1.  The Framework and Players: An Overview

1. About this course

Some countries successfully implement development policies while others fail miserably. The natural question is why? There are many possible reasons for different achievements. Politics, history, ethnic unrest, lack of talent, etc. may be cited. However, we are interested in what policy makers can control rather than what cannot be changed easily. This course will focus on the way the government is run to explain divergent performance. In particular, we will look at the administrative branch of the government and ask how development policies are initiated, formulated, implemented, and reviewed. We will identify key players and study the relations and interactions among them.

Our purpose is both positive and normative. Positive means fact-finding (what is). We would like to explain why some policies and programs work superbly while others get stuck in inefficiency and corruption. Normative means policy-oriented (what should be). We would like to suggest how policy can be improved. While effective policy design and implementation cannot be the same for all countries, studying many cases under a common framework will teach us what can be copied from other countries and what cannot be copied.

We are interested in operational, down-to-earth questions rather than grand theory. "Does democracy promote growth?" is a question that is too general and abstract for this course. We prefer questions like "how do countries draft industrial master plans?" "how can we reconcile the interests of the trade ministry and the industry ministry?" and "how different countries cope with the pressure from donors?" That is why we examine many concrete examples. We treat each country and each project as valuable case studies. We do not adopt the regression approach where each country is treated as one data point.

Our course is open and interactive. We are a small group in a small classroom where everyone can raise issues and ask questions freely. It is not a one-way teaching from professors to students. In each class, instructors will present some issues from our recent policy research, to stimulate your discussion. The remaining time is all yours. We would like to hear your questions and concrete cases which you know. In fact, receiving your input is one of the main objectives of this course. Experiences from your countries may be incorporated in our research and used in this course in the future.

2. Models in social sciences

What is the difference between a GRIPS course and a news report? After all, there are many daily reports on policy failures in developing countries on TV, internet, newspapers and magazines. They describe background, people involved, policy content, and dismal results. They blame corrupt officials, political conflicts, ill-designed measures, foreign interventions, and so on. What is the difference between social science and the CNN news report?

They may look at the same phenomena, but social science researchers must follow certain steps to argue and analyze.

   --Define concepts and key variables
   --Identify players
   --Present an idea (hypothesis) using these concepts, variables and players

A hypothesis may be about a relationship among key players, classification of different cases, causes of success or failure, or how the situation evolves over time. By introducing clear concepts, variables and players, a common analytical framework is set up. This framework is used to explain the past and predict the future. It is also used to compare different countries and generate policy advice. In this sense, the framework has broad applicability.

Reality is very complex and cannot be explained in full detail. A social science model tries to simplify reality by restricting the way we look at it. A good model explains many aspects of reality with a relatively simple framework and only a few assumptions. By contrast, if you try to explain reality by introducing new ideas and causes randomly, explanation has no limits and each case is considered unique and different. There is no comparability or transferability.

To study policy effectiveness at the operational level, models should not be too mathematical. We would like to use case studies and international comparisons rather than dynamic utility optimization under perfect rationality.

3. Our framework

To study development policy formulation, we propose to employ the following analytical framework.

Our key players are central government, local governments, non-government stakeholders, and foreign governments. They may further break down into various subgroups as below:

Players at the subgroup level should be interpreted flexibly. They can be added or subtracted for the purpose of each analysis. However, the distinction between top leader and the rest of the central government is crucial.

Among these players, we propose to look at the following key relations:

(1) Leadership style (top leader vs. the rest of central government)

(2) Horizontal coordination within the central government (inter-ministerial linkage)

(3) Vertical coordination between central and local governments (center-local governments)

(4) Relationship with non-government stakeholders (government-stakeholders)

(5) Relationship with foreign governments (government-foreigners)

We argue that these five relations are fundamental, and how the government handles them determines policy style as well as its success and failure to a large extent. In other words, we can concentrate on these players and relations to understand and predict the effectiveness of each development policy. Surely, there are other factors that may influence outcome. They can be introduced into the analysis if necessary, but only to enhance or supplement the players and relations that have been identified as crucial.

To examine each relationship (1) to (5) above, we do not impose any rigid procedure. We may classify cases, narrate historical evolution, describe one eminent personality, see what problems emerged and how they were solved, compare similar cases internationally, study laws and institutions that were introduced, and so on. Methodology should be chosen on a case-by-case basis. In this sense, our framework is a flexible reference box and does not force any particular conclusion, unlike the Huntington-Nelson Model or the Lewis Model explained above which have clear conclusions.

This is a framework proposed particularly for this course. As our study progresses, we will see if this framework is convenient and informative for our purpose. If it is not very useful, we will revise it or even replace it with another framework.

4. Dynamics of institutional change

Developing countries are often in policy traps. The economy may stagnate and policy makers may begin to discuss measures to overcome difficulties, but there may be no political will or institutional momentum to implement needed changes. Sometimes, everyone knows the solution except the president or the prime minister. To know the remedy is one thing. To carry it out is quite another. Even if you know the best policy formulation method (by attending this course, for example), how can you ensure that it is actually adopted in your country? Is there any theory that tells us how to get out of a policy impasse like this?

Masahiko Aoki and his colleagues at Stanford University and Tokyo University have advanced comparative institutional analysis (CIA), a new branch of institutional economics that uses evolutionary game theory. CIA addresses such dynamic questions as "are US standards replicable in transition countries?" "why A system (America) and J system (Japan) evolve differently and do not merge?" and "how much transition cost is required to move from one institutional equilibrium to another?" CIA usually studies systemic changes in the economic sector, but their concepts can also be used to think about government policy formulation.

In the real world, perfect rationality is impossible since information is limited and people's ability to process information is also limited (called bounded rationality). To solve this problem, people specialize in using certain type of information only, to economize on time and resources. When such people gather, organizations such as firms, and even the entire economy, are created. They collectively specialize in certain skills which determine their productivity and competitiveness.

For example, Japanese firms specialize in long-term relations and teamwork, while US firms specialize in open contracts and individualism. The former is probably suitable for producing automobiles, while the latter may be superior in biotech research. Each system is good at something and poor at another, and there is no system which is superior to other systems in all respects. Organizational characteristics do not change easily within each economy, and different systems continue to co-exist in the world (multiple evolutionary equilibria). Here are some concepts from CIA that may be useful.

Institutional complementarity is the term that explains why a system is resilient once it is established. Society consists of many institutional elements which are complementary to each other. For example, postwar Japan had lifetime employment, seniority wage, subcontracting, bank regulation, enterprise-based labor unions, university entrance exam competition, etc. which together supported the production system based on long-term relations and teamwork. It was difficult to change only one element of this system since such a partial change would cause inconsistency and reduce productivity. To change all elements at once would require enormous energy and effort.

Strategic complementarity means that people have little incentive to deviate from the dominant behavior, since that would reduce their expected happiness or income. In Japan, students should cultivate harmonious spirit and fidelity to organization. In America, job applicants must acquire marketable skills and aggressive attitude. Those who don't will not be hired or promoted. This is another reason for the durability of systems as viewed from individuals.

Path dependence is the term that highlights the importance of the beginning. If systems evolve as described above, the initial choice becomes critical. In a primitive situation in which institutions are still random and no institutional complementarity has formed, the future is decided by the type of institutional thrust that first becomes dominant (group-oriented or individualistic, for example). Once it is decided, society will be stuck with that system for a long time. Similarly, after a big shock that seriously destabilizes the existing system (for example, the end of economic planning), new institutional momentum that emerges from it will decide the deflected path of that society. Many developing and transitional countries face such initial ambiguity in institutional direction. Under such circumstances, policy can greatly influence the subsequent institutional evolution.

Policy impasse described above can be understood as a situation in which an inefficient way of making policies was installed and then solidified, and institutional elements and people's attitude to support it have formed. Players have no incentive to change the system since they draw benefits from it. Removing one person or reforming one organization does not improve the situation because of institutional and strategic complementarity. Changing the entire policy making system will require too much energy and meet fierce political resistance.

Is there any way out? Even though institutions are sticky and path dependent, there are times when a system jumps to another system. Here are some agents of change:

Collective mutation--this means that a large number of people inside a society mutate simultaneously, as if their DNA has changed. If only a few people behave differently, they are simply called "crazy" or "silly" and the system remains unchanged. But a sufficiently large mass begin to behave differently, institutional and strategic complementarities of the old type stop working and rules and customs start to change. This is a spontaneous and internally driven change, which may occur when a large number of people feel suppressed or victimized under the existing system. This may also happen when the society becomes richer as a result of successful development and people begin to have new demands and expectations from the government.

Foreigners--foreign governments, firms and individuals follow different systems and are not bound by the behavioral code of the domestic society. They bring and even force new elements, which cause friction and inconsistencies with the indigenous system. In low income countries, bilateral donors and international organizations are particularly powerful. If this prompts a change and new growth in a desirable direction, such pressure is highly welcome. However, not all foreign influences are good from the viewpoint of social evolution. The government must guide and coordinate foreign pressure to prevent undesirable changes.

Policy--even without foreigners, the government can introduce a number of policies that upset existing calculations and complementarities. If needed institutional reform is identified and agreed, the government should take initiative to engineer such a systemic shift.

Leadership--but the key question is, who will organize such policies? It is extremely difficult for bureaucrats to initiate a bold reform. Their power within the government is miniscule compared with enormous institutional and strategic complementarities they face. Drastic policy shifts are usually introduced when a new, strong top leader (president or prime minister) comes to power. The leadership quality (strong will and economic literacy) is crucial for this to succeed.

Political parties and interest groups--opposition parties and interest groups can also make a difference under a democratic form of government in which diverse and even critical voices are allowed. This includes a truly well-functioning democracy as well as populism. By contrast, non-ruling political groups are often emasculated in an autocratic regime.

Researchers, experts and NGOs/NPOs--outsiders may also influence policy formulation indirectly by creating a social environment and providing necessary information for needed reform. The importance of their role also depends on the type of political regime.

In an advanced democracy, policy initiative can emerge from various groups such as grass-roots, NGOs, intellectuals, interest groups, and political parties. Mechanisms to capture and reflect their opinions are in place. However, in developing and transition countries, political regime is less developed and does not have such multiple channels. For all practical purposes, initiative for bold change must come from the top political leader. Foreigners and diverse domestic groups may play supplementary roles to the policy decision of such a leader.

5. Dynamic capacity development

Development is a political as well as an economic process. It succeeds only when both aspects are fully taken into consideration, especially the complex interaction between the two, and appropriate visions, strategies and action plans are fleshed out and executed. Here, the politics of development refers broadly to what can be done under the political landscape of the country as well as the administrative capacity of the government, whereas the economics of development refers to what should be done in terms of policy content to move the economy to a higher level given its initial conditions. The one is about the feasibility of development policy and the other is about its desirability.

Not all feasible policies are desirable and not all desirable policies are feasible. To be effective, a policy maker at any level or in any organization must rack his/her brains for a narrow and delicate set of actions that satisfy both feasibility and desirability. Because all countries are different in both aspects, no one-size-fits-all solution can apply. Since the first best from the viewpoint of economics is often impossible from the viewpoint of politics, compromises must be made and a detour may have to be taken. Policy making is a very complex game, and any advice that looks only at one aspect is easy to formulate but certain to fail. While this general point may be too obvious to anyone, it must be stressed that the lack of consideration of this obvious fact constitutes a major cause of failure in development policy advice.

While the government is directly responsible for designing and implementing development policies, the weight of foreign advice cannot be ignored in latecomer countries. Depending on what they say, foreign advisors from aid organizations or academic institutions can contribute significantly to the country’s welfare or bring misery and despair to its people. Although there is no need to explicitly state the political and administrative constraints of a developing country, foreign advisers are well advised to take them fully into consideration when they draft any report. Some advisers seem to believe that their job is to find an economically sound solution while implementation is the problem of the host government. But if the advice is meant to be practical rather than academic, the fact is that policy advice not based on (implicit) feasibility analysis can hardly be implemented regardless of whether proposed actions are a few or many, or whether they are globally common or tailor-made to a particular country.

From this perspective, the shortcomings of the traditional IMF conditionalities and World Bank policy matrices are clear enough and need no further elaboration. By now, few economists defend an international organization that imposes a long list of common policies on countries struggling with macroeconomic crisis or popular discontent.

The argument for good governance suffers from the same problem. The advocates of this view regard the inadequacy of governing institutions as the main source of poor policies. They extract desirable attributes of growth-friendly governments from the advanced West and evaluate and rank developing countries by these criteria. For instance, the World Bank’s Worldwide Governance Indicators (WGI) consist of six scales: voice and accountability, political stability, government effectiveness, regulatory quality, rule of law, and control of corruption. Member countries are given grade points ranging from 0 to 100 on each of these scales. This approach is criticized from various angles including the confusion of causality between growth and governance, the impossibility—-and even non-necessity-—of attaining good governance in low-income countries, the need for a smaller or different set of institutional targets to start with, and the absence of empirical evidence that good governance is necessary for growth (Grindle, 2004; Khan, 2008; Shimomura, 2005). On the last point, it should be recalled that high performing economies in East Asia generally had poor records in public-sector efficiency, transparency or cleanliness at the beginning or even during their high growth periods. From the viewpoint of interaction of politics and economics, however, the most fundamental shortfall of the good governance drive is the total lack of analysis on the political and administrative feasibility of Western-style governing principles in the socio-political context of the country in question.

Growth diagnostics, which is supposed to overcome the problems associated with the long and universal policy menu of the Washington Consensus, is subject to similar criticism. This research program was proposed by three economists associated with Harvard University (Hausmann, Rodrik and Velasco, 2005) to discover a small number of most binding constraints to growth in each country. It proposes a logic tree (the HRV tree) that instructs researchers to look systematically for such binding constraints and also serves as a checklist—albeit a rather simple one. The HRV tree assumes that boosting private investment is the key to growth, which can be thwarted by either low return or high financing cost. For each case, the inquiry continues by asking the reason why it occurs. The idea that policy advice should be simple and geared to the situation of each country is commendable. This research program has already produced a large number of country growth diagnostics at Harvard University, the World Bank, the Inter-American Development Bank, the Asian Development Bank, and the British Department for International Development. However, it must be pointed out that growth diagnostics writes prescriptions only from the economic side. When political and administrative constraints are added, it is highly doubtful that a small number of economic problems identified to be most binding in a particular country are the correct entry point for reform. Sometimes it is more effective not to tackle the greatest constraint head-on, and instead work on peripheral issues first to gain political support and administrative competence for a bolder action later. There may also be other sophisticated scenarios for improving the chance of success. It must therefore be concluded that the analytical scope of growth diagnostics is too narrow. Policy sequence which works in real world requires far deeper thinking than just following down the HRV tree.

How should we cope with the nexus of politics and economics in development with the understanding that the two are inseparable? One obvious suggestion, at least for academicians, is to conduct inter-disciplinary research. However, the producing a book with economists and political scientists analyzing development independently and without intellectual cross-fertilization hardly helps. Each discipline is deeply entrenched in its methodology which is scarcely mutable. Operationally meaningful results cannot be had simply by inviting them into the same conference room.

The World Bank’s World Development Report in 1997 proposed a strategy which may be dubbed as policy-capability matching. It acknowledged that some policies, such as selective industrial policy, were inherently more difficult and required far more information and policy skill than others, such as providing universal primary education or a level playing field for all businesses. It argued that countries with already advanced institutions might try difficult policies but those without them should first build institutional capabilities in three areas: (i) effective rules and restraints, (ii) greater competitive pressure, and (iii) increased citizen voice and partnership. The latter group should content themselves with easy policies (or "fundamentals") for now and leave difficult ones for later when their institutions were upgraded. This advice can be useful in preventing developing countries from over-reaching themselves, but it shares the same weakness as the good governance approach. It is based on the belief that institutions and capabilities can be enhanced generally and more or less independently from the particular development path that the country has chosen to tread. But such unfocused effort at capacity development is difficult to rally politically and too broad to implement administratively. There should be an alternative and more concentrated way to strengthen capability that appeals to the political constituencies as well as the hearts of the general public.

What East Asia's successful economies practiced was quite different from any of the above. Starting from an incompetent and often corrupt government, a leader rose to take over power, either legally or illegally, to establish a new government with the sole purpose of achieving rapid economic development to maintain national unity or defend the nation from external threats. Such a leader often launched the political regime of authoritarian developmentalism where he himself became the prime driving force of development. He was backed by a technocrat team to concretize his vision, national ideology that glorified material advancement, unwavering belief in upgrading technology and competitiveness, popular support for rising living standards, and political legitimacy based on industrial results rather than democratic procedure (Ohno, 2008a; Watanabe, 1995). Military-like discipline ruled to largely wipe out corruption and nepotism. In this process, politics and economics were deeply intertwined. Leaders had no illusion that politics and economics could be practiced separately or solved independently from each other. Social scientists have a lot of catching up to do to analyze what these policy practitioners actually did.

East Asian economies raised policy capability through hands-on efforts to attain concrete goals rather than trying to improve governance generally and aimlessly. Organizations were created or restructured, and officials and advisors were mobilized or re-assigned, to execute specific tasks required by the five-year plan, the master plan for a priority industry, or the blueprint for a new industrial zone. This approach had several advantages such as concentrating limited human and financial resources on truly needed areas, clear criteria for monitoring and assessing performance, flexible reshuffling of resources in response to initial results or changing circumstances, and the cumulative pride and sense of achievement that emerge as specific targets were realized one by one. We shall call this approach dynamic capacity development.

(For more on dynamic capacity development, see I. Ohno and K. Ohno (2008) below.)

References

Aoki, Masahiko (2001), Information, Corporate Governance, and Institutional Diversity: Competitiveness in Japan, the USA, and the Transitional Economies, Oxford University Press.

Aoki, Masahiko (2001), Toward a Comparative Institutional Analysis, MIT Press.