Foreword

This excellent book makes an important contribution to our understanding of the role of institutions and policies in driving economic and social development. It builds on and develops an alternative approach to development, the political settlements approach, that says that institutions and policies work in ways that depend on the behaviour of the organizations affected by them. Organizations in developing countries can be formal organizations but also powerful informal networks of politicians, businesses and bureaucrats. The effectiveness of institutions and policies cannot be understood without identifying the powerful organizations in each context. Organizations have interests and their relative power gives them the capability to resist or support the implementation of particular rules. Organizations act to support or resist rules because rules have implications for resource allocations. If the organizations subject to particular rules want to change or distort them in their own interest, and they have the power to do so, the operation of these rules will clearly be affected. As a result, when economists talk about the efficacy of particular institutions and policies, they are really describing how rules have interacted with powerful organizations to produce outcomes that can be judged to be economic success or failure.

There can actually be no general theory of institutions on their own, but we can have a general analytical frame for looking at the effects of particular institutions in particular contexts of organizational power. The distribution of economic and political organizational power in a society is its political settlement. The book is part of a research agenda that studies how political settlements, institutions and policies interact to produce different types of economic and social development. The ongoing interaction between institutions and political settlements leads, over time, to outcomes that we can judge to be economic success or failure. The book develops a range of pluralist perspectives on rents and rent seeking and in particular it develops the analysis of how institutions and political settlements interact. It should be of great interest to economists, development policy analysts and policymakers.

The analysis of policy design in different contexts has not been helped by ideological debates between liberal free marketeers on the one hand and supporters of developmental states on the other. Proponents of these positions have often used theory and evidence selectively to support their particular positions. These debates have not helped developing countries identify feasible policies that are implementable in their context, and that can accelerate and sustain their development paths. In some social, political and economic configurations, institutional and policy combinations that approximate free market ones have indeed triggered and sustained development, though always with substantial state interventions that are often underplayed by proponents of free markets. It is also true that in other power configurations, institutional and policy combinations that appear to be driven by an autonomous developmental state have achieved transformative results, though always with a strong commitment to markets and competition in critical areas. The limitation of these analyses has been that their proponents rarely recognize the very specific configurations of social and political factors that enabled particular institutions and policies to be as effective as they were. Most importantly, they do not investigate how the bargaining power of different types of organizations in each country affected the outcomes of their institutions and policies.

The book draws on the analysis of political settlements, social transformations, rents and rent management and puts them together in a framework the author describes as ‘developmental rent management analysis’. This is a useful synthesis of the most essential components of these approaches for understanding and developing policy. Policies, institutions, organizations and political settlements are all linked through policy rents and rent seeking. Policy rents are income flows that are created by policies in the context of existing institutions with the objective of achieving specific objectives. The achievement of the desired policy outcome depends on how changes in incentives and resource flows, both of which can be described in the language of rents, induce changes in behaviour in society.

For instance, policy may create revenue flows to schools or hospitals to improve education and health outcomes and combine these with institutional rules about how these resources have to be used and who is to monitor and govern them. These revenue flows create potential incomes for many different actors and organizations who may be essential for achieving the policy outcome but may also seek to benefit from the income flows as individuals and organizations. Any policy that creates policy rents therefore inevitably induces a variety of rent-seeking activities. All activities that try to affect the allocation, use or alteration of policy rents are rent-seeking activities. The actual social outcome achieved by the policy will therefore depend on the relative power and interests of the different individuals and organizations engaged in rent-seeking, monitoring and governance activities, all of whom may also be critical players for delivering the desired social outcomes.

The distribution of organizational power in developing and emerging societies is very different from that in advanced countries but they have also differed greatly between themselves. This is why institutions and policies that work in one developing country have often not worked in another, and also why those that worked at one time have often stopped being effective when either the political settlement substantially changed or new technological, social or other challenges emerged. The ‘best practice’ for delivering health outcomes in developing countries is therefore a meaningless concept. There is a pressing need to move beyond ideological models that occasionally fit a few cases but fail to provide a way of thinking about policy in the general case where power configurations may be quite specific. The political settlements approach offers a way of developing higher-level theories and analysis of how institutions, organizations and rents interact that can allow us to develop context-specific policy in a rigorous way.

Consider a policy that seeks to direct resources for health service delivery in a developing country. The policy rents can flow in a number of ways and rent seeking activities by doctors, private providers, public sector interests, NGOs, politicians and patients will inevitably try to influence policy design. The policy and institutional design that emerges will determine whether the money goes primarily through the public or the private sector or a mix of both, through corporates or NGOs, and so on. Rent seeking will not only influence the emergence of this institutional and policy structure, it will also influence the implementation of the policy from then on. It will help to determine how resources are used within the delivery system once it is set up. As the rent seeking activities can have positive or negative outcomes, and in any case can never be ruled out, the reasonable strategy is to understand it, limit it and influence how it works, not try to rule it out, as some early neo-liberal analysts of rent seeking attempted to suggest.

If the political choice is made to direct the flow of resources through public hospitals, the ultimate delivery of services will depend on the governance and monitoring of resources going to salaries, purchases of medicines, the mix and quality of services provided and so on. Will qualified doctors and nurses be hired or those who have political connections, will medicines be overpriced, and the margins shared between buyers and sellers? Many similar questions have to be answered to understand the overall outcomes that are likely to be achieved through this institutional and policy structure, and this is what this book describes as a rent management system. The latter describes the constellation of interests and agencies whose interaction determines how policy resources are used in specific contexts. The configuration of relative power and capabilities of the organizations and agencies involved is therefore critical for understanding what is going on.

A very different set of rent seeking questions will arise if private providers are selected as the delivery mechanism. Will they be able to overprice their services by colluding with or hiding information from politicians and bureaucrats giving the contracts? Which agencies are empowered to check this and are they likely to collude with private providers and do they have the power and technical capacity to regulate them? Will the private providers receiving public money deliver the right mix of services to maximize social welfare or focus on services that are cheaper or where private co-payments are made? How effective will governance agencies be given their power relative to these private sector players? These questions and others like them will describe the rent management system in this case. Whether public or private delivery or some combination offers the best way forward depends on our assessment of these comparative rent management problems. Policy always begins with a historical inheritance of institutions and policies that may be delivering results that are better or worse than expected, and the task of policy analysis is to analyse the existing rent management structure with feasible alternatives and then to nudge the system towards better systemic outcomes using feasible and incremental institutional and policy changes.

Drawing on this pluralist literature on political settlements, rents and rent seeking, as well as the closely related literature on the analysis of industrial policy and structural change in developing countries, Christine Ngo provides a user-friendly and very useful synthesis of many of these ideas in her developmental rent management framework. When institutions and policies create incentives and compulsions to use resources in effective ways, rapid and sustainable growth can follow. For this to happen, the combination of policies, institutions and organizations have to be such that the rules (both formal and informal) create the right incentives and compulsions for achieving the socially desired results. The right incentives are created if the rules create incentives for individuals and organizations to behave in developmental ways. But the rules also have to create compulsions for developmental behaviour because incentives are usually insufficient. Powerful individuals and organizations may want to behave in privately beneficial but socially damaging ways. To achieve socially acceptable outcomes, their capacity to do this must be limited. The interaction of specific rules with different agencies and organizations must create credible pressures and sanctions on critical individuals and organizations to make it difficult for them to capture or use resources in unproductive ways and indeed to create pressures on them to behave in socially desirable ways. Feasible ways of doing this will clearly depend on the initial distribution of organizational power and capabilities, the political settlement at the national or sectoral levels. If these policy conditions hold for important formal and informal institutions and policies at a national or even a sectoral level, rapid growth and transformation can happen. Indeed, rapid transformation can happen at a sectoral level as a result even if the state does not look anything like a classic developmental state and the market does not look like a rules-based market economy. This is why the application of this framework to the Vietnamese case is so useful.

Vietnam’s success in developing several critical manufacturing sectors has been at the heart of its social transformation over the last twenty years. However, its policy and institutional structures have been far removed from a classic market economy with stable private property rights, a rule of law and effective institutions supporting competition. Vietnam’s policy and institutional structure has also been far removed from the classic developmental state of the East Asian type. The Vietnamese state has displayed limited capacities of the classic developmental state to allocate policy rents from above, monitor the relative success of the firms or sectors getting the policy rents, and then continue with the allocation or withdraw these rents according to performance. Like most developing countries, Vietnam has powerful networks of lower-level politicians and bureaucrats, even though it is a single-party system, and these networks have the power to influence the allocation of rents in important ways. As a result, policy rents often get captured by powerful sub-groups of politicians or businesses or state-owned enterprises, and the management of these policy rents has sometimes not been very successful.

However, in many important sectors, the configuration of interests, capabilities and the relative power of the players allowed rent management that was indeed highly developmental. The argument in this book shows how we can make sense of and explain how Vietnam achieved its very creditable success by looking at policies, rents and rent seeking in a new way in the sectors that drove its growth. Even more importantly, this understanding may help policymakers in Vietnam and elsewhere build on their successes by replicating what works and trying to nudge other sectors and regions into similar outcomes. By providing an analysis of Vietnam using this framework, Christine is adding to a growing body of literature on how we can understand these non-conventional cases, which actually turn out to be the norm. The more we understand success and failure in cases that do not fit the archetypical liberal market or developmental state models, the better will we be able to advise developing and emerging countries on feasible policy changes that can have an impact in their context.

Finally, while the political settlements and rent management analysis was developed to make sense of the anomalous operations of institutions and policies in developing and emerging countries, these tools are becoming increasingly relevant for advanced countries too, as their institutions come under stress. In developing countries, the interaction of institutions and organizations has always been important to understand because formal rules were often violated or contested by powerful interests that frequently accessed rents informally. Many advanced countries that once appeared to do very well with the institutional structures of competitive market economies did so because these institutions had legitimacy and were supported by a range of powerful organizations ranging from political parties, corporations, trade unions and the media, and this was because the institutions delivered enough to all powerful interests given the interests and capabilities of the latter.

However, as market economies evolved with increasing globalization, they excluded large numbers of people from effective power to influence policy, and policy then evolved to exclude them further. These changes in the political settlements of advanced countries have concentrated income and power in new organizations while older ones like trade unions have become weaker. Business organizations that deal in digital data or finance have become incomparably more powerful than older manufacturing firms or their unions. These changes in relative power allowed further institutional and policy changes in advanced countries that further exacerbated the distribution of incomes and power. The contemporary emergence of populist and nationalist mobilizations in many advanced countries is symptomatic of these underlying tensions and the declining legitimacy of existing institutions. They demonstrate that unless progressive organizations are able to mobilize the excluded and use new organizational forces to support policies that can be gradually implemented to address the new challenges, extremist movements are likely to gain greater ascendance. Effective new policies and institutions not only have to be appropriate for addressing the new social, technological and environmental challenges. They also have to be designed in such a way that powerful organizations will not or cannot obstruct or distort these changes. The rent management framework provides a way of thinking through these challenges and checking whether policy proposals, whether in developing, emerging or advanced countries, pass the test of feasibility and impact.

Mushtaq H. Khan

Professor of Economics

School of Oriental and African Studies (SOAS)

University of London