Political Settlements and the Governance of Growth-Enhancing Institutions Mushtaq H. Khan This version July 2010 Abstract: It is well known that institutions work very differently across countries because their political contexts are different. It is also understood that this has important implications for the design of governance priorities in different countries. This paper develops an analysis of the ‘political settlement’ to provide an analytical framework for analysing institutions and governance in developing countries. Central to this analysis is an understanding of the distribution of power. We define this as the relative holding power of different groups and organizations contesting the distribution of resources. Holding power is partly based on income and wealth but also on historically rooted capacities of different groups to organize. A political settlement emerges when the distribution of benefits supported by its institutions is consistent with the distribution of power in society, and the economic and political outcomes of these institutions are sustainable over time. In advanced countries, the distribution of power is largely based on the distribution of incomes generated by formal institutions and rights. The correspondence between power and formal institutions explains why Weberian states in advanced countries can effectively enforce formal institutions. In contrast, the distribution of power in developing countries draws significantly on organizational abilities based in non-capitalist sectors. In many cases, the historical roots of these capabilities go back to colonial history or earlier. Here, formal institutions alone cannot support distributions of benefits consistent with these distributions of power. Informal institutions like patron- client allocative rules, and informal adaptations to the ways in which particular formal institutions work play a critical role in bringing the distribution of benefits supported by the institutional structure into line with the distribution of power. Differences in the political settlement can therefore explain why developing country institutional structures are different and similar formal institutions also perform differently. The political settlement also defines the ‘growth-stability trade-off’ facing particular institutional changes: institutional changes cannot be implemented if their implementation pushes political stability below the tolerance limit of that society. An understanding of the political settlement can therefore provide a framework for looking at institutional performance and evolution across countries. While all developing countries have variants of ‘clientelist’ political settlements, there are significant differences between these clientelist settlements. Differences between countries are examined along two dimensions: the organization of the ruling coalition and its relationship to the emerging productive sector. The analytical framework is applied to the case study countries studied in this series of papers to outline how their political settlements evolved over time in terms of these characteristics. The evolution of their political settlements is shown to be closely related to changes in their formal growth-enhancing institutions and the performance of these institutions. This analysis can therefore help to identify governance changes that can be sufficiently enforced to make a developmental difference in particular countries as well as providing a framework for understanding the paths along which the political settlement is changing in different countries. CONTENTS 1. Introduction ................................................................................................................ 4 2. Institutions: The Analysis of New Institutional Economics ...................................... 9 A First Approximation: Formal Institutions ........................................................... 13 Further Developments: Informal Institutions and Non-Institutional Factors .......... 15 3. Power and the Political Settlement .......................................................................... 18 Political Settlements: Two Levels of Analysis ....................................................... 20 4. Power and Institutions Defining the Political Settlement ........................................ 24 The Significance of Informal Institutions in Developing Countries ....................... 26 Economic Growth with Informal Institutions ......................................................... 28 5. The Political Settlement as a Constraint on Institutional Performance ................... 31 Partial Enforcement ................................................................................................. 32 The Growth-Stability Trade-off .............................................................................. 36 Political Settlements and the Trade-off Curve ................................................. 37 Implementation Strategies and the Slope of the Trade-off Curve ................... 40 Incremental versus Discontinuous Changes .................................................... 42 Comparisons across Countries ......................................................................... 45 6. A Typology of Political Settlements ........................................................................ 48 The Capitalist Political Settlement .......................................................................... 49 Clientelist Political Settlements .............................................................................. 53 Pre-capitalist Political Settlements .......................................................................... 58 Political Settlements in Crisis ................................................................................. 59 7. Patron-Client Networks ........................................................................................... 60 Patron-Client Organizations and the Structure of the Ruling Coalition ................. 64 Patron-Client Networks and the Political Power of (Emerging) Capitalists ........... 64 An Interactive Framework for Analysing Institutions in Political Settlements ...... 75 8. Thailand: The Rise and Fall of Competitive Clientelism ........................................ 77 Authoritarianism with Weak Capitalists: 1960s to early 1970s .............................. 79 Summary .......................................................................................................... 81 Competitive Clientelism: Mid-1970s to 2001 ......................................................... 81 Summary .......................................................................................................... 84 The ‘Unproductive’ Dominant Party: 2001-2008 ................................................... 84 Summary .......................................................................................................... 88 The Backlash: Authoritarianism with a Democratic Face 2008 ............................. 88 Summary .......................................................................................................... 89 9. Maharashtra: From Dominant Party to Competitive Clientelism ............................ 89 The Congress Dominant Party System: 1947-1980s .............................................. 91 Summary .......................................................................................................... 95 The Rise of Competitive Clientelism 1990- ........................................................... 95 Summary .......................................................................................................... 96 10. West Bengal: The Limits of a Progressive Dominant Party .................................. 97 The (Weak) Congress Dominant Party System: 1947-1970s ............................... 100 Summary ........................................................................................................ 101 The CPM: A Progressive Dominant Party 1977- .................................................. 102 Summary ........................................................................................................ 106 11. Bangladesh: From Authoritarian Rule to Competitive Clientelism ..................... 106 Military Authoritarianism: 1958-1971 .................................................................. 109 Summary ........................................................................................................ 111 The Rise and Fall of Dominant Party Authoritarianism 1972-1975 ..................... 111 Summary ........................................................................................................ 113 2 Clientelistic Authoritarianism 1975-1990 ............................................................. 113 Summary ........................................................................................................ 115 Competitive Clientelism 1990- ............................................................................. 115 Summary ........................................................................................................ 118 12. Tanzania: From Authoritarian One-Party to Stable Dominant Party ................... 118 One Party Authoritarianism and Nation-Building 1962-1992 .............................. 121 Summary ........................................................................................................ 123 The Limits of the Dominant Party Coalition 1992- .............................................