When in the late nineteenth century the USA accorded an average tariff protection of over 40 per cent to its industries, its per capita Income In PPP terms was already about three quarters that of Britain ($2,599 vs. $3,511 in 1875).[249] And this was when the ‘natural protection’ accorded by distance, which was especially important for the USA, was considerably higher than today, as even the above quote from World Bank acknowledges.[250] Compared to this, the 71 per cent trade-weighted average tariff rate that India had just prior to the WTO agreement despite the fact that its per capita income in PPP terms is only about one fifteenth that of the USA – makes the country look like a veritable champion of free trade. Following the WTO agreement, India cut its trade-weighted average tariff to 32 per cent, bringing it down to a level below which the USA’s average tariff rate never sank between the end of the Civil War and the Second World War.
To take a less extreme example, in 1875 Denmark had an average tariff rate of around 15-20 per cent, when its per capita income was slightly less than 60 per cent that of Britain ($2,031 vs. $3,511). Following the WTO agreement, Brazil cut its trade-weighted average tariff from 41 per cent to 27 per cent, a level that is not far above the Danish level, but its income in PPP terms is barely 20 per cent that of the USA ($6,840 vs. $31,910).[251]
Given the productivity gap, even the relatively high levels of protection that had prevailed in the developing countries until the 1980s do not seem excessive by the historical standards of the NDCs. When it comes to the substantially lower levels that have come to prevail after two decades of extensive trade liberalization in these countries, it may even be argued that today’s developing countries are actually less protectionist than the NDCs used to be.
Chapter 3
Institutions and Economic Development:
‘Good Governance’ in Historical Perspective
3.1. Introduction
The issue of institutional development, under the slogan of ‘good governance’, has recently come to occupy the centre stage of development policy debate. During the last decade or so, the international development policy establishment (henceforth IDPE) has come to recognize the limitations of its former emphasis on ‘getting the prices right’ through ‘good policies’. It has now come to accept the importance of the institutional structure that underpins the price system.[1] Particularly following the recent Asian crisis, which has been widely interpreted as a result of deficient institutional structures, the IDPE has begun’ to move its emphasis to ‘getting the institutions right’ and attach what Kapur and Webb call ‘governance-related conditionalities’.[2]
On the offensive these days are those who believe that every country should adopt a set of ‘good institutions’ (unfortunately often implicitly equated with US institutions), with some minimal transition provisions (five-ten years) for the poorer countries – various agreements in the WTO being the best example of this. Backing up this claim is a rapidly growing body of literature, especially from the World Bank and its associates, which tries to establish statistical correlation between institutional variables and economic development, with the supposed causality running from the former to the latter.[3]
Exactly which institutions should go into the ‘good governance’ package differs from one recommendation to another, not least because we still do not fully understand the relationship between particular institutions and economic development. However, this package of ‘good institutions’ frequently includes democracy; a clean and efficient bureaucracy and judiciary; strong protection of (private) property rights, including intellectual property rights; good corporate governance institutions, especially information disclosure requirements and bankruptcy law; and well-developed financial institutions. Less frequently included but still important are a good public finance system and good social welfare and labour institutions providing ‘safety nets’ and protecting workers’ rights.[4]
Critics argue that, apart from the fact that the international financial institutions (IFIs) do not have an official mandate to intervene in most of these ‘governance’ issues,[5] the institutions of developed countries can be too demanding for developing countries in terms of their financial and human resource requirements. Some critics also argue that some of these institutions may go against the social norms and cultural values of some of the countries concerned. Many emphasize the difficulty of institutional transplantation and warn against the attempt to impose a common institutional standard on countries with different conditions.
These critics have an important point to make, but in the absence of some idea of which institutions are necessary and/or viable under what conditions, they are in danger of simply justifying whatever institutional status quo exists in developing countries. So what is the alternative?
One obvious approach is to find out directly which of the ‘best practice’ institutions are suitable for particular developing countries by transplanting them and seeing how they fare. However, as we see from the failures of structural adjustment in many developing countries and of transition in many former Communist economies, this does not usually work and can be very costly.
Another alternative is for the developing countries to wait for spontaneous institutional evolution. It could be argued that the best way to obtain institutions that suit the local conditions is to let them evolve naturally, as indeed happened in the now-developed countries (NDCs) when they themselves were developing. However, such spontaneous evolution may take a long time. Moreover, given the nature of the evolutionary process, there is no guarantee that such an approach will in fact yield the best possible institutions, even when viewed from the perspective of specific national requirements.
These, then, point us to the third – and my preferred – alternative route, which is to learn from history. Just as we looked at the issue of ‘good policies’ from a historical perspective in the last chapter, we can, and should, draw lessons from the historical, as opposed to the current, state of developed countries in the area of institutional development. In this way, developing countries can learn from the experiences of developed countries without having to pay all the costs involved in developing new institutions (one of the few advantages of being a ‘latecomer’). This is significant because, once established, institutions may be more difficult to change than policies. This will also help donors wanting to encourage the adoption of particular institutions by the recipients of their financial support to decide whether or not the particular ‘we’re-not-ready-yet’ arguments put to them by some recipient country governments are reasonable.
3
For a review of these studies, see Aron 2000. The institutional variables are often represented by various ‘indices’ constructed by consulting firms and research institutes based on surveys of experts or businessmen (for detailed discussions on these indicators, see Kaufmann et al. 1999).