1985, who draws in turn on classic work by Polanyi 1944/1957). In some variants, it is precisely because bureaucrats are not calculative and selfish utilitarians that formal organizations can sometimes accomplish the important things they do. In the organizational perspective, institutions are rules governing people’s behavior not through incentives, but through norms and culture and expertise.

Finally, historical institutionalism is agnostic about debates over the logics of consequences and appropriateness – it draws freely on both – but places greater stress on the cross-national variability and, even more so, the historical origins and temporally durable character of institutions. Coming primarily from political science, this literature tends to focus on the institutional characteristics specifically of states, and it sees state institutions as facilitating or hindering the influence of outside political pressures – thereby empowering or disempowering them. State institutions provide outside interest groups with veto points – where proposed policy changes can be defeated – or deny access to them. Conversely, they also provide points of access for outsiders to insert themselves into, or otherwise influence, the policy process. Proposed policy changes are therefore more easily defeated – and the status quo ante harder to change – in more “fragmented” states, such as those that are federal, presidential, bicameral, use referenda, and use single-member districts rather than proportional representation (Huber et al. 1993). For historical institutionalists, institutions embody past politics: they are “sticky,” make national trajectories “path dependent,” and are influenced by what happens in “critical junctures.” All of this is to say that time-specific events and conditions, whose occurrence and/or character can vary substantially across countries (or across whatever the relevant unit of analysis may be), can endure and have enduring causal effects that last long after the events and conditions themselves are gone or changed (Collier and Collier 1991; Immergut 1992; Steinmo et al. 1992).

Developmental States

In 1950, Japan’s GDP/capita was 20 percent as large as that of the United States, Taiwan’s 10 percent, and South Korea’s 9 percent. By 2007, these figures were 73 percent, 68 percent, and 61 percent, respectively (all figures in this paragraph come from the Conference Board and Groningen Growth and Development Centre, Total Economy Database (Conference Board 2008)). These three East Asian economies have therefore made huge strides in raising their incomes relative to those in the world’s largest advanced industrial nation. The developmental states literature has sought to understand how they have accomplished this “miracle” (to use the World Bank’s 1993 phraseology), especially as no other country starting from a similar level of development and with a comparably large population has succeeded in narrowing the gap anywhere near as much. This literature has been largely based on case studies and qualitative comparative research on these three uniquely successful country cases, sometimes contrasting them to less positive or even failed cases of post–World War II development. Aside from Japan, Taiwan, and South Korea, the city-states of Singapore (which went from 23 percent to 91 percent) and Hong Kong (23 percent to 94 percent) have been dramatic post–World War II success stories, and to a lesser extent Thailand (9 percent to 27 percent), Malaysia (16 percent to 34 percent), and more recently China (5 percent to 23 percent) and Vietnam (7 percent to 9 percent, after dropping to just 4 percent in the 1980s). These countries have not (yet) attracted the same level of attention from this literature (in the case of Singapore and Hong Kong probably because they are considered so unique as to present few lessons for other countries).

This literature presents the form and actions of the state as the key determinants of economic development outcomes (see Johnson 1982; Amsden 1989; Wade 1990; Evans 1995; Chibber 2003; Kohli 2004). Though individual studies in the developmental states literature differ in their emphases, overall they support a thesis aptly reflected by the title of Evans’s influential book Embedded Autonomy: States and Industrial Transformation (1995). Using a qualitative comparative study of Brazil, India, and South Korea (and to a much lesser extent Zaire, Taiwan, and Japan), Evans argues that “embedded autonomous” states have been the key ingredient in the few instances of genuinely successful, late (post–World War II) development. “Embedded” states are those with cooperative, close relationships with domestic capitalists, where public sector officials hear and genuinely take into account what their private sector counterparts tell them. “Autonomous” states are those that are both internally coherent collective actors and sufficiently independent of those same capitalists to be capable of imposing collective rationality – i.e. pro-industrialization policies – on them. Evans presents South Korea’s rapid economic growth as the product of its possessing an embedded autonomous state, while the mixed (only somewhat successful) cases of Brazil and India represent instances of an embedded but not autonomous state, and of an autonomous but not embedded state, respectively. A state like Zaire’s, neither embedded nor autonomous, is merely predatory – the worst of all worlds, from both developmental and other points of view.

For the developmental states literature, then, the state’s character and capabilities as a bureaucratic organization are crucial; state and bureaucratic strength and capacity are prerequisites for late development, not impediments to it (Evans 1995; Wade 1990). In ordinary parlance, “bureaucracy” is seldom, if ever, a good thing. But for economic development, a strong, well-resourced, smoothly functioning state bureaucracy is a tremendous benefit – compared with the alternative of an underfunded state populated by unprofessional, incompetent officials whose pride in the public sector is so low that they use their offices more as means to supplement their own incomes, rather than as ways to earn a decent living while contributing to the public good.

If embedded autonomous states succeed where others fail because they possess organizational competences and capabilities that others do not, what exactly is it that they do with those capacities, to such good effect? The developmental states literature suggests that successful states put their exceptional capacities to work by effectively “governing the market” (to use the title of Wade’s 1990 book), leading to “state-directed development” (Kohli 2004). Such states intervene heavily in the economy, simultaneously supporting, directing, and disciplining domestic industrialists, so as “to overcome such obstacles as capital scarcity, technological backwardness, rigidities in labor markets, and to confront the overwhelming power of foreign corporations and of competitive producers elsewhere” (Kohli 2004:377). States can extract resources from society, and channel them toward economic activities the state views as developmental priorities – thereby shaping the direction of private sector initiative as well (Kohli 2004:385). This literature thus argues that what the state in a developing country should (though only sometimes can) do is to play an active role in the national economy, guiding indigenous industries; regulating their integration into world markets; and using appropriate industrial policies to support their growth. This literature is therefore skeptical about the developmental value of free trade, preferring instead to provide priority industries with opportunities to grow at home before confronting competition abroad. The developmental states literature therefore sees states as potentially important positive contributors to successful instances of economic development. This view sets this literature in opposition to other political economy research emphasizing myriad ways by which states can negatively influence growth, industrialization, and development – the latter research implying that states should have only minimal economic roles, and should be replaced as much as possible by markets.

The developmental states literature weds this argument about “developmentalist” (frequently non-market-based) policies, with an antirational choice approach to social (including economic and political) behavior in general. It combines organizational institutionalism’s emphasis on nonmarket or extramarket norms, culture, and organizational effectiveness, with historical institutionalism’s emphasis on state structures (Grindle 2001:350–2). The literature employs “explanations that go beyond the utilitarian calculations of individuals to the enduring pattern of relationships within which such calculations are immersed” (Evans 1995:18). In this perspective, then, institutions tend to be informal norms as much as they are formal rules constraining and incentivizing strategic behavior. Actors’ variable social contexts provide them with ideas, identities, time horizons, preferences, and values – not just strategic environments.

This literature thus opposes rational choice institutionalism, both in its utilitarian social theory and in its view of what policies are best for development, claiming instead that it is because actors are not necessarily utilitarian, constantly searching for ways to help themselves at society’s expense, that states can be effective agents of development. This literature blends the questions of state effectiveness and industrial policy into a single issue: effective states are those that are effective at choosing and implementing industrial policies (i.e. policies aimed at fostering specific industries and sectors) and other kinds of interventions in the economy. It takes largely as given that successful development means having the state influence a national economy’s place in the world economy (“the international division of labor”), by shaping both its external articulation with world markets and its internal industrial makeup.

Good Governance

While still focused on cross-nationally variable institutions, the “good governance” literature diverges substantially from the developmental states literature, particularly in its view of markets. While the latter literature prioritizes the ability to “govern” markets (often meaning regulating or restricting them), the former is concerned primarily with states’ variable capacities to provide the institutions underpinning markets and market-driven growth. Critical institutions include property rights (including intellectual property rights – patents and copyrights, and to a lesser extent trademarks), the rule of law (and its administration), and rules governing the provision of public goods (including education and physical infrastructure) (Shirley 2005). This perspective holds that, where states – and individual state agencies, from the central bank and the customs service to the police and the ministry of education – are efficient, relatively free of corruption, and genuinely oriented to providing public services, development will tend to flourish far more than where such organizations are inefficient, corrupt, and primarily means for individual bureaucrats to reap personal financial rewards. The good governance literature therefore acknowledges, and even stresses, that nonmarket or extramarket institutions are a necessary foundation for markets – and thus for development, given the centrality of markets for the development process.

This institutional perspective can be contrasted with what Rodrik et al. (2004) label “integration” theory: the view that economies’ variable opening to international markets is the major driver of their differential rates (and thus resulting levels) of development. Testing the effects of integration vis-à-vis institutions, Rodrik et al. (2004) find that the former has far less impact than the latter. Key institutions for the good governance literature are property rights, regulatory institutions, the provision of public goods, political freedom/democracy, and public sector effectiveness (La Porta et al. 1999:222, 224; Rodrik 2007:156). Although the instincts of some good governance scholars lead them to prefer government smallness – to the point where they consider it another characteristic of “government quality” (La Porta et al. 1999:222, 224) – in practice, “the better performing governments are larger and collect higher taxes. Poorly performing governments, in contrast, are smaller and collect fewer taxes. […] Identifying big government with bad government can be highly misleading” (La Porta et al. 1999:266). Because of arguments like this, the good governance literature strikes a similar note to the developmental states literature, despite its substantially different theoretical premises.

This thrust of the good governance literature derives somewhat from its divided view of the state. On the one hand, though it shares organizational institutionalism’s emphasis on organizational competence and coherence, the good governance literature remains predominantly utilitarian, eschewing organizational institutionalism’s more cultural and normative view of human behavior. Given its rational choice-based view of human behavior, the good governance literature does not expect a great deal from political actors, including government bureaucrats. Its rational choice premises make no serious distinction between the political and economic worlds (Grindle 2001:348), and so predict that political actors, just like economic actors, will seek predominantly to maximize their own personal material gain. This general orientation, then, expects the state to be the site of self-serving, collectively suboptimal behavior (Grindle 2001:370). In such an environment, where key actors are concerned about themselves and not the common good, administrative practices and policy outcomes tend to be inefficient and broadly undesirable.

The policy implication of such a view is that states’ spheres of influence should be limited – heavy-handed and inefficient public sector management and direction should be replaced by the smoothness of markets. And this sort of policy paradigm (commonly referred to as “market-oriented reforms” by supporters, “neoliberalism” by critics) has indeed been tried: After peaking in the 1970s, state economic intervention in the typical developing country was cut back substantially starting in the 1980s. But the results have been disappointing – even to supporters. The rise of “institutionalism” even among those who are quite supportive of markets has therefore been, in substantial part, a response to the disappointing results of market-oriented policy changes since the 1980s. Among mainstream development scholars, support for market liberalization, privatization, and deregulation was always tempered by other concerns – as was obvious even from the article that coined the (in)famous phrase “Washington Consensus” (J. Williamson 1990). But there have nonetheless been important shifts over time in the central emphases of the research literature, and, to a lesser extent, in actual public policies. The “Washington Consensus” has been expanded to include a wide range of institutional reforms expected to contribute to market-driven growth (Grindle 2004). As Rodrik (2007:150) puts it: “Markets can malfunction both when governments interfere too much and when they interfere too little.” While in the 1980s and 1990s many scholars argued that developing countries needed to take steps to reduce state intervention in the economy (cutting back regulation, liberalizing trade, opening financial markets, privatizing state-owned enterprises), more recently the emphasis has shifted to interventions that states should indeed make.

There is therefore a tension between positive and negative views of the state among good governance scholars: On the one hand, if state actors behave consistently with rational choice tenets, then states are likely to be bastions of self-serving, socially destructive activity. On the other hand, however, states have to be positive players if markets are to work – and logically, given that markets do sometimes work well, states must at various times and places be positive players. Like the developmental states literature, then, the good governance literature suggests that an effective and competent civil service can be an important contributor to successful economic development – though the presence of such a public service is not a given (Stiglitz 1996:156–7).

In some variants, scholars in the good governance literature begin to meet the developmental states literature halfway. For example, Birdsall et al. (2005:145) argue that the East Asian miracles employed “export subsidies, directed credit, patent and copyright infringements, domestic-content requirements on local production, high levels of tariff and nontariff barriers, public ownership of large segments of banking and industry, and restrictions on capital flows, including direct foreign investment.” Rodrik (2007:150) therefore argues that the potential benefits of well-designed industrial policies should not be discounted. Stiglitz (1996:156–7) argues that, in the East Asian success stories, state interventions succeeded because they were well balanced: not so heavy-handed as to disrupt markets, but strong enough to provide extra incentives for development-oriented behaviors. These interventions worked because they were “relatively free from corruption and helped to direct resources to areas that produced high economic returns” (1996:156–7).

In another, rather different, meeting point between these two literatures, Evans and Rauch (1999) and Rauch and Evans (2000) regress economic growth on an index of the national state’s “Weberianness,” meaning the extent to which the state as an organization approximates classic social theorist Max Weber’s ideal-type bureaucracy. They find that the quality of the country’s public bureaucracy is significantly correlated with economic performance. These two articles bracket the developmental states literature’s emphasis on interventionist economic policies, as well as its emphasis on the character of the state’s relationship with domestic capitalists. They also elide the contradiction between the good governance perspective’s microfoundational utilitarianism and the developmental states literature’s more cultural view of behavior.

Some work in the good governance literature can therefore sometimes find common ground with research on developmental states, though the emphasis tends either to be on the organizational emphasis of the developmental states literature (i.e. on issues of bureaucratic effectiveness), or on the potential benefits of some market-constraining policies. In that sense, despite their substantially different premises about human behavior, the two literatures need not be completely antithetical.

Political Economic Pathways

The third body of literature, that on “political economic pathways,” shares the good governance approach’s broadly market-driven view of development, in contrast to the more state-driven view of the developmentalism literature. Drawing on economic history in the tradition of Douglass North (1990; North and Thomas 1973), this literature privileges property rights as the crucial institution for economic development, though some studies define “property rights” more broadly than others (see e.g. Lange et al. 2006:1415). But it also tends to stress how countries follow historical pathways or trajectories: Acemoglu and Robinson (2006a:674) say that generally “once a society gets onto a particular path it stays on it.” And it investigates primarily not the effects of institutions on development, but the historical sources of institutions in the first place. The pathways literature therefore combines rational choice institutionalism’s emphases on the power of institutions to incentivize innovation and investment (in both physical and human capital), with historical institutionalism’s stress on the historical origins of cross-nationally variable institutions that are “sticky” and that have enduring effects over time.

In the European context, Acemoglu et al. (2005) suggest that access to the Atlantic (and thus Atlantic trade) was the major driver of European economic growth in the early modern period. Atlantic trade increased the incomes specifically of actors who supported key institutional changes that proved conducive to development over the long term – while Atlantic trade also produced more direct effects just by expanding the size of the market available to countries with direct access to it. These advantages help to explain the rise of western Europe vis-à-vis eastern Europe in the early modern period.

Beyond Europe, however, this literature focuses intensely on experiences under colonialism. Some colonies witnessed the establishment of institutions (both economic and political) that, particularly after 1800, led to fast economic growth. Other countries suffered from colonial institutional legacies that impeded such growth. Political institutions had indirect effects on growth, insofar as political institutions at time t tend to influence what economic institutions exist at time t + 1, because political institutions contribute to the distribution of political power, which influences which people will get the economic rules they want (Acemoglu and Robinson 2006a).

Variation in economic and political institutions was both a cause and consequence of important cross-national differences in societies’ economic and political circumstances. At the extreme, slave-based economies, or economies based on some other form of highly coercive labor – i.e. those predicated on the maintenance of gross social inequalities – tended to adopt long-enduring economic institutions that reproduced social inequality. The consequences of such institutions for growth in GDP/capita were strongly negative. Grossly unequal institutions provided secure property rights only to a dominant minority, denied them to the majority, and thereby failed to provide widespread incentives to innovate and invest. Colonies based on European settlement – i.e. those where Europeans were enticed to immigrate – had more egalitarian institutions that facilitated broad-based development. Nonsettler colonies, in contrast, adopted generally extractive institutions that were designed to capture wealth only for the colonizers. It was, in short, the differences between extractive institutions, on the one hand, and those ensuring secure property rights for the majority, on the other, that set colonial societies on their variable trajectories toward economic stagnation or advancement (Acemoglu and Robinson 2006a; Acemoglu et al. 2002; Lange et al. 2006).

This perspective therefore qualifies a more general endorsement of property rights with the caveat that property rights are effective for development only insofar as they are extended to the mass of society – not just an elite, privileged minority. The institution of private property does little developmental good if it remains a privilege only of the societal elite – but the elite may nonetheless defend such a system if it suits their short-term priorities, and if they have the political capacity to do so. Like colonialism, inequality is both consequence and cause, an intervening variable linking past conditions to subsequent variation in growth versus stagnation. It is this particularly historical perspective, focusing on the determinants of institutions, that sets the pathways literature apart from that on good governance. Other research on the effects of inequality has demonstrated that inequality leads to increased corruption (You and Khagram 2005), possibly implying a link between the pathways and good governance literatures, given the latter’s emphasis on clean government. Inequality also leads to a range of other problems, from inferior health (Wilkinson and Pickett 2006) to biodiversity loss (Mikkelson et al. 2007) to political disengagement by nonelites (Solt 2008), all of which could similarly be mechanisms leading to reduced growth.

In colonial/postcolonial societies, the historical pathways by which these processes unfolded varied according to local circumstances, as well as to the identity of the colonial power. Lange et al. (2006) show that among Spanish colonies, more extensive colonialism led to worse developmental outcomes in the long run, whereas among British colonies, the reverse was true. Because the Spaniards generally colonized areas that had, initially, more advanced indigenous civilizations, while the opposite was true for the British, these two colonial empires both contributed to tremendous developmental reversals, but in opposite ways. The most extensive Spanish colonialism, and the most indirect British colonialism (Lange 2004), led to the establishment of the worst economic (and often political) institutions, with negative consequences both for GDP/capita, and for corruption, the quality of the public service, the provision of public goods, political stability, and the rule of law. (In contrast to this pattern of more direct colonialism fostering greater subsequent development, however, Banerjee et al. (2005) find that areas ruled indirectly in colonial India had fewer public goods by 1991.)

Sokoloff and Engerman (2000; see also Engerman and Sokoloff 2002; 2005), taking a different tack, show how geographical characteristics laid the foundations for variable levels of early social inequality, which then conditioned the establishment of better or worse institutions for economic and social development. They ascribe the major developmental differences today between the US and Canada, on the one hand, and the rest of the Americas, on the other, to differing levels of social inequality more than two hundred years ago. Easterly (2007) has provided strong recent empirical support for this thesis that in/equality, via the mechanism of institutions, contributes significantly to levels of development. Easterly contrasts an institutional explanation of variable cross-national development with alternative theories about the impact of colonial settler mortality, ethnic fractionalization, tropical location, and legal origin. To deal with the likely endogeneity of inequality, Easterly uses countries’ variable suitabilities for producing different kinds of crops (wheat and sugarcane) as an instrument. Countries naturally suited to producing wheat rather than sugarcane are likely to become more equal, given the far greater advantages of slavery and other coercive labor practices in economies based on sugarcane. Easterly finds that inequality affects key mechanisms – institutional quality and schooling – which in turn affect income per capita.

One clear tension between the pathways and developmental states literatures is their treatment of political democracy. For pathways research, democracy is a good thing for economic development: egalitarian political institutions tend to lead to egalitarian economic institutions, and the latter tend to foster more growth than the alternative. Acemoglu and Robinson (2006a) argue that both economic development and political democratization are predominantly common consequences of a single cause: previous social equality. For the developmental states literature, in contrast, from the point of view of economic development, authoritarianism is arguably an advantage. Kohli admits that developmental states are undesirable “from the standpoint of liberal political values” (2004:381). They concentrate not only economic but also political power, and they often pursue economic growth by repressing workers and other politically subordinate groups. Similarly, Wade (1990:372) argues that “the class structure of many developing countries implies a cruel choice between faster economic development and well-defended civil and political rights.” These views contradict the pathways perspective on the synergies between democracy and development, and also appear inconsistent with the finding of Gerring et al. (2005) that countries with greater “stocks” of democracy (i.e. more total years of democratic governance) tend to enjoy faster economic growth. Perhaps the average effect of democracy on development is positive, but the most extreme cases of growth have somehow benefited from a lack of it.

Despite this tension between them, however, one possible link between the developmental states and political economic pathways literatures could well be that institutional legacies of colonialism conditioned states’ subsequent ability or probability to become developmentalist. Arguably, the developmental state, or the good governance at the root of recent development success stories, is a consequence of the previously relatively high social equality present in successful cases. It is not inconsistent to guess that developmental states may have some historical roots in the colonial period – as Kohli (2004:381) and Lange (2004) suggest.

Institutions: Critiques and Discussion

No one denies that wealthier societies, at least on average, possess significantly more competent and effective public bureaucracies. But one major criticism levied against institutional explanations of development is that they confuse cause and effect: arguably, “good” institutions emerge from, rather than contribute to, economic development. A second possibility is that good institutions are spuriously related to development – that is, perhaps countries with good institutions tend to grow over time, but there is no causal relationship between the two processes. Instead, some underlying factor might be leading to both outcomes, creating only the appearance of a causal relationship between them. Third, alternatively, if institutions are endogenous – that is, if they are only a causal mechanism, a proximate cause itself driven by some more underlying condition – their importance as an explanation of development could in a sense be limited. Arguably, in this case, emphasizing institutions as the cause of development could be deceptive, and could distract from research on the more fundamental (and possibly noninstitutional) root causes of why different countries have better or worse institutions.

In a review of Kang (2002) and Chibber (2003), Schrank (2007) argues against institutionalism, and advocates instead a focus on “social structure.” He takes on what he sees as the dominant institutional view that Korea’s exceptional postwar development was due largely to its state’s institutionally given ability to discipline indigenous industrialists. His criticism is that Korea’s state had this power only because of the unusual character of Korea’s social structure. More specifically, for idiosyncratic local reasons, the local landlord class was effectively abolished in Korea, unlike most other developing countries, subsequently allowing the state to take steps that were politically unfeasible elsewhere. Even if that interpretation is correct, though, Schrank’s view is actually quite consistent with the pathways literature, which argues that institutions are key, but that they are themselves conditioned by factors like experiences under colonialism (as in Sokoloff and Engerman 2000; Easterly 2007). In other words, there is no reason for considering institutions any less “important” as determinants of development outcomes, just because they are endogenous. (The very title of Acemoglu and Robinson’s book Economic Origins of Dictatorship and Democracy (2006b) conveys something of their view of the sources of contemporary political institutions.) As Engerman and Sokoloff observe, “to acknowledge that there is some endogeneity to institutions does not imply that institutions are unimportant, or that they have only a limited impact on economic performance” (2005:646). They might persist and have a substantial effect – though where institutions come from might have implications for how much, or how quickly, they can be changed.

Kurtz and Schrank criticize the “good governance” literature specifically for employing dubious measures of good governance, which they say are “contaminated by perception and/or selection biases” (2007:551). They raise concerns that an overemphasis on institutions (good governance) may divert attention away from more useful and/or important tools of development. While commending Evans and Rauch’s efforts, and recognizing the correlation between “Weberianness” and growth prior to that time, they note that the correlation with subsequent growth rates proved insignificant (2007:552).

Questions that Remain and Future Research

Research on the political economy of development asks how political variables affect processes of economic growth and transformation – processes which, over long periods of time, determine people’s material standards of living. The basic insight of institutional research on development is that historically and temporally variable, socially constructed rules exercise a tremendous influence over development outcomes, both directly (such as by shaping patterns of market behavior) and indirectly (such as by shaping the outcomes of political struggles over public policies). Three bodies of literature link institutions and development. Each of the three spans two institutional approaches in social science generally, and for all three the state figures large. For developmentalists, states have to intervene in the economy, and do it well. This requires the correct social relations, not just rational incentives – e.g. esprit de corps among state officials. For the good governance literature, states should generally try not to interfere much with markets, but they should take care to acquire and maintain the capacity to provide and protect markets. For pathways researchers, institutions are mechanisms by which historical conditions impinge on the future, shaping important decisions about innovation and investment.

Important residual disagreements among these perspectives notwithstanding, there is currently broad, multidisciplinary agreement about the importance of economic, political, and social institutions for development. And contemporary scholars’ broad commitment to institutional approaches in the study of development could be a sign of growing consensus across disciplines about the need for a mixed economy with an adequately resourced and competent state, sufficiently autonomous from private sector actors. Yet many policy debates and questions remain. Precisely what lessons should be drawn from past experience? Despite the common emphasis on institutions, which institutions are “right” for development? Moreover, there remains the question of not only what is desirable, but what is more, and more immediately, desirable – in other words, questions of policy priority. If politics entails a certain measure of triage – determining what problems or agendas to tackle first, and deciding how to allocate scarce political capital – then a long list of desirable institutional transformations is of only limited utility (Grindle 2004). All three institutionalist literatures focus on bureaucratic competence and coherence, even if they differ somewhat on the goals to which these capacities should be directed. But if good governance – in this broad sense – receives clear and universal support across the three institutional approaches, there is no clear consensus on how more countries can acquire it.

One of the sharpest current policy debates is about development aid from wealthier to poorer countries. On the one hand, the institutionalist approach is not encouraging about the ability of First World countries to foster Third World development – whether with aid or by unilaterally liberalizing barriers to trade with poor countries (Shirley 2005:633). While aid and/or trade might appear to be unambiguously positive steps forward, institutional research suggests that only countries with strong and appropriate institutions will be able to take advantage of them – but given the developmental advantages of such institutions, countries that have them are likely to be at least middle-income already (Birdsall et al. 2005). Critics (e.g. Easterly 2006) have thus assailed decades of spending as a massive waste, with little benefit at all. On the other side of the debate, aid advocates (e.g. Sachs 2005) argue that only a large infusion of aid will help those living in the least propitious geographical circumstances – above all, sub-Saharan Africa, but also other tropical, landlocked, and/or high-disease environments. Such a view is consistent with studies such as Mellinger et al. (2000), which note that territories located (a) in the tropics and (b) far from seacoast and navigable rivers are at a major developmental disadvantage (particularly because of high disease prevalence, and costly access to large markets).

At the very least, the institutional approach suggests that outsiders should endeavor to do no harm – i.e. they should avoid interfering with whatever positive changes may be occurring in developing countries. For example, they should avoid imposing prematurely strict intellectual property laws, or restrictions on the kinds of industrial policies used to good effect by previously successful industrializers (see Shadlen 2005; Wade 2003). The kinds of interventionist policies emphasized particularly by the developmental states literature are now effectively banned under many international agreements to which developing countries have tied themselves. Conversely, premature intellectual property laws have been foisted upon them. Market-oriented development scholars disparage interventionist policies as economic nationalism, autarky, and “picking winners” – the latter being something that they regard as nothing short of impossible, even without all the potential problems of political interference in the policy process. But scholars such as Chang (2002) make a strong case that the historical records of now-developed countries demonstrate the benefits of industrial policies and trade protections for infant industries, etc. If such policies – at least when done right – can be used to good effect, then developing countries should be provided the “development space” necessary to implement them.

The pathways literature has tended to be the least policy-oriented, though if anything it seems to validate the importance of social equality as the basis for development-friendly institutions. Yet even if societal equality does appear to be a consistently strong foundation for future development, the appropriate policy response is far from clear. Alesina and Rodrik (1994) argue that the problem with inequality is its tendency to foster costly redistributive policies; if that is correct, then pursuing redistribution to create a more equal society would clearly be a problematic course of action (Glaeser 2006). But, and setting aside the inevitable political impediments, what should be done in places of high inequality? The issue of inequality could in effect split the pathways literature in two: If both social equality and the egalitarian enforcement of property rights are so important, what then of instances where property rights are violated (e.g. land reform in Latin America) in order to make society more equal? The implications of the pathways literature for instances such as these are far from clear. If an equal distribution of wealth and power is key, then some violation of elites’ right to possess most of a country might arguably be desirable. This is a particularly pressing question, given that most countries are seeing increasing internal economic inequality. Whether this trend is a serious problem for development, and how much it is a controllable consequence of public policies, has not been resolved.

Aside from rising inequality, another defining trend of our time is the rapid industrialization of the world’s most populous country – China. The development literature – at least in the West – has not yet absorbed China’s recent breakneck industrialization, nor decided what to make of it. On the one hand, China is another case of an Asian success, following a recipe mixing heavy insertion into international markets with domestic policies diverging dramatically from neoliberalism. What precisely is driving China’s tremendous growth, and what lessons should be drawn by other countries?

Another potential direction for future research, albeit a less policy-oriented one, could be the issue of diffusion, which embodies both methodological challenges and intriguing theoretical questions. Comparative research has traditionally treated countries as independent entities, unaffected by each other’s practices. But clearly processes of diffusion matter, and they could potentially matter a lot for development-relevant policies. John Meyer and various collaborators (see Meyer et al. 1997) have consistently demonstrated that formal organizations – including states – mimic each other. A recent collection edited by Simmons et al. (2008; see also Dobbin et al. 2007) has, in very methodical fashion, uncovered and analyzed four mechanisms by which diffusion can occur: mimesis, coercion, competition, and/or learning.

Finally, there could also be more research on national particularities. Dani Rodrik (2007) argues against “institutional mono-cropping” (Evans 2004), saying that “what works” in a given instance is likely to be very particular to that instance. In that sense, the whole strategy of looking for single “recipes” that work across all countries is flawed. Rather, the goal should be identifying locally specific recipes. Are there policies that apply everywhere, or must we follow slower decision-making procedures and eschew general approaches to identify the right policies for particular contexts? What does such an approach imply for development research? Indeed, an even more general issue in political economy is how to understand the relationship between the political economy of development and research in the political economy of development. In other words, how are development policies and other practices affected, and likely to be affected in the future, by potential discoveries and further developments in the research literature?


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