Special effort is made to incorporate in the book examples from outside the more ‘important’, and thus better-known, countries (that is, Britain, the USA, Germany, France, and Japan) so that more general lessons can be drawn. However, coverage of other countries necessarily remains less extensive due to the sheer paucity of English-language studies on them. I have tried in part to overcome this problem with the help of research assistants who speak other languages, but the limitations of such methods are patent. In addition, it should be pointed out that there is still great value in looking at the experiences of the supposedly better-known countries, particularly because there exist many myths and misconceptions about their histories.
The distinction between policies and institutions that I adopt in the book is necessarily arbitrary. In common-sense usage, we might say that institutions are more permanent arrangements while policies are more easily changeable. For example, raising tariffs for certain industries would constitute a ‘policy’, whereas the tariff itself could be regarded as an ‘institution’. However, such simple distinctions quickly break down. For example, patent law might be regarded as an ‘institution’, but a country could adopt a ‘policy’ of not recognizing patents as indeed Switzerland and the Netherlands did until the early twentieth century. Similarly, when we examine competition law we will do so in the context of corporate governance institutions, but also as a part of industrial policy.
1.3. The Chapters
Chapter two deals mainly with what these days are called industrial, trade and technology policies (or ITT policies for short). This is because, in my view, differences in these policies separate the countries that have been more successful in generating growth and structural change from the others. ITT policies have for a few hundred years stood at the centre of controversies in the theory of economic development. This does not imply, of course, that other policies are unimportant for development.[26] Nor does it imply that economic growth (still less industrial growth) is all that matters, although I do believe that growth is a key to more broadly-defined economic development.
Chapter two focuses on a smaller number of countries than the following chapter on institutions. This is above all because policies are more difficult to characterize than institutions, given that they are, as I have defined them, more variable. For example, we can easily date the formal legislation of limited liability or central banking (although it may be more difficult to define the exact point when the institution in question became widely accepted and effective), but it is much more difficult to establish that, say, France had a free-trade policy during the late nineteenth century. Because of the difficulty involved in clearly identifying the existence and the intensity of particular policies, I felt that more country-based narratives were necessary, which in turn meant that I could not cover as many countries in the chapter on policies as in that on institutions (Chapter 3).
Chapter 3 ranges more widely both geographically and conceptually. Partly because of the institutional complexity of modern societies, and also because we have a limited understanding of which institutions are really critical for economic development, a relatively large number of institutions are covered in this chapter. They include: democracy; bureaucracy; judiciary; property rights (especially intellectual property rights); corporate governance institutions (limited liability, bankruptcy law, auditing/disclosure requirements, competition law); financial institutions (banking, central banking, securities regulation, public finance institutions); social welfare and labour institutions (child labour laws, institutions regulating adult working hours and conditions). As far as I am aware, this book is unique in providing information on such a wide range of institutions over a large number of countries.
Chapter 4, the final chapter of the book, returns to the central question: are the developed countries trying to ‘kick away the ladder’ by which they have climbed up to the top, by preventing developing countries from adopting policies and institutions that they themselves used?
I will argue that the current policy orthodoxy does amount to ‘kicking away the ladder’. Infant industry promotion (but not just tariff protection, I hasten to add) has been the key to the development of most nations, and the exceptions have been limited to small countries on, or very close to, the world’s technological frontiers, such as the Netherlands and Switzerland. Preventing the developing countries from adopting these policies constitutes a serious constraint on their capacity to generate economic development.
In the case of institutions, the situation is more complex. My main conclusion is that many of the institutions that are these days regarded as necessary for economic development were actually in large part the outcome, rather than the cause, of economic development in the now developed countries. This is not to say that developing countries should not adopt the institutions which currently prevail in developed countries (although conversely they should not adopt the industrial and trade policies now in place in developed countries). Some of these institutions may even be beneficial for most, if not necessarily all, developing countries, although the exact forms that they should take is a matter of controversy. For example, central banking is necessary to manage systemic financial risk, but it is debatable whether the central bank should have near-absolute political independence and focus exclusively on inflation control, as the current orthodoxy has it. Indeed, given that many potentially beneficial institutions have only developed after painful economic lessons and political struggle, it would be foolish for developing countries to forego the advantages of being the latecomer which stem from the possibility of ‘institutional catch-up’.
However, the benefits of institutional catch-up should not be exaggerated, as not all ‘global standard’ institutions are beneficial or necessary for all developing countries. To refer to some examples that I will discuss in depth later, stringent intellectual property rights may not be beneficial for most developing countries. Equally, some other institutions, such as anti-trust regulations, may not be all that necessary for them, which means that the net result of adopting such institutions may even be negative, given that the establishment and maintenance of these institutions demand resources, in particular skilled human resources, which are often scarce. There is also the question of whether introducing ‘advanced’ institutions in countries that are not ready for them implies that these institutions might not function as well as they should. Moreover, we should not lose sight of the fact that the currently developing countries actually have much higher levels of institutional development when compared to the NDCs when they were at equivalent stages of development (see section 3.3.3 of Chapter 3). If this is indeed the case, there may actually be relatively little room for effective improvement in institutions for these countries in the short run.
From this perspective, we could also say that there is an element of ‘kicking away the ladder’ in the dominant development discourse on institutional upgrading, in so far as some of the institutions demanded of the developing countries are irrelevant or harmful given their stage of development, and to the extent that they are costly to run.
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For example, few people will dispute that achieving macroeconomic stability through appropriate budgetary and monetary policies is a pre-condition for development, although I object to defining it narrowly as merely achieving very low rates of inflation (say, below five per cent), as in the current orthodoxy (also see Stiglitz 2001a, pp. 23-5).