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