World Institute for Research

No. 2/2007

Why the Poorest Countries four distinct traps that between them account for the problem, each requiring a distinct remedy. I also argue are Failing and What Can that globalization, though it has been benign for the be Done About it majority of the developing world, is not working for the bottom billion and is not likely to do so. On by Paul Collier the contrary, it is liable to make them increasingly marginalized.

So what are the key policy issues? One is that Africa has failed to develop jobs in export manufactures, the strategy that has been transforming Asia. Bangladesh has generated nearly three million jobs by exporting garments. If Kenya could do the same, it would be transformed. But Asia’s success has made it harder for Africa to get started. It will help by granting Africa better access to developed country markets. At present most of the G8 countries impose tariffs on imports of garments from Africa. There is one exception: the US. The US allows Kenya to export shirts duty-free into its market. Europe does not. Even the few African countries that are allowed duty-free access into Europe get blocked by absurd technical © Friedrich Stark / Das Fotoarchiv. / Still Pictures Still / Fotoarchiv. Das / Stark Friedrich © requirements: Lesotho sells thousands of shirts to America, but they do not satisfy the regulations of the European Union. As a result, over the last five years Africa’s garments exports to Europe have declined while increasing sevenfold to the US. The G8 could easily adopt a common set of rules for these African exports that would generate jobs across the region. I proposed this to the G8, but they spent their time posturing over aid commitments.

Globalization, though it has been benign for the majority of the developing world, is not working for the bottom billion and is not likely to do so. On the contrary, it is liable to make them increasingly marginalized.

large group of smallish countries totalling A second policy issue is that many of the countries about a billion people have sheered off from the of the bottom billion are now in the throes of revenue A rest of mankind. As the world becomes more booms from oil and other minerals that dwarf any socially integrated this giant pool of will be both conceivable aid flows. The last time this happened unacceptable and explosive. It is the world’s biggest was thirty years ago and it proved a disaster. The economic problem and we need to do something about money corrupted the local politics so badly that it. To know what to do we need to start with a diagnosis. not only was it wasted, it impoverished, sometimes While the common fate of the bottom billion has been even leading to civil war. Can the governments of stagnation and poverty there has been no single cause. In developed countries do anything to reduce the risks my recently published book The Bottom Billion I propose of repetition? Well, where do corrupt politicians put

United Nations University Falling behind and falling apart: Average growth in GDP per capita

Bottom Billion Other Developing Countries 4% 4%

2.50%

0.50% -0.40% -0.50%

1970s 1980s 1990s

Source: The Bottom Billion. pp. 8-9. ‘The experience of the societies in the bottom billion was thus one of massive and accelerating divergence’ (p. 10) their money? They certainly do not Quite possibly the most effective needs. The western powers are afraid leave it in their own banks, it comes ‘aid’ Britain has ever provided was that sending troops abroad will be to banks in developed countries. And the troops that have secured peace unpopular, and the governments of what do developed country banks in Sierra Leone. Britain currently the bottom billion fear that western do? Basically, they keep quiet about guarantees the peace there through involvement would license pre- it. Is this a necessary consequence of an ‘over-the-horizon’ commitment: emptive invasions. banking secrecy laws? No it is not. if there is trouble, British troops will If the money is suspected of having fly in. It has not been necessary: the Trade in shirts, the governance of terrorist associations then, very commitment alone is sufficient. Civil resource bonanzas, and security sensibly, we now require the banks wars have been devastating to Africa: commitments are a more sophisticated to blow the whistle on it. But if its the one in Sierra Leone delivered agenda than simply doubling aid. stolen from the ordinary citizens the coup de grace to an economy However, I should stress that I do of the bottom billion, well that is that had already been wrecked by not see them as alternatives to aid just too bad. It cost the reforming revenues from diamonds. Across the but as complements. Think how the government of Nigeria huge legal region there are now several post- US responded to the need to rebuild fees to track down some of the conflict situations that need this sort Europe after 1945. It recognized previous president’s millions in a of commitment. To date, nearly half that the problem was serious and Swiss bank, and even when they of all post-conflict countries revert addressed it through the full range won their court battle the Swiss to war within a decade: we should of possible policies. Yes, there was Minister of Justice blocked sending surely be able to make a difference a big aid programme, Marshall Aid. the money back. here. Unfortunately, along came the But this was complemented by a war in Iraq and closed down serious complete reversal of US trade policy, A third policy issue is security. discussion of Africa’s security from protectionism to integration, through the founding of the GATT. Even the few African countries that are allowed duty-free access into It was also complemented by a Europe get blocked by absurd technical requirements: Lesotho sells reversal of US security strategy: from thousands of shirts to America, but they do not satisfy the regulations isolationism to mutual guarantees of the European Union. enshrined in NATO and over one

 hundred thousand troops in Europe for four decades. Finally, there Al- was a dilution of the principle of absolute national sovereignty, with the creation of new structures for mutual support of good governance,

enshrined in the founding of the

Alexander Zachn Zachn Alexander Alexander OECD and the EEC. That is what Zachn Alexander happened when the US became serious. The challenge posed by the divergence of the bottom billion is Paul Collier delivering the evidently more diffi cult than that keynote address at the of rebuilding Europe. It will take WIDER Conference on that same full panoply of policies, although obviously the content of Fragile States – Fragile Groups each policy will be different. on 15 June 2007 in Helsinki.

Quite possibly the most He is the co-author of the effective ‘aid’ Britain has ever following recent WIDER provided was the troops that ‘The Bottom Billion is a serious research papers on fragility have secured peace in Sierra book but an easy read. I tried to and development: Leone. make it an easy read because I RP2007/16 Lisa Chauvet, realized that the policies of the G8 Paul Collier, and Anke So, the message is to narrow our governments towards development Hoeffl er: Paradise Lost: focus and broaden our instruments. were increasingly being set by The Costs of State Failure in Narrow our focus to the divergence politicians trying to please their the Pacifi c; of the countries now at the bottom own voters. Inadvertently, the of the world economy: a one-billion same process that has succeeded RP2007/30 Lisa Chauvet, Paul person problem. Our efforts will be in getting development onto the Collier, and Anke Hoeffl er: spread too thin if we continue to fuss political agenda, which has been The Cost of Failing States and about the entire fi ve billion people in the lobbying of rock stars and the Limits to Sovereignty. developing countries. Broaden our NGOs, risked trivializing its policy instruments beyond the exclusive content. It is time for academics to Paul Collier is Professor reliance upon aid, to recognize that set aside our tendency to write only of Economics at Oxford other policies are likely to matter for each other, and to reach out to University and Director of the more. Our aid agencies need to be our fellow citizens, communicating Centre for the Study of rethought as genuinely development our expertise. African Economies. agencies. While the style is light, the content The Bottom Billion: why the is entirely about economic research, essentially pulling together my poorest countries are failing recent research with a number of and what can be done about colleagues. This pulling together it, is published by Oxford is also increasingly rare in University Press. academic behaviour. Our work is now overwhelmingly presented in article-sized nuggets with few serious outlets for more sustained analysis.’ – Paul Collier

3 Applying Behavioural Economics to Development Policy by C. Leigh Anderson and Kostas Stamoulis

ehavioural economics Though there are many examples observation and repeated experiments combines the insights of that challenge standard economic suggest that individuals often employ Bpsychology and economics models we consider three that we find ‘fast and frugal’ heuristics; rules that to better understand and predict particularly salient for development: allow them to make decisions either decision making by considering decision making under uncertainty, in the absence of full information or how, for example, emotions and intertemporal choices, and social when they are unable or unwilling to attitudes (psychological tendencies) preferences. incorporate all the information that is influence how preferences translate available in the relevant timeframe. into choices. Decision-making Under Uncertainty These rules may lead to errors in Applying behavioural economics to probability judgments. Common development policy is a particularly Poor individuals live in risky heuristics are availability, anchoring, relevant, but neglected, field of inquiry environments, with fewer mechanisms and affect, whereby people estimate given that in developing countries the for smoothing the variability that frequency by the ease of recalling poorly educated, the spatially isolated underlies the uncertainty. How they vivid or recent events, by using and those in highly risky environments, deal with uncertainty depends on three arbitrary amounts as bases, or by their may be disproportionately represented aspects: the qualitative dimensions preference for an outcome. These in the group for whom standard models of risk, decision rules with known heuristics can affect evaluations of do not regularly apply—and further, and unknown probabilities, and the expected costs and benefits in resource that behaviours may more acutely framing of choices as gains and losses allocation decisions. affect policy outcomes because there (reference dependence). We will are fewer formal institutions, such briefly discuss each. Reference dependence has been as credit and insurance markets, to regularly confirmed in a variety of temper their effects. Individual and social tolerance of a experiments. Alternatively attributed risk depends upon its quantitative and to an endowment effect, loss aversion, Despite the growing literature on qualitative characteristics, including or a status quo bias, the result is development policy we are still unable magnitude, certainty, voluntariness, that preferences vary according to to fully understand how the poor make dread, proximity and distribution of the direction of change. In general, decisions, especially under uncertainty impacts. Individuals systematically individuals are more sensitive to losses and over time. It is not clear why, for overestimate the size of risks that are than equivalent sized gains—with example, individuals do not regularly small, novel, unfamiliar, involuntary losses often being weighed more than adopt subsidized technologies such as and uncertain, and underestimate the twice as heavily as gains. Previous ventilated cooking stoves to reduce size of risks that are more certain, questions around insurance behaviour health risks. They avail themselves less larger, familiar or somewhat voluntary. are now attributed to consumers than predicted in health programmes, For instance in Chiapas, Mexico, overweighting small probabilities. participate less than expected in farmers were willing to pay for For developing countries, a recent market opportunities, under or over local and improved variety seeds overview of crop insurance studies insure themselves, and make short- that decreased the frequency and concludes that the costliness of run decisions that are inconsistent magnitude of maize crop loss. Farmers informal household risk management with their long-run welfare. The stated a higher willingness to pay to strategies imply a positive demand for rise and fall of different paradigms reduce catastrophic loss from drought, a fair value insurance contract. Yet crop of poor household behaviour can and chronic loss from pests, than for insurance has been a ‘near-universal’ partly be attributed to this limited exactly the same loss reduction from failure on a financial basis. Common understanding. We believe that some wind lodging. Our results suggest that explanations include the covariant more helpful answers may lie within the technology with which a crop loss risks in agriculture, moral hazard behavioural economics, that these is reduced may be less important in and adverse selection, and insecure insights are particularly important for adoption than perceptions of control property rights. But behavioural poor and rural populations, and that and dread over the environmental risk evidence also implicates discrepancies they can improve the future design, causing the loss. between perceived and measured risk. implementation and subsequent For example, contrary to popular effectiveness of development policies Traditional models assume that insurance for earthquakes—a vivid and programmes. individuals make fully reasoned and dreaded, but low likelihood event and consistent choices. Yet regular —the higher likelihood, but more

 familiar crop loss evokes enough risk Other results suggest that consumers seeking behaviour to render insurance perceive price increases arising from programs unsustainable. seller cost increases as fair, but not price increases in response to demand Intertemporal Choice fluctuations—and oddly enough, without any information about the Contrary to standard discounted base profi t levels of the seller. utility models that assume constant discount rates evidence suggests that Providing for public goods also short-run discount rates, experienced counters traditional wisdom. For at the moment, are higher than the example, studies suggest that people long-run discount rates we project are more likely to contribute to public forward. Hence people with time goods when they believe others are varying discount rates, if they lack also doing this, even though from an perfect self-control, may pursue short- effi ciency perspective the marginal C. Leigh Anderson is run actions that they had previously social benefi ts are highest when no calculated were not in their best long- one else is contributing. Professor at the Daniel run interest—they may consume J. Evans School of Public their savings, fail to stick to a debt Conclusion Affairs, University of repayment schedule, skip school or job Washington training opportunities, exploit natural Though behavioural economics has resources unsustainably, or choose been slow to penetrate development occupations that require little human policy, interest is growing at capital investment. organizations such as the International Fund for Agricultural Development Standard economic theory posits and the FAO that individuals can only be made better off with access to credit, since The challenging questions for future they can always choose not to avail research, we believe, are around themselves of it. But even with good measurement and scale. To be useful, intent, the optimal payback plan of easily measurable correlates of individuals can change over time, unobservable attitudes need to be creating repayment diffi culties. Naïve found, and the specifi city of reference consumers, so called because they are levels and context must be scaled up. unaware of their self-control problems, And just as institutional perspectives repeat regrettable behaviours. have become part of the mainstream Kostas Stamoulis, Chief, Sophisticates, on the other hand, can we will eventually overcome our own Agricultural Sector in anticipate their inconsistency and seek ‘status quo’ bias about incorporating Economic Development ways to decrease liquidity and help more psychological realism into our Service (ESAE), FAO, Rome bind their future behaviour. Evidence models. from Africa and Asia indicates that relatively simple institutional mechanisms can help align short run choices with long-term preferences, such as lock boxes, money guards, deposit collectors, limited withdrawal savings accounts, and rotating savings and credit associations. See the chapter ‘Applying Behavioural Economics to Social Preferences International Development Policy’ by C.L. Anderson and K. Stamoulis, Social preferences infl uence market in Advancing Development: Core and exchange behaviour. Repeated Themes in Global Economics, experiments suggest that individuals edited by George Mavrotas and are willing to suffer monetary losses Anthony Shorrocks, published by to punish opponents for outcomes Palgrave Macmillan (paperback) or intentions perceived as unfair. 9780230019041.

5 Globalization, Growth, and Poverty in Africa by Machiko Nissanke and Erik Thorbecke

frican countries have to grow faster, most African countries on-going globalization has entailed benefited relatively less have increasingly searched for ways a high cost to the region not only Afrom the positive effects of to accelerate their participation in the in terms of low globalization than other parts of the global economy over the past two but also in persistent poverty. In world in terms of economic growth decades. Indeed, most economies in particular, the past neglect—if not and development. Following largely Africa significantly liberalized their overt exploitation—of agriculture in an inward-oriented development trade and investment policy regimes many African countries short-circuited strategy in the early decades of as part of Structural Adjustment the development process as agriculture the post-independence period, the Programs since the mid 1980s. is the only potential engine of growth majority of African countries failed at an early development stage. to take advantage of the opportunities However, in spite of this Africa’s provided by the dynamic growth share of total world trade has fallen There is no doubt that sustained impetus associated with globalization between 1980 and 2002: Africa’s poverty reduction requires economic in the 1970s and 1980s. Instead of share of world exports falling from growth. However, the pattern of becoming more integrated into the about 6 per cent to 1.5 per cent, and growth does significantly affect the world economy, they were largely imports from 5 per cent to 1.5 per rate of poverty reduction. In this marginalized and experienced slow cent. Many countries in Africa have context, it can be argued that Africa’s growth and stagnation. also intensified their efforts to attract growth has been distinctly against the foreign direct investment with various poor not only in terms of its ability As a result the incidence and depth of fiscal and other incentive measures. to deliver the required growth rate to poverty has risen in the region. The Yet, foreign direct investment (FDI) ensure that the poor could benefit from number of poor, measured in income flows to the region so far have been economic growth, but also in terms poverty based on the US$1 a day largely limited to extraction of oil of its structure. Economic growth in international poverty line, increased and other natural resources. Africa Africa, where it has occurred, has not in Africa, almost doubling from 164 attracted only around 6 per cent of been translated into significant poverty million in 1981 to 313 million in total net FDI inflows to developing reduction. Critically, the nature and 2001. In terms of the headcount ratio, countries in 2000-4. pattern of integration into the global the poverty incidence in Africa is 46 economy in Africa as well as domestic per cent in 2001—the highest in the The recent upturn in economic growth conditions has not been conducive world. Poverty in Africa is both most recorded in many natural resource- to generating virtuous cycles of prevalent and severe in rural areas. rich economies in Africa is closely globalization-induced growth as Poverty measured in terms of non- associated with the price hike of generally observed in Asia. Africa income indicators such as health and oil and mineral commodities in the has paid a high price for its neglect has not improved much world markets. The sustainability of of agriculture which continues to be either over the past 15-20 years in growth rates of 6-7 per cent recently the Achilles’ heel hindering the take- the region. The overall picture gives observed in these economies will be off into sustained growth in many little cause for optimism that Africa dependent on the degree to which of the poorest and least developed will soon reap the benefits of the commodity booms are used purposely countries. process of globalization, unless it for diversification and transformation scales up efforts in a number of fronts of economic and trade structures. In most of East Asia, the structural including adopting a more pro-poor transformation of their economies has pattern of growth and increasing Indeed, today, several decades after been considerably facilitated by the the provision of public services in gaining political independence, the integration/globalization process (see the social sector. Further, the degree high primary commodity-dependence Nissanke and Thorbecke 2008). The of income inequality in Africa has remains one of most conspicuous growth—accompanied by a substantial increased sharply in the last two characteristics of the trade pattern reduction of abject poverty—in East decades. Today, many countries in of countries in Africa with the rest Asia can be explained in terms of the Africa suffer from a relatively high of the world. The failure of these region-wide comparative advantage intra-country inequality which is economies to diversify and undergo recycling in production and export among the highest in the world. structural transformation, and hence, of labour-intensive goods. The to benefit from the technology- process involves a strong demand With growing recognition of the need driven, highly dynamic aspects of for unskilled and semi-skilled labour,

 driven by exporting labour intensive In short, while globalization has made goods and pro-trade FDI through some contribution to economic growth effective technology, knowledge in Africa, it has not yet facilitated the and skill transfer. Most of the East process of structural transformation and South-East Asian economies required for countries in Africa to have successfully gone through the reach the take-off stage and accelerate structural transformation of their economic development and poverty production and trade structures with reduction. Instead, globalization continuous upgrading of their human has tended to increase intra-country skill endowments and technology/ inequality and has done very little to knowledge base. By relying on their reduce poverty. Naturally, the impact of dynamically evolving comparative globalization on poverty is extremely advantages these countries were context-specifi c. In general, however, Machiko Nissanke is able to maximize the benefi ts from the limited scope of globalization in Professor of Economics at dynamic externalities. Specialization Africa appears to be the result of a the School of Oriental and in sectors with large spillovers and combination of poor initial conditions, African Studies, University dynamic externalities is more apt such as fundamental disadvantages of London. She previously to engender a pattern of equalizing of location (disease-prone tropical worked at Birkbeck College, growth. countries with a harsh environment); inadequate political institutions; University College London Moreover, in most of East Asia, the extremely under-developed physical and the University of pro-poor pattern of public expenditure infrastructure, and a related high risk Oxford. in favour of the rural poor and the investment climate. Progress on all agricultural sector during early these fronts will be necessary if Africa stages of development produced is to enjoy the potential benefi ts of and sustained the ‘shared’ growth globalization. process. There were concerted efforts on the part of governments Readings to facilitate building primary assets of the poor through such measures Nissanke, M. and E. Thorbecke (2006) as an equitable distribution of land ‘Channels and Policy Debate in the (through appropriate land reforms); Globalization-Inequality-Poverty extensive public provision of free Nexus’, World Development, Vol. 34 and universal primary education; No. 8 pp. 1338-1360, in the Special Erik Thorbecke is the promotion of small-scale enterprises Issue: The Impact of Globalization on H.E. Babcock Professor and development of rural infrastructure the World’s Poor. of Economics, Emeritus, – roads, irrigation, schools, agricultural Graduate School Professor support outposts, health stations, and Nissanke, M. and E. Thorbecke and former Director of the irrigation systems. (2007) The Impact of Globalization Program on Comparative on the World’s Poor: Transmission Economic Development In contrast, the high susceptibility and Mechanisms, Palgrave Macmillan. at . The vulnerability to exogenous shocks Foster-Greer-Thorbecke through its fragile trade linkage may Nissanke, M. and E. Thorbecke (2008) poverty measure has have left Africa behind and suffering Globalization and the Poor in Asia: been adopted almost from vicious cycles of globalization- Can Shared Growth be Sustained? induced decline. Many parts of Africa Palgrave Macmillan. universally by international remain isolated from global markets organizations. and the global community as the Round, J. (2007) Globalization, region’s access to information and Growth, Inequality and Poverty in Machiko Nissanke and technology is limited. There is some Africa: A Macroeconomic Perspective, Erik Thorbecke are the evidence to suggest that in Africa WIDER Research Paper RP2007-55. co-directors of the WIDER ‘globalization may be associated with project on The Impact of increasing inequality and (hence) with Globalization on the an increase in poverty’ (see Round World’s Poor. 2007).

7 Stranger than Fiction? Institutions and Economic Development by Ha-Joon Chang

ainstream economists For example, it is not enough to say institution) are defined in relation used to treat institutions that developing countries need better to the structure of the rights and Mas mere ‘details’ that gets fiscal institutions. We need to be obligations of the relevant actors. in the way of good economics. Then able to tell them how to build such As the definition of those rights and from the mid-1990s, everyone, institutions. Second, we need more obligations is ultimately a political including the IMF and the World case studies of institution building— act, no institution, including the Bank, suddenly started to emphasize historical and more recent. Real life market, can be seen as being free the role of institutions in economic experiences of institution building are from politics. development. There are a few reasons often ‘stranger than fiction’—that is, behind this rather dramatic change. they are often more imaginative than The politics involved in institution- First, the institution-free technocratic what theoreticians have suggested building process can often be reform programmes of the 1980s have on the basis of broad generalization very unpleasant. The efficient tax almost universally failed. Second, and abstract reasoning. institutions of early modern Britain a number of devastating large- fuelled its imperialist expansion and scale financial crises in developing Against ‘Institutional repression of lower classes at home countries around the turn of the Mono-tasking’ in the name of protecting private century have prompted debates on property. At one level, this ‘dark’ the need for reforming financial Institutions can, and do, serve origin of certain institutions limits and other institutions in order to multiple functions. Unfortunately, in their applicability. For example, few prevent and deal with such crises. the mainstream discourse, there has would recommend that developing Third, there have been increasing been a tendency to assign a single countries create institutions that attempts by the developed countries function to each institutional form, repress the poor to emulate the British to introduce ‘global-standard’ described as ‘institutional mono- economic success in the eighteenth institutions to developing countries. tasking’. century. However, institutions can Fourth, there have been some be used for purposes that were not important theoretical developments The failure to understand the originally intended, and therefore the in institutional economics—both functional multiplicity of institutions ‘darkness’ of their origins need not orthodox and heterodox. means a failure to fully exploit keep us from using them for better the potential of an institution. purposes. Stranger than Fiction? For example there are many developmental functions of a central Structure vs. Human Agency Despite the heightened interests bank that are neglected because of in institutions, there are still some the currently dominant view that the In the mainstream theory of important gaps in our understanding. sole function of the central bank is institutional change, there is no First of all, we still do not know to guarantee price stability. real human agency, because what a what institutions in exactly which rational actor will choose is already forms are useful for economic Institutional mono-tasking also structurally determined. However, development in which contexts. For makes it easier for particular interest case studies show that history has example, everyone may agree that groups to hijack certain institutions developed the way it has because a ‘good’ property rights system is and make them work mainly to their someone somewhere made choices essential for economic development, advantages. Shareholder-oriented that were not obvious according to but there is no agreement on what institutions of corporate governance the structural parameters. a ‘good’ property rights system is. have often allowed shareholders to Second, even when we can identify assert their interests over those of If human actors are not automata a particular institution as beneficial other stakeholders in the firm and responding to structurally- in a given context, we often do of the broader society. determined incentives, their ideas not know how we can build such matter a great deal. Sometimes institution. Politics of Institutional Change ideas can be used as tools by human agents in their attempt to change A recent WIDER volume1 argues Institution building cannot simply institutions in the way that they that, in order to fill these intellectual be a technocratic exercise. All prefer. The American professional gaps, we first need to develop new institutions, including the market managerial class has been able to discourses on what may be called the (which is often assumed by use the shareholder-value ideology, ‘technology of institution building’. mainstream economists not to be an which identifies it as main targets of

 restraint, in a way that allowed it to introducing the desired institutions, There is no universal formula for build institutions that enrich itself as the current orthodoxy goes. In institutional development. However, (e.g. stock options). However, ideas other words policy-makers should even in this inherently complex area, are not merely tools that human target the kind of activities that would it is possible to extract some general actors cynically manipulate in order bring the right kinds of institutions, principles and enrich our empirical to make the institutional changes not the other way around. knowledge, especially if we are that they prefer. Institutions affect willing to go beyond the rather the ideas that human actors hold, Moreover, even when we agree narrow theoretical and empirical and therefore they shape the human that some institution is likely to confines of today’s orthodox actors. be good, there is always a danger discourse on institutions. of ‘institutional overdose’. For Unintended Consequences and example, even if some protection Intended Perversions of private property is absolutely necessary, it is wrong to infer from Emphasizing human agency does that the stronger the protection is not imply that those who plan and the better it is, as the conventional implement institutional changes wisdom goes. are in full control of the situation. There are unintended consequences Concluding Remarks of institutional change—positive or negative. The recent WIDER volume shows that there is no universal formula However, the failures of certain for institutional change that will institutions to serve their original promote economic development. functions may not always be Functional multiplicity, the unintended. Some actors may importance of informal institutions, deliberately choose to use them unintended consequences, and for purposes other than the original intended perversion of institutions ones. Patents for instance may be all imply that importation of best turned into vehicles of rent-seeking practice formal institutions does not (as in the case of Britain at the time guarantee any particular positive of Adam Smith) or even an obstacle outcome, even assuming that the to innovation (as in the recent imported institution can actually Ha-Joon Chang is Reader extension of patents to the genetic take root in the importing country. in the Political Economy of level). The fact that there is no set formula, Development, University however, should not make us think of Cambridge, and directed Such institutional perversion that there is nothing we can do to need not be a negative thing. It improve the quality of institutions the WIDER research project has been shown that despite its in developing countries. ‘Institutions for Economic apartheid origins, the rather effective Development: Theory, institutions of taxation in South First of all, being late-comers, History, and Contemporary Africa are slowly beginning to be developing countries have the Experiences’. used for redistributive purposes. benefit of being able to imitate institutions that exist in the more 1 Institutional Change and The Technology of Institution developed countries–of course, Economic Development Building with due local adaptations–and Edited by Ha-Joon Chang thus cut down the costs associated October 2007 Although there is a diversity of with developing new institutions de institutions across time and place novo. Second, historical experiences UNU Press (paperback) it should not be taken to imply that show that countries do not have to 9789280811438 there are no common principles start with high-quality institutions. – North America / Geneva in the technology of institution It is perfectly possible to improve edition building that can be applied across the quality of institutions while the Anthem Press (paperback) countries. country is developing its economies, 9781843312819 with economic development and – UK / Europe / South Asian Institutional reform may be more institutional development feeding edition effectively initiated by introducing into each other. desired economic activities than by

9 A Fiscal State with its Royal Navy: Institutions and the Industrial Revolution by Patrick Karl O’Brien ‘Good’ institutions have become their realm and as the force required the appreciation by wealthy elites a core ingredient of most modern day to back conquest and commerce of the advantages attending the explanations of economic growth and with continents other than mainland establishment of a standing fleet of development. The recently published Europe. For several reasons that warships under control of the Crown WIDER book on Institutional conception took nearly two centuries as well as the externalities generated Change and Economic Development (1453-1649) to mature, one of by a Royal Navy for the maintenance (see the previous Angle article by the most important being that the of that other and equally significant Ha-Joon Chang) emphasizes that aristocracies and the propertied public good—internal order. what is appropriate as an institutional elites assembled in the Houses of framework for development Following on from a in one context, might not be ©Topfoto/Lehtikuva series of republican and appropriate in another. This royalist experiments with implies that there might the political principles, be important historical methods of assessment specificity in the relationship and collection of taxes, between institutions and a ‘reconstructed’ fiscal development. In this article base came into place I illustrate this link between under the restored Stuart institutions, history and monarchy. Constitutionally development, by describing that base rested, first the institutional context and foremost, upon the which led during the reaffirmation by the Crown eighteenth century to the of the long-established First Industrial Revolution, tradition (challenged arguably one of the most under provocation by significant events in the The Battle of Trafalgar 1805 as seen from the mizen starboard Charles I) that English economic history of the shrouds of HMS Victory monarchs could not levy modern world. Why, and how, did Lords and Commons successfully taxes without formal consent from the Industrial Revolution happen to resisted all attempts by the Crown Parliament. Thereafter, Parliament take place in the United Kingdom to deepen and widen its fiscal never presumed to control royal (UK) when it did? base in order to fund the resources expenditures and hardly ever required to establish armies and withheld consent for supply; In this article I argue that to some navies of sufficient scale, scope and particularly in wartime. significant degree an Industrial technological capability to defend Revolution emerged in the UK the realm, maintain internal order The Royal Navy as the outcome of aggressive and and protect private investment successful mercantilism. In the in commerce and colonization It is upon the Navy under the beginning was a fiscal state with its overseas. Providence of God that the safety Royal Navy. honour and welfare of this realm Eventually nearly two centuries of do chiefly attend The Formation of a Fiscal State fiscal stasis, economically malign, Preamble to articles for the First disputes over religion and persistent Anglo-Dutch War, 1652-54 Not long after the First Hundred Years acrimony over the crown’s rights War (1337-1453) when England’s to taxation, culminated in an feudal armies had ignominiously ‘interregnum’ of highly destructive The maritime strategy pursued for retreated from centuries of dynastic civil war, republican rule, and the defence of Britain was taken and imperialistic warfare on the the restoration of monarchy and forward during the Commonwealth mainland, the island’s kings, aristocracy. As well as truly massive to mature into a well-funded and aristocrats and merchants began destruction of life and capital, this binding commitment by the state to conceive of naval power as famous interregnum witnessed: the to a standing navy of the size and the first line of defence against most serious threats to hierarchy and technical capability required to external threats to the security of property rights in English history; preclude invasions of the Isles from

10 offshore. That commitment which external security taken as given, Colonial) of an expanding imperial continued to our own era of airpower stability, good order, respect for an workforce or, when necessary, made sense to an isolated Republic established inegalitarian system of hired as mercenary soldiers from threatened with Royalist inspired property rights and the maintenance labour abundant societies on the privateering on its trade, with of hierarchy over their potentially mainland. Furthermore, and while invasions supported by outraged unruly employees became a key the Navy operated as the realm’s kings from the mainland, but in political-cum-economic interest for main relatively cheap but highly possession of funds (realized from landowners, merchants, farmers, effective fi rst line of defence, the the sale of the expropriated wealth industrialists and other businessmen state funded and maintained a royal of the monarch and his treasonable of Hanoverian Britain. army which (together with local supporters) to invest heavily in the militias) remained on call and active construction of warships. On the whole, their ‘monarchical for the preservation of the internal and aristocratic’ state met concerns order necessary for investment and Persistently high levels of public for the protection of property, for economic growth. expenditure on the Royal Navy the maintenance of authority over probably exceeded allocations for workforces and when necessary gross domestic capital formation redefined their legal rights by between 1760 and 1810 and in times promulgating statutes for the of war amounted to around half of realm which superseded custom the value of Britain’s exports, plus re- and common laws that could be exports. This commitment provided interpreted as providing protection the kingdom with Europe’s (the for the welfare of the majority of the world’s) largest fl eet of battleships, nation’s workforce without assets, cruisers and frigates, manned by a status and power. largely coerced workforce of able seamen, managed by well motivated Conclusions: The Security, offi cers. Stability, and Growth of the Realm The relatively low costs, and in Patrick Karl O’Brien, former outcome, highly successful and Somehow through eleven wars the Director of the Institute of economically signifi cant offshore Royal Navy retained command of Historical Research at the strategy for defence allowed the the Channel and the North Sea. University of London and British state to spend more upon Throughout the period which past president of the British armed forces and to allocate greater witnessed Britain’s combined Economic History Society, is proportions of its already elastic geopolitical and economic rise, now a Centennial Professor fiscal and financial resources not the Navy’s guard over Western and only to complementary mercantilist Eastern approaches to the Isles, of Economic History at and imperial missions pursued blockades of enemy naval bases, the London School of at sea, but to sustain surprisingly the interdiction of their supplies of Economics where he acts high levels of military expenditure. strategic raw materials and weapons as Convenor of the Global Throughout the period 1688-1815, and occasional pre-emptive strikes Economic History Network the military share of expenditures on effectively prevented a rival fl eet (GEHN). armed forces by the European state from clearing a viable sea route This article is based on most committed to naval defence for the landing of armies on the WIDER Research Paper and aggression amounted to a modal kingdom’s shores. (2006/75) ‘The Formation 60 per cent. In wartime the proportions of the of a Mercanilist State and Prospects for trade across a ‘less than British workforce (particularly the Economic Growth of united’ Kingdom came, from time to skilled artisans) drafted into the the United Kingdom time, under serious threat from within army (the country’s secondary 1453-1815’ that was the potentially seditious provinces of line of defence) remained low. prepared within the WIDER Scotland and Ireland; particularly Troops (and embodied militias) project on ‘Institutions for the latter where a colonized Catholic required for defence and service Economic Development: population resented ‘English’ overseas could, moreover, be Theory, History, and property rights and the metropole’s recruited overwhelmingly from Contemporary Experiences’, discriminatory regulation of local among the unskilled potentially directed by Ha-Joon Chang. commerce and industry. With unemployed fringes (often Celtic and

11 WIDER Conference WIDER Conference Fragile States – Fragile Southern Engines of Global Groups: Tackling Economic Growth: China, India, Brazil, and Social Vulnerability and South Africa © Mike Goldwater © Lehtikuva / Reuters Stringer (China)

WIDER hosted two major international security of the poorest of the poor. The forging political alliances among conferences during 2007 in Helsinki, keynote speeches were by Paul Collier themselves and with others, they are on themes that reflect the increasing on ‘Elections and Reforms in Failing increasingly active and vocal on the diversity in development performance States’ and Patrick Guillaumont on the world stage. As argued and discussed across the world. The first conference, ‘Design of an Economic Vulnerability during this two-day conference, on ‘Fragile States – Fragile Groups’ Index and its use for International the ‘rise of CIBS’ is expected to was held on 15-16 June 2007. Many Development Policy’. have profound implications for of the world’s poorest and most international governance. vulnerable countries are classified Special parallel sessions were as fragile states, and a disconcerting organized in collaboration with A total of 173 delegates from 31 number are described as failed states. the United Nations Department for different countries participated in At this conference, attended by over Economic and Social and Affairs (UN- the conference, which was opened 100 participants from universities, DESA) on economic security, and by the Governor of the Bank of research institutes and official donor with the United Nations University Finland, Erkki Liikanen. The main organizations, the various dimensions Institute for Environment and Human themes addressed at the conference affecting the development of the Security (UNU-EHS) on environment included growth, trade, international more than 350 million people living shocks and global insecurity. The finance, global governance, and in extreme poverty in these countries Household in Conflict Network geopolitics, and comparative studies. was scrutinized. (HiCN) organized a parallel session The keynote addresses were given by on conflict and instability and Eliana Cardoso ‘Some Comparisons Papers presented dealt with the its effects on poor households. with China and India on Trade concept and measurement of state The conference concluded with a Exchange Rates, and Tax Reform’, fragility and household vulnerability, roundtable discussion on how to and Deepak Nayyar ‘China, India, the impact of conflict on household improve the economic security of Brazil and South Africa in the vulnerability, financial and trade fragile states and fragile groups. World Economy: Engines of Global shocks, aid and mechanisms to improve Growth’, and special parallel sessions aid effectiveness, food insecurity, WIDER’s second major development were organized in collaboration environmental shocks, the role of conference of 2007, on the theme of with the Bank of Finland and the women, the impact of HIV/AIDS, the the ‘Southern Engines of Global South Centre. potential of microfinance, the causes Growth’, took place in Helsinki on and consequences of migration, and 7-8 September 2007. The conference with strategies for dealing with state reflects the fact that China, India, For more information fragility and household vulnerability. Brazil and South Africa (CIBS) www.wider.unu.edu In his opening address, Dr Rob Vos, have an important impact on the Director of Development Policy global economy through growth Analysis at UN-DESA emphasized and trade effects, and their roles in the need for expanding the economic financial markets. Meanwhile, by

12 WIDER Special Events and Book Launch

The speakers of the first plenary session of the WIDER Conference on Fragile States – Fragile Groups: Tackling Economic and Social Vulnerability, organized in Helsinki Alexander Zachn Alexander on 15-16 June 2007. From left: Paul Collier, Rob Vos, and Patrick Guillaumont.

The speakers of the concluding plenary session were Beatriz Armendariz, Paul Mosley, David Hulme, Nazrul Islam, and Rob Vos.

The keynote speakers of the first plenary session of the WIDER Conference Southern Engines of Global Growth: China, India, Brazil, and South Africa organized

in Helsinki on 7-8 September 2007. Zachn Alexander From left Eliana Cardoso and Deepak Nayyar who discussed the major topics of the conference: growth, trade, fiscal policy, capital flows and global governance.

The governor of the Bank of Finland Mr Erkki Liikanen delivered the opening presentation.

Launch of the WIDER study on Measuring Human Well- being: Key Findings and

Ida Folkesson Ida Policy Lessons presented by Mark McGillivray (second from left) and Farhad Noorbakhsh (on right), with James Foster, discussant (second from right). Jean-Marc Coicaud (on left) chaired the session, which took place at the UN headquarters in New York, 17 September 2007.

The event attracted considerable attention from UN, development and policy communities in New York.

13 WIDER Publications

2006 WIDER Annual Lecture measured, this Policy Brief Stranger than Fiction? outlines a contextual background Understanding Institutionl WIDER Annual Lecture 10 to the project. The study introduces Change and Economic Global Patterns of Income and some key concepts and measures Development Health: Facts, Interpretations, used in assessing achieved well- Ha-Joon Chang and Policies being, especially at the national UNU-Policy Brief 6, 2007 by Angus Deaton level, and some of the best known and most widely used well-being The volume Institutional Change measures are highlighted. The and Economic Development Policy Brief goes on to provide fills some important gaps in our an overview of the five edited understanding of the relationship volumes that emerged from the between institutional changes and project, summarizing some of the economic development. It does main conclusions. so by developing new discourses on the ‘technology of institution The Significance of Transport building’ and by providing detailed Costs in Africa case studies—historical and more Wim Naudé and Marianne Matthee recent—of institution building. UNU-Policy Brief 5, 2007 It is argued that functional multiplicity, the importance of The success of Africa’s exports, informal institutions, unintended as well as its spatial development, consequences, and intended depends on lowering transport ‘perversion’ of institutions all costs. This Policy Brief addresses imply that the orthodox recipe of pertinent questions such as importing ‘best practice’ formal ‘what are transport costs?’, ‘do institutions does not work. While transport costs matter for trade?’, denying the existence of universal It is now widely agreed that ‘how important are transport formulas, the volume distils some comparisons of living standards costs in practice?’, and ‘why are general principles of institutions across countries, or across Africa’s transport costs so high?’ building from theoretical households within countries, A case study of the firm location explorations and case studies. should ideally go beyond decisions of exporters in South measures of income or expenditure Africa illustrates the significance Books and encompass non-income in particular of domestic transport dimensions of well-being, in costs for manufactured exports. Institutional Change and particular health. Since income and The message that arises is that Economic Development health are positively correlated, Africa’s international transport Edited by Ha-Joon Chang adding the health dimension tends costs are significantly higher UNU Press (paperback) to exacerbate the inequality related than that of other regions, and its 9789280811438 to income differences alone. domestic transport costs could be —North America / Geneva edition just as significant. Moreover it is Anthem Press (paperback) Policy Briefs shown how domestic transport 9781843312819 costs influence the location, the —UK / Europe / South Asian Measuring Human Well-being: quantity, and the diversity of edition, October 2007 Key Findings and Policy Lessons manufactured exports. Various David Clark and Mark McGillivray policy options to reduce transport Recognizing the complexity of UNU-Policy Brief 3, 2007 costs in Africa are discussed. the issues involved, this book draws together contributions from An outcome of the WIDER scholars in economics, history, research project Social political science, sociology, public Development Indicators that administration and business sought to provide insights into how administration. These experts human well-being might be better discuss not only theoretical conceptualized and, in particular, issues but also a diverse range of

14 exploring these approaches to hunger this volume is novel in its shift away from rather obvious research on macro food availability to more composite dimensions cutting across economics, sociology, law and politics. With regional experiences and country case studies this constitutes an invaluable collection for researchers and activists trying to make a difference.

Forthcoming Books

Food Security: Indicators, Measurement, and the Impact of real-life institutions—political, Trade Openness bureaucratic, fiscal, financial, Edited by Basudeb Guha- corporate, legal, social and Food Insecurity, Vulnerability Khasnobis, Shabd S. Acharya and industrial—in the context of and Human Rights Failure Benjamin Davis dozens of countries across time Edited by Basudeb Guha- (hardback) 9780199236558 and space—spanning from Britain, Khasnobis, Shabd S. Acharya December 2007 Switzerland, and the USA in the and Benjamin Davis UNU-WIDER Studies in past to today’s Botswana, Brazil, (hardback) 978023055376 Development Economics and China. The contributors show October 2007 Oxford University Press that there is no simple formula Studies in Development for institutional development. Economics and Policy Hunger is addressed from a variety Instead, real-life experiences of Palgrave Macmillan of perspectives that are new and institutional development have relatively under-researched. The been achieved through a mixture emergence of the WTO and the of deliberate imitation of foreign freeing of agricultural trade, for institutions and local institutional example, have serious implications innovations. for hunger and food security in many countries. The book examines the New in Paperback issue across regions. It also presents Linking the Formal and Informal several technical, regional, and Economy: Concepts and Policies country case studies that facilitate Edited by Basudeb Guha- comparisons. It tackles food security Khasnobis, , at three distinct levels—national, and Elinor Ostrom household, and individual. (paperback) 9780199237296 October 2007 Understanding Inequality and UNU-WIDER Studies in Poverty in China Development Economics Edited by Guanghua Wan Oxford University Press (hardback) 9780230538047 January 2008 Multidisciplinary in nature, with Studies in Development Economics contributions from anthropologists, Do we have a right to food? and Policy, Palgrave Macmillan economists, sociologists, and The significance of a human political scientists. Contains new rights approach, and the way Using the latest analytical empirical research on the linking and in which it translates to gender frameworks, this book conveys a interaction of formal and informal considerations, with links to the comprehensive and up to date view sectors in developing economies. HIV/AIDS pandemic, agricultural of inequality and poverty in China. productivity and the environment, adds a new dimension to the problem of world hunger. By

15 The International Mobility of Talent: Types, Causes, and Development Impact Edited by Andrés Solimano (hardback) 9780199532605, February 2008 UNU-WIDER Studies in Development Economics Oxford University Press

[This volume] brings together the best research in this critically important subject, identifying the roles of creativity, knowledge, ideas, WIDER was established by UNU as its fi rst and skills that go beyond trade and capital as the movers of economic research and training centre and started development. work in Helsinki, Finland, in 195. Through —Richard Florida, Joseph L. Rotman School of Management, author its research and related activities, WIDER of The Rise of the Creative Class seeks to raise unconventional and frontier issues and to provide insights and policy Globalization and the Poor in Asia: Can Shared Growth be Sustained? advice aimed at improving the economic and Edited by Machiko Nissanke and Erik Thorbecke social development of the poorest nations. (hardback) 9780230201880, March 2008 WIDER Angle is the newsletter of UNU- Studies in Development Economics and Policy, Palgrave Macmillan WIDER. Published twice a year, the newsletter focuses on the Institute’s Domestic Resource Mobilization and Financial Development research activities. It is distributed free of Edited by George Mavrotas charge. The newsletter is also available on our website at: www.wider.unu.edu. (hardback) 9780230201767, March 2008 Studies in Development Economics and Policy, Palgrave Macmillan Editorial content, design and layout by Ara Kazandjian ([email protected]), Inequality and Growth in Modern China and Wim Naudé ([email protected]). Edited by Guanghua Wan (hardback) 9780199535194, March 2008 UNU-WIDER Studies in Development Economics Research and Training Centres and Programmes of the United Nations Oxford University Press University www.unu.edu

• UNU World Institute for Development Economics Financial Development, Institutions, Growth and Poverty Reduction Research (UNU–WIDER) • UNU Maastricht Economic and social Research Edited by Basudeb Guha-Khasnobis and George Mavrotas and training centre on Innovation and Technology (hardback) 9780230201774, April 2008 (UNU–MERIT) • UNU Institute for Natural Resources in Africa Studies in Development Economics and Policy, Palgrave Macmillan (UNU–INRA) • UNU International Institute for Software Technology (UNU–IIST) • UNU Institute of Advanced Studies (UNU–IAS) • UNU International Leadership Institute (UNU–ILI) Research Papers and Discussion Papers • UNU International Network on Water, Environment and Health (UNU–INWEH) • UNU Programme for Comparative Regional For the complete list and free access to the 750+ Research Papers and Integration Studies (UNU–CRIS) Discussion Papers published since 2001, visit the WIDER website or • UNU Institute for Environment and Human Security (UNU–EHS) contact us. • UNU Programme for Biotechnology for Latin America and the Caribbean (UNU–BIOLAC) • UNU Food and Nutrition Programme for Human and Social Development (UNU–FNP) • UNU Geothermal Training Programme (UNU–GTP) • UNU Fisheries Training Programme (UNU–FTP) Ordering WIDER publications • UNU International Institute for Global Health (UNU-IIGH) WIDER The WIDER Discussion Paper and Research Paper series are Katajanokanlaituri 6 B available to download from www.wider.unu.edu 00160 Helsinki, Finland Tel. (+358-9) 6159911 Fax (+358-9) 61599333 Books are available from good bookshops, libraries, or direct from E-mail [email protected] the publishers: www.oup.co.uk, www.palgrave.com, Website www.wider.unu.edu and www.unu.edu/unupress/. For further information on the Institute’s activities, please contact: Mr Ara Kazandjian For other inquiries and orders please contact WIDER Publications, Tel. (+35-9) 159910 Mr Adam Swallow, Katajanokanlaituri 6 B, FIN-00160 Helsinki, E-mail: [email protected] Printed by Forssa Printing House Finland, e-mail: [email protected]. Finland, 007, ISSN 13-95

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