Herramientas y Técnicas para el desarrollo del cronograma

2.1 Introduction

The primary concern of this thesis is to examine some of the ways in which institutions, policies and the configuration of organizations can help to explain the development trajectories of developing economies. Our discussion of theory and the case study evidence suggests that a pure institutional analysis is insufficient for understanding the ways in which institutions and policies actually operate because there is a significant gap between the formal specification of an institution and its operation in practice. This gap in the operation of formal institutions and policies is particularly important in developing countries. The ‘variable’ that we focus on as an important determinant of institutional operation is the distribution of power across organizations in a polity. The relative power of organizations is an endogenous variable at a macro level and an exogenous variable when we are analysing the effects and outcomes associated with particular formal institutions at the micro level. The relative power of organizations is described at the macro level by the interaction of organizations and institutions that determines the distribution of benefits and incomes across organizations as an outcome of this ongoing and interactive process. The macro-distribution of organizational power and the balance between institutions and organizations that underpins it are described as the

‘political settlement’. At the micro-level, the political settlement is effectively an exogenous variable that helps to explain why particular formal institutions and policies have outcomes that are specific to contexts. The insight is that the distribution of power across organizations affects the enforceability of particular institutions because any particular institution implies specific income flows and benefits that will be either supported or obstructed by powerful organizations. If a particular institution does not support the interests of powerful organizations, their activity can have a number of implications. The formal institution may be reversed

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(or in many cases not adopted in the first place), it can be modified formally or informally so that the distribution is more acceptable to powerful organizations and this may affect the outcomes associated with the institution, or there may be a conflict with other organizations including state organizations that results in enforcement eventually but at a more or less high enforcement cost. In each case, the political settlement affects the outcomes associated with the institution and this can help to explain why different formal institutions and policies emerge in different contexts and why similar institutions have different effects across these contexts.

This analysis draws on and extends the analytical framework in Khan (2010b).

The framework of ‘political settlements’ used in this thesis suggests that the primary problems of instability and volatile growth in economies going through developmental transformations is due to the presence of informal institutions that support a distribution of power that is not in line with the incomes supported by formal institutions in that economy. The existence of powerful organizations in a country whose demands cannot be supported by formal institutions means that the formal institutions cannot be enforced effectively without informal modifications that make these institutions workable in the presence of these organizations. These informal modifications create and distribute benefits, or rents (M. H. Khan 2010b) that are either directly captured by the organizations in question or distributed by ruling coalitions to organizations to maintain their capacity to rule. Hence how ruling coalitions are constructed and how power is distributed between the ruling coalition and excluded political organisations is an important analytical feature examined in this thesis. Different configurations of organizational power lead to different strategies to support or modify the formal institutions that deliver rents. These strategies in turn have implications for growth and development. In other words just as the distribution of informal and formal rents supports a distribution of power at the level of the macro-political economy, the distribution of power across organizations sets constraints for economic and institutional policy and the outcomes associated with them. This constraint could take the form of the choice of policy itself, as was the case of West Bengal in India which adopted agricultural growth strategies rather than policies and institutions that supported industry (M. H.

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Khan 2009a; P. Roy 2012) or it could take the form of an implementation constraint affecting particular policies, as was the case with industrial policies in Pakistan which will be discussed later in this thesis.

This distribution of power across organizations is thus important because it affects the enforceability of formal institutions and determines the types of modifications (formal or informal) that determine outcomes. The relevant outcomes include both economic growth and political stability. Indeed, the macro-political settlement can be understood as a reproducible combination of institutions and organizations where the institutions support a distribution of benefits that is acceptable to and reproduces the relative power of the relevant organizations and achieves the minimal economic and political conditions that ensure the reproducibility of the system (M. H. Khan 2012f). Two features of the macro-political settlement and its micro implications are given particular importance in our analysis. First, we look at how the ruling coalition and other powerful organizations in a society are configured and how this has historically evolved. This ‘data’ gives us an idea of the political settlements in our case studies and the directions in which they have been evolving.

Secondly, at the micro-level, we look for evidence of the gap between formal institutions and their expected outcomes on the one hand and the actual implementation and outcomes on the other, to examine the extent to which this gap reflects the distribution of power across affected organizations. The purpose of this analysis is to explain the differential performance of economic regions in the Indian subcontinent and to draw out policy conclusions about feasible reform strategies in the future.

The organization of the ruling coalition and the configuration of power across political organizations can be classified in a variety of ways. A typical feature of political competition in South Asia is the presence of a relatively large number of political entrepreneurs and organizers who organize their political supporters to seek rents through political competition. When the number of potential political organizations is large, the ruling coalition is typically composed of a subset of powerful political organizations. Excluded political organizations compete from outside to replace the existing ruling coalition, typically through elections. This

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political context can have many variations but is broadly described as competitive clientelism in Khan (2012f). When the ruling coalition is able to include enough political organizations within it (and if necessary, effectively repress the rest), the coalition has a longer time horizon. This configuration of power can result in the same party ruling for a long time and the power structure can be described as

‘patrimonial’. There are several variants of the patrimonial ruling coalition. If the ruling coalition can exclude others at little cost or with limited coercion, and if the leadership of the coalition have the upper hand in bargaining with lower levels, we have ‘strong patrimonialism’ of the type characterizing East Asia in the 1960s. If the ruling coalition finds it difficult to exclude others and has to take recourse to frequent suppression to stay in power, it is ‘vulnerable patrimonialism’. If it is sufficiently inclusive to make suppression unnecessary, the leadership may sometimes find they are unable to impose discipline on their followers and these contexts can be described as ‘constrained patrimonialism’. One party rule may be sustained with little violence but the capacity to implement may be low because of many powerful factions within the ruling party. In order to analyse the implications of these differences properly we need to define a few fundamental concepts like

‘rents’ as well as ‘power’ as these concepts have been variously used in social science. This will enable us to address the issues concerning constraints on growth in the different political settlements that we examine in our case studies. In this thesis we examine case studies of Pakistan, Gujarat and Tamil Nadu through the lens of political settlements to map how specific distributions of power affected growth, stability and the pace and type of technology adoption.

2.2 The Institutional Analysis of Growth

Institutional economics is increasingly concerned with broad historical questions of differences in performance across countries. Countries with similar natural endowments and similar rules and regulations, have exhibited widely different economic performances. Put another way, while factor endowments and economic policies can explain some of the differences between countries, there is still a residual in performance differences that has to be explained with deeper

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institutional, political and other differences between countries. What then are these other variables that affect economic growth? One possible candidate is culture and cultural norms which can affect the acceptability and implementation of formal institutions and the ways in which they operate in practice (North 1993; Fukuyama 1996; O. E. Williamson 1998). Some heterodox political economists have placed politics and political organizations at the heart of differences in institutional performance (Bardhan 1997; M. H. Khan 2010b). The core idea is an old one. Marx‘s political economy with its focus on class conflict and the ‘Veblen dichotomy’

between negative business interests and positive industrial interests identified in the old institutional economics focused on the link between contestations over distribution and the enforcement of particular institutions as a key process driving economic growth.

In contrast, much of modern institutional economics is concerned with what can be described as a ‘static’ institutional analysis where the background political conditions and contests are abstracted from. More specifically the question concerning modern institutional economists for much of the time has been the identification of the theoretically appropriate property rights structure that ensures economic efficiency and the minimization of transaction costs. A property right is an institution (a rule) that specifies the right to enjoy or use a good and this can be specified in greater detail as the rules governing who can make what decisions about the use and allocation of a particular asset (Allen 2000). Property rights are institutions and institutions in Douglass North’s famous definition are ‘the humanly devised constraints that structure political, economic, and social interactions. They consist of both informal constraints–sanctions, taboos, customs, traditions, and codes of conduct, and formal rules–constitutions, laws, property rights’ (North 1990).

Transaction costs are the costs of creating, maintaining, transacting and interacting with institutions in general and property rights in particular (Allen 2000) . They can also be broadly defined as the costs of running the economic system (Arrow 1962).

This thesis adopts a broader heterodox view of transaction costs, where the costs of contestation over the choice of different specifications of rights and the costs of protecting and enforcing rights in the context of distributive contests are included in

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our definition of transaction costs. Thus the distribution of power among the organizations affected by a particular right can be an important determinant of the relevant transaction costs of enforcing a particular right. However before we move to this level of analysis we need to differentiate our approach from the analysis of property rights and transaction costs in both neo classical economics (NCE) and NIE.

Both property rights and transaction costs play an important part in NIE analysis while property rights are a cornerstone of NCE analysis.

At the heart of the neo classical economic (NCE) analysis are some specific assumptions about the property rights over endowments that allow efficient exchanges and contracts to be conducted. Property rights are complete in the sense that all valuable assets and activities have rights and liabilities defined over them, these rights are exclusive in most models and finally they are transferable and negotiable, which is what allows markets to work. Property rights with these characteristics are necessary and sufficient for markets to result in efficient outcomes. Much of NCE has been concerned with demonstrating the efficiency outcomes that follow from market exchanges. Market failures are recognized, and solutions to market failures are identified as corrective interventions of different types. However, NCE did not in general go much further in identifying the deeper causes of incomplete specifications of property rights and other sources of market failures.

NCE models are largely models of transactions where transaction costs are either absent or only present as costs at the point of exchange and never within the firm or at the level of collective enforcement. Where they exist, transactions costs are modelled like taxes or transportation costs. Demand for a good with high transaction costs adjusts as consumers respond to higher prices and hence in strict NCE there are no transaction costs that affect the very possibility of exchange (Allen 2000) . Efficiency implications for NCE arise only when market failures are due to missing property rights or contracting failures. Missing property rights can lead to externalities and in these cases policy is required to achieve what would otherwise have been negotiated in a market. Public goods are another source of market failure, this time due to a free rider problem where individuals try not to pay for the

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provision of a jointly consumed (non-rival and non-excludable) good. If many individuals fail to make a contribution to the provision of such a good, it will be under-provided in a market. This is a market failure and the government can improve welfare by providing the good and financing its provision with taxation.

Monopolies result in market failures if a single supplier produces or supplies a product. The ability to set prices enables the monopolist to maximize profits by restricting output and this too results in welfare losses compared to the alternative where competition brings in additional production (assuming divisible technology).

The principal agent problem is another source of a market failure where moral hazard issues arise as the principal is unable to prevent the agent from cheating or modifying a contract in a context of asymmetric information. Thus, market failures in NCE are due to the absence of the appropriate welfare maximizing rules existing or being enforced.

The point of departure of the New Institutional Economics or NIE was the analysis that market failures exist because the transaction costs of introducing or enforcing the appropriate rules would be too high. For instance, in the case of the negative externality the costs of defining property rights over each unit of pollution, or determining the marginal social costs of pollution and then firming the appropriate taxes on every polluter may be prohibitive. Thus, in the NIE analysis, the appropriate rules or institutions are not only able to reduce transaction costs (and therefore increase efficiency) but the creation and enforcement of these rules themselves have transaction costs. NIE was thus able to begin to explain not only the sources of market failures, but also why these failures may persist.

The analysis of the social gains from institutions like property rights was extended, as was the analysis of the costs of creating and transacting with these rights. Some of this was simply formalization of old insights. Adam Smith had recognized that the risk of expropriation would harm investment. Property rights are therefore needed to extend the time horizons of asset users. Without property rights, valuable assets can be overused (as in the tragedy of the commons) or investments in improvement may not be forthcoming. Property rights allow efficient market exchanges only if they are well defined over all relevant assets so that assets can be transferred to the

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highest valued uses and the effects of all activities can be fully taken into account (Coase 1960). And finally more detailed specifications of property rights within the organization of production are required to create incentives and compulsions to increase efficiency. Thus, Alchian and Demsetz argued that the structure of rights within the capitalist firm that created the ‘residual claimant’ was efficient because it created incentives for monitoring team production. This was a narrower version of the point made by Marx a long time ago about how capitalist property rights created the incentives and compulsions for both static and dynamic productivity growth (E.

M. Wood 2002; M. H. Khan 2009a).

The analysis of transaction costs was significantly deepened in the context of the analysis of the firm (Coase 1937; O. E. Williamson 1985). Williamson argued that NCE saw the firm as a production function and hence a construct described by technology. In contrast for the NIE or more specifically for the transaction cost economics approach within NIE, the firm is a governance structure. This introduced for the first time the issue of aligning governance structures with the transactions problems that needed to be addressed, a territory completely uncharted by NCE (O.

E. Williamson 1998). The NIE school has since undergone many iterations and refinements and is now a far broader field of economics than one that is just concerned with transaction costs at the firm level. Even Williamson has extended the approach to look at the role of institutions in society (O. E. Williamson 1998). The next step was to extend the language of institutions, transaction costs and governance to the classical concerns of political economy analysis involving power structures, institutions and organizations. Authors in this area ranged from Pranab Bardhan and Mushtaq Khan at one end to game theoretic approaches in the work of Avner Greif at the other. In the latter approach institutions are modelled as the equilibrium behaviour of individuals in non-cooperative games like Prisoner’s Dilemma or Chicken Games. Property rights thus occupy centre stage in both NCE and NIE. However NCE begins with property rights and assumes either that they can be enforced costlessly or that deviations from that benchmark can be corrected with costless government interventions. In contrast, NIE maintains that both property rights and other institutions have to be created and their enforcement is not

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costless. The effects of property rights and institutions on efficiency and growth depend on the ‘transaction costs’ of their creation and enforcement relative to the savings in transaction costs that would follow if the creation and enforcement succeeded.

2.3 Property Rights, Transaction Costs and Conflict

Transactions costs are an important part of institutional analysis as they determine (by definition) the efficiency of transactions in a society. Since transactions can be in markets but also through other institutions, the transaction cost framework is a general way of looking at all social interactions. Limiting the discussion for now to the transaction costs associated with property rights, it is helpful to distinguish between ex-ante and ex-post transaction costs as they refer to different problems related to transacting with property rights. Ex-ante costs include discovering and negotiating prices, finding the right partners and devising the contract. Ex-post costs include monitoring the implementation of the contract, enforcing the contract, and engaging with any distributive conflicts that may emerge from differing interpretations of the contract (M. H. Khan 2009a). In game theoretic terms transaction costs therefore include coordination costs, the costs of distributive conflicts and the costs of containing free riding (Greif and Laitin 2004). There are cases however where property rights cannot be created because the transaction

Transactions costs are an important part of institutional analysis as they determine (by definition) the efficiency of transactions in a society. Since transactions can be in markets but also through other institutions, the transaction cost framework is a general way of looking at all social interactions. Limiting the discussion for now to the transaction costs associated with property rights, it is helpful to distinguish between ex-ante and ex-post transaction costs as they refer to different problems related to transacting with property rights. Ex-ante costs include discovering and negotiating prices, finding the right partners and devising the contract. Ex-post costs include monitoring the implementation of the contract, enforcing the contract, and engaging with any distributive conflicts that may emerge from differing interpretations of the contract (M. H. Khan 2009a). In game theoretic terms transaction costs therefore include coordination costs, the costs of distributive conflicts and the costs of containing free riding (Greif and Laitin 2004). There are cases however where property rights cannot be created because the transaction