Seizing Power through Development. The EPRD's Quest for a Developmental Coalition

Table of Contents

1 Introduction
1.1 Opening the Discussion: Conceptualising the Link Between Capitalism and It’s Institutions
1.2 The Structure of this Thesis: Political Settlements of Mustaq Khan and the Case of Ethiopia

2 State of the Art
2.1.1 Between Market and State: Early Theories of Development Economics
2.1.2 State-dependent Development: the Cases of the Fast-growing East Countries
2.2 A Political Turn in Development Theory: Early Contributions of Adrian Leftwich
2.3.1 From Institutions to Development: a Framework by North, Wallis and Weingast
2.3.2 Institutions as Development Traps: a Framework by Acemoglu and Robinson
2.4 From Development to Institutions: the Political Settlement Theory by Mustaq Khan

3 Methodology: Process Tracing by Beach and Pedersen

4 Political Settlements and Institutional Change: the Case of Ethiopia
4.1.1 Ground in the Mill of Modernisation: Authoritarian Reform and the Politicisation of Ethiopian Ethnicities
4.1.2 Growing Beyond Ones Limits: Forging the EPRDF Coalition
4.2.1 Perceptual Organisation: Building the Democratic Authoritarian State
4.2.2 Joggling Political Demands: Liberalisation and State-led Peasant Economy
4.3 Reshuffling the Deck: the Ethio-Eritrean War and the Rise of the Developmental State Paradigm
4.4.1 My Neighbour, the Developmental State: Intimate State-Society Relations and Technological Diffusion
4.4.2 A Thin Ice for Authoritarian Expansion: The Sudden Rise of Horizontal Factions
4.4.3 Enlightened Authoritarianism: Developing Rural Economies
4.4.4 Industrialising Ethiopia: Between Forgotten Leaders and Spoiled Newcomers
4.5 Development Without the People: Collapse of the Developmental 113 State?

5 Discussion and Concluding Remarks: Political Settlements, Economic Policy and Agency of the Global South
5.1 Theories of Economic Development: Evidence from Ethiopia
5.2 Political Settlement Theory of Mustaq Khan: Possible Implications for Ethiopian Policy Makers
5.3 Implications for Theory? - Some Preliminary Suggestions

6 References List

Figures and Tables
Table of Adaption of Political Settlement Theory of Khan to Process Tracing by Beach and Pedersen
Map of Ethiopa
Table of Detailed Process Tracing for Ethiopia
Graphs on GDP Growth and GDP/capita Growth

List of Abbreviations of Political Organisations

Abbildung in dieser Leseprobe nicht enthalten

1 Introduction

1.1 Opening the Discussion: Conceptualising the Link Between Capitalism and it’s Institutions

A contemporary critique of the global political economy must not be caught in a liberal perspective on the origins of economic development. Liberal theorists, amongst others, have perceived rapid economic development to be contingent on the support by the legal-institutional structure which characterises capitalist societies in the Global North. The central pillars of this structure are legally protected private property rights, the rule of law and a state monopoly on violence. Liberal strands of development theory have attributed the failure of many societies in the Global South to catch up with Northern levels of welfare to the absence or insufficiency of these institutions. In the most recent decades this perspective has been promulgated most prominently by the New Institutional Economics (NIE). Its analysis, which found its way into policy under the catchword of good governance, claims that the takeoff of capitalism in the Global South is impeded by high levels of corruption, legal insecurity and the capture of state institutions by vested interests.¹

Scholars who stand in the tradition of Marxism and Keynesianism have been disputing this causality for its supposed disregard of the socio-historical conditions which evoked the entrenchment of capitalist interests in societies of the Global North.² Marx had highlighted that the transition to capitalism - and indeed all forms of economic growth, redistribute economic surplus unequally between different social forces. He therefore claimed that the entrenchment of capitalist modes of production was an outcome of social power struggles, in which the dominant group enforced its interests on less powerful groups. Institutions functioned to consolidate, materialise and perpetuate this relation of power. Abandoning the teleology of Marx³, some post­Marxist scholars have adapted this perspective on institutions; they claim that institutions are an outcome of power struggles and thus reflect historical distributions of power rather than to be a means to transform the distribution of power in itself.⁴ NIE generally claims the opposite direction of causality. Although it agrees that institutions reflect the interests of the powerful of a society, it expects that, once established, the effect of institutions on power is stronger than that of power on institutions. This is because institutions give rise to a system of beliefs and attitudes in a society, which stabilises and perpetuates them. Insomuch institutions work to consolidate power configurations in society, which locks them into specific path dependencies. In consequence, policies developed on the basis of NIE theory, like good governance, have adopted a fundamentally different approach to foster the growth of capitalist sectors than those who disagree with the liberal depiction of the history of capitalism. Good governance policies took institutions of the Global North as best-practice examples and valuable resources to inform institutional reforms in the Global South. They tried to adapt Southern institutions in such a way that they would converge stronger with the performance of their Northern counterparts and open up institutional avenues to challenge current configurations of power. Good governance policies seek to promote social organisations which are autonomous from the state and able to confront their governments with opposing beliefs and interests. State institutions were reformed and opened up to civil society, so to remove them from the exclusive grip of ruling elites. Efficiency was to be enhanced by anti­corruption measures and introduction of corporate management techniques. However, the results could not keep up with the expectations. Often institutions regressed to previous performance levels or had different effects than intended.⁵

Mustaq Khan (2010) and other critics of the good governance approach have again arrived at Marx, when they explained this failure with the absence of the necessary social forces to sustain the altered institutions. They argued that performance was below expectations because enforcement of institutions can be costly if the rules laid out by an institution conflict with powerful interests in society. If this raises enforcement costs to such a level that they cannot be carried by economically weak states, then any enforcement requires alternative sources of payment to enhance levels of compliance. In this case it is very likely that the sources of such payment will have their own impact on the character of the institution. To assess the exact value of this impact requires to study the social organisations which participate in the production of a particular institution. This would imply to desert the one-size-fits-all approaches of good governance and take expected violations of institutionally provided rules into account. Critics have argued that such approaches would promote non-democratic forms of governance and would be unwarranted by cross-country studies on institutional indicators.⁶ Khan (2006) has shown that such studies omit the historical evolution of institutions and that the link between good governance institutions and economic performance disappears if evidence of historical performances of institutions is included into the regression. Far from rejecting the efficiency of democracy per se, Khan (2010) argues that science has to acknowledge that the indigenous adaptions made to transplanted Northern institutions effectively change the character of these institutions to differ significantly from the blueprints. A pragmatic approach would then have to take these adaptations into consideration when designing development policy. This, however, would require a departure from the Northern-conceived blueprints, regardless of their normative value. Institutional reform would have to be re-oriented towards facilitating growth instead of replicating institutional ideal-types, ill-suited for the social configurations in the places of application.

Although the causality between capitalism and capitalist institutions is disputed, the effectiveness of Northern institutions to co-ordinate the large and plural societies in the Global North is not. Critics of the liberal version of the history of capitalism do agree with liberalists that these institutions have developed over the past 200 years to provide the most efficient and legitimate means of governance, including: the formalisation and increasing access to the judicial system; the establishment of democratic systems and widening of suffrage; and the creation of redistributive institutions, like taxes or social security schemes, which significantly lowered domestic inequality compared to the pre-capitalist era.⁷ Furthermore, they seem to be the most feasible way to overcome collective action and co-ordination problems and thereby help to improve living standards. While contemporary critics of capitalism argue that a solution to the inequality of welfare between North and South would require the abolishment of global capitalism or at least its confinement by strong regulative and redistributive institutions; there is little evidence that this would garner the support of governments from wealthy countries, most of which rest their power on the consent of those constituencies which would loose most from such a redistribution. A more feasible, yet still challenging, avenue to bring global welfare levels in balance would be via the accumulation of political and economic power by Southern states themselves. Thus, while over the long term an arrival of Southern institutions at the levels of capacity and efficiency of their Northern counterparts seems indispensable, the most sustainable way to achieve this goal remains highly controversial between liberal and heterodox theorists in political economy. This thesis will therefore aim to enrich this debate by delivering an empirical basis to the contested claims of political scientists and shed a light on the role of agency of Southern states in the competitive global world order.

1.2 The Structure of this Thesis: the Political Settlement Theory of Mustaq Khan and the Case of Ethiopia

This thesis is seeks to contribute to this debate by probing the theory of institutional evolution provided by Mustaq Khan (2010). For Khan, the performance of a country’s institutions is intrinsically linked to the social order of a society, which he terms the political settlement. Accordingly, it is the distribution of power within a society which provides the best explanation for the likelihood for a particular institutional adaption to become effective. Because institutions distribute benefits and costs on different social groups unevenly, he expects to find different institutions to be enforced to different degrees, depending on the relative power and interests of social forces and the ability of the promoters of change to find informal institutions which can enforce changes despite opposition. This interaction between different social forces is expected to explain variations of institutional performance, which then translate to sectoral and temporal variations of growth patterns. To test this hypothesis, this thesis is conducting an in-depth analysis of the links between political power, institutional evolution and economic growth in Ethiopia since the fall of the Derg regime in 1991.

The case of Ethiopia offers several benefits for testing Khan’s hypothesis. It offers multiple within-case observations since Ethiopia’s federal system provides for a spacial variation of political and economic institutions across the country’s regions. Every one is structured by a different distribution of political power and economic endowments, giving rise to a complex network of power relations within and between states, between centre(s) and periphery. The case offers also temporal variation. Several events divide the observation period into distinct periods, accompanied by its unique processes of distributing political and economic power. This is true for the reconstruction of state institutions in the aftermath of the civil war, the war with Eritrea in 1998 and the concomitant adoption of two distinct economic policies, with two different growth episodes.⁸ Furthermore, the case offers sectoral variation, both within and between economic sectors. Lastly, the case is less encumbered by three important intervening variables than comparable cases. These variables are: (1) being an Asian country, (2) resource-driven growth, and (3) missing technical expertise at higher state level. On the first point: because most of the fast-growing countries of the more recent past are located in Asia, some scientists have been arguing that ‘region specific factors have been at play’ (Van de Valle 2001, 166). This would suggest that social orders in Asia are of a complete different sub-set than orders elsewhere in the Global South. Thus, the case of a fast growing country located in Africa provides the opportunity to test this essentialist claim. Second, many contemporary fast-growing countries in the Global South are primary resource exporters. The high proportion of these countries affected by dutch disease and boom and bust circles has led some scientists to conceptualise them to be a distinct social order rather than to be functioning under the same logic of social interactions like other societies elsewhere.⁹ Ethiopia allows to circumvent the trap of essentialisation also, because it is resource-poor and its exports are price elastic, which requires the country to generate economic growth from increases in productivity, instead by increases in external prices. Third, Ethiopian policy makers legitimised their rule by resting it on the scientific discourse of social sciences and economics. Many of them have been studying at Western universities; they have based their policies on theories of development economics; and employed international development experts like Jospeh Stiglitz, Dan Rodrik and East Asian state development agencies to design Ethiopian policies.¹⁰ Thus, the probability for policies to have been ineffective due to missing theoretical knowledge was significantly lowered. In turn any policy failures are much more likely to be effects of the political settlement.

Under the proposition that the performance of institutions is intrinsically linked to the social forces of a society, I expect to find formal institutions to be differently enforced and manipulated according to the relative power of a social group in conjunction with other groups and the ruling coalition. Stated differently, I expect to find variations of institutional enforcement and performance, reflecting the distribution of power in society. Furthermore, I expect institutions to change their performance wherever their underlying social formation disintegrates or loses power relative to other groups in society. Together, these different variations of enforcement of institutions will allow to explain different episodes of economic growth in Ethiopia. Adopting my question above to the case I ask:

RQ1: How does the power of the ruling coalition in Ethiopia against the power of all other social forces in society affect institutional performance?

RQ2: Does the variation of institutional performance in Ethiopia explain different episodes of economic growth?

The thesis is proceeding in the following order: In chapter two I present the state of the art, which is subdivided into six sections. In section 2.1.1 and 2.1.2, I sketch the evolution of the debate about economic development and its conclusions between 1960 and 2000. This includes the early state-centred models of economic convergence, the neoliberal turn at the end of the 1970s and the studies of the East Asian developmental states. In section 2.2, I present the turn from the largely micro­level studies of the developmental state to macro-level theories informed by New Institutional Economics (NIE), starting with contributions by Adrian Leftwich (2008). In section 2.3.1 and 2.3.2, I examine two frameworks on economic development by influential authors of the NIE, North, Wallis and Weingast (2009) and Acemoglu and Robinson (2012). Included in the discussion of Acemoglu and Robinson’s model is an extensive empirical critique of NIE premises, which concludes the chapter on this theory. In section 2.4, I present Khan’s (2010) theory on political settlements and conclude with some preliminary steps to operationalise it. The method of this thesis, process tracing, is outlined in chapter three, which also includes a chart in which Khan’s theory is adapted to the method.

Chapter four presents the empirical study of the political and economic developments in Ethiopia since 1991, in nine subsections, according to the temporal sequence of the evolution of the Ethiopian political settlement. The opening section of chapter four justifies the structure of analysis with implications drawn from the method and the case. The following two sections provide a background of the political settlements pre­dating the 1991 period. They introduce the reader to the organisational history of the most powerful social organisations in Ethiopia and the background about the formation of the ruling coalition, the Ethiopian People’s Revolutionary Democratic Front (EPRDF), which ruled the country since 1991. The transition to a new institutional structure in Ethiopia, after the fall of the Derg regime, is provided in section 4.2.1, and the concomitant economic developments in section 4.2.2. Section 4.3 presents the first major restructuring of the ruling coalition since the EPRDF’s rise to power in 2001. It was at this point when the EPRDF declared to reform Ethiopia to become a ‘developmental state’. Accordingly, section 4.4 describes the developments during this period. The initial turn to developmental state policies in section 4.4.1, the first crisis of the new policy in 4.4.2, and it's subsequent entrenchment in 4.4.3 and 4.4.4. Each of the latter two sections will also provide two in-depth micro-level analyses of institutional transformation and economic developments in agriculture and manufacturing. The empirical chapter closes with the latest crisis of the ruling coalition in 2016, which resulted in a collapse of the political settlement in 2018. In chapter five, I discuss the findings form the case and draw a conclusion whether the theoretical predictions of Khan have been sufficient in explaining the developments in Ethiopia, what this would imply for Ethiopian policy makers and what the case of Ethiopia can add to theory.

2 State of the Art

2.1.1 Between Market and State: Early Theories of Development Economics

Contemporary development theory began to evolve since the 1940s, when under the influence of strong state regulation of markets and early decolonisation, the first theories on processes of economic convergence were developed. Until the mid-2000s the debate was marked by the macro-economic dispute of whether it should be states or markets which should lead economic development. A state-centred approach was dominant up until the mid-1970s. Its theoretical premises were built upon Keynes’s macro-economic theory, on which most economic policy in the Global North and South was similarly based. Its scholars¹¹ stressed that the Global South suffered from a low- equilibrium trap created by market-failure s ¹² , in which missing demand led to weak private consumption and eventually, low growth. In order to increase demand, the state had to intervene. A big push of state-led investment was deemed necessary to create employment, raise private consumption and enable self-carrying growth. Particularly high hopes were put on a rapid industrialisation, because industries have many back- and forward linkage s ¹³ to other economic activities.

It quickly became clear, however, that the interactions between social and economic factors in the Global South made the steering of macro-economic indicators to be more complex than these scholars had initially thought. Many states had followed the policy advise and erected large state-owned industries to substitute imports¹⁴, but these industries turned out to be inefficient, unproductive and became a drag on the current account. When in the 1970s the oil crisis hit the global economy, most of these states faced severe liquidity constraints and came close to bankruptcy. The dominant interpretation of this failure was informed by neo-classical theory¹⁵ and concluded that the state had intervened too much. Its involvement had retarded the efficient allocation of resources, which market-led allocation usually entails. The umbrella-term for this thinking became neoliberalism, because its proponents argued to free markets from government interference.¹⁶ States should limit their intervention in order to facilitate the free interaction of economic actors, which would be enabled by protecting property rights and regulating monetary policy, to provide for a favourable macroeconomic environment.^{17 18}

The neoliberal depiction of the state was one of an easily manipulatable instrument lending strong incentives to misallocation and inefficiency. This character manifested itself most clearly in the pivotal role of the state in the appropriation of economic rents.18 Rents are incomes not appropriated through better combination of productive factors, but by exploiting non-market generated scarcities. According to neoliberals, they arise wherever personal interests determine the distribution of scarce resources. Since such allocations are based on political factors and not on criteria of productivity, they inevitably lead to welfare losses. The state was the gateway through which powerful individuals secured their share on these resources, therefore states’s rights to allocate them should be restricted or removed.¹⁹ Some scientists argued that a distinctive social structure had risen in the Global South: neo-patrimonialism. In such societies, state institutions and political power are used to accumulate economic benefits to sustain a network of loyal clients, which collectively protect this arrangement. Through the continuous loss of resources, this system deprives the economy of investment funds.²⁰

The solution put forward were the so-called structural adjustment programmes (SAP), which disbursed loans on conditions of economic and political reforms. They were predominantly executed by the International Financial Institutions (IFI), World Bank (WB) and International Monetary Fund (IMF). Getting the prices right became a dictum of that time and an important goal for the IFI. Rent-creating institutions should be abolished or put under market constraints; available resources were to be allocated more efficiently by giving markets more space to rule; and trade was to be expanded to restore national accounts and strengthen the comparative advantage.²¹ But much like the policy prescriptions in the 1960s, the SAP failed to take the specific social circumstances in the underdeveloped capitalist systems into account. Improvements in exports and balance of payments were accompanied by deteriorating social indicators and welfare.²²

2.1.2 State-dependent Development: the Cases of the Fast-growing East Asian Countries

In parallel with the growing evidence that the SAP caused drastic social distortions, the scientific debate became increasingly polarised. While many critically questioned the suitability of SAPs to meet not only monetary but also social and developmental goals, a body of studies emerged which proved that under specific circumstances the state can have a positive role in development and may even be indispensable. The central concept of this research is the developmental state, which combines state policies and institutions strategically with market forces to reach high economic growth. Until today, the developmental states of East Asia²³ are the only successful example of countries to catch up to Northern levels of capitalistically produced welfare.²⁴

Initiating the debate was Chalmers Johnson (1982), who found that the state was a central factor in Japan’s economic development. His research identified four central variables why state intervention in Japan led to economic growth. First, the state centralised its personnel and economic resources in a pilot agency. Second, the administrative staff of this agency (the Japanese Ministry of International Trade and Industry - MITI) was strictly selected by meritocratic recruitment and drew the best brain power of the country. Third, politics did not try to patronise this bureaucracy but instead insulated it consciously from political, judicial and popular pressures. The bundling of expertise and political focus on one ministry enabled a coherent economic policy.²⁵ This policy was, fourthly, based on market-conforming methods and informed by detailed knowledge of industrial sectors. This knowledge originated from close co­operation of the ministry with industrialists, for example in institutionalised forums. But it also derived from the practice to have retired civil servants work at the top of Japanese companies. This did not result in increased corruption, in the sense of resources siphoning out of the system, due to the professional adherence to institutional roles and central control of agents.²⁶

Principal aim of the economic policy was to move production away from low- technology-cum-low-productivity goods, to production with higher productivity.²⁷ For this purpose the MITI maintained a capital market, regulated competition and provided incentives, by manipulating market signals, like interest rates, supply or demand prices. Companies which invested in technologically advanced production were enabled to use these benefits to expand their production. At the same time, the MITI had pre-defined performance targets, against which the companies were measured. They were granted some time under government protection to finance learning costs, but had to proof that they were able to make gains, or otherwise lose access. The ministry regulated internal competition of sectors by only continuing to support those companies which made it to the top of productivity. Competition was increased further by the condition to export the produce, which meant that international standards of quality had to be met.²⁸ Lastly, Johnson explained that not all policies of the MITI were equally and instantly successful. Policy was rather based on a process of iterative learning, which demanded continuous adaptation of strategies.²⁹

In context of the pre-eminence of the neoliberal paradigm, Johnson’s study provoked strong resentment. Maybe because of this, it led other scientists to study developmental experiences elsewhere in the region. Alice Amsden (1989) and Robert Wade (1990) analysed the politics of industrialisation in South Korea and Taiwan, while also testing both cases for Johnson’s developmental state concept. Despite the very different strategies observable in the various countries, both of them confirmed Johnson’s political economy of state-led development. They criticised the economic orthodoxy, which attributed the growth of these East Asian countries to freely functioning markets.³⁰ These scientists instead argued that low-equilibrium traps were a consequence of market failures and the developmental state one possible solution to it. A free market would have never led to the composition of investment observed in the converging East Asian states. As Wade (1990, 297) argued, it was the state which ‘raised the economy’s investable surplus’ and ensured investment in domestic productive capacity to ‘sustain higher wages [...] and [then] expose[d] these investment projects to international competitive pressure’. The results were ‘rapid rises in labor demand, and [...] increases in labor incomes [...] [leading to] wide distribution of the material benefits of growth’ (ibid.).

Wade and Amsden both underlined the importance of the state monopoly on capital markets, which aligned disbursements of credits and levels of interest rates with political policy. As Amsden (1989, 14-17) has put it sharply: the key to the success of the developmental state did not lie in getting the prices right - on the contrary, it was intentionally getting the prices wrong, which induced investments and spurred economic growth. The inflated prices were economic rents, which financed firms learning costs, and bought the time necessary to reach economies of scale.³¹ Competition from foreign producers, was limited by setting import quotas and limits on the size of foreign direct investments (FDI). Domestic producers were protected, which gave them time to learn and improve their technology, until they would be able to be internationally competitive. Simultaneously, politically bounded involvement of foreign capital was supported in order to facilitate the import of knowledge and technologies, which could be appropriated by domestic producers. This exchange was the key to long term productivity gains.³² Similarly to Japan, the availability of incentives was reciprocal and tied to ‘monitorable performance standards’ (Amsden 2001, 8). The ability of the state to discipline the private sector was found to be one of the key institutional capabilities of the developmental state.³³

After the possibility of successful state-led development was substantiated, the debate turned to examine the institutional features of developmental states and their social foundations. Ha-Joon Chang (1994) attributed the success of these states to their ability to find solutions to the co-ordination problem. The co-ordination problem is one of many problems which can arise in the production of public good s ^{34 35} , like economic development. It is part of a wider set of social dilemmas, which are called collective action problems.35 They describe many of the social predicaments which block societies from collectively producing conditions or goods from which all would benefit.

In the case of the co-ordination problem, all players would benefit from the production of a public good, but this can only be produced if all players co-operate. Since every player is conspicuous of unequal appropriation of benefits by the others, which could still decide to not sustain production while having some players to produce, every player prefers to abstain from co-operation. To enable co-operation, it would need the co-ordination by an overarching structure, which facilitates an alignment of informations and interests among all players.³⁶

Chang’s work is based on concepts of New Institutional Economics (NIE)³⁷, which increasingly gained traction in economic theory at that time. NIE argues that economic growth may be inhibited if transaction costs for executing economic actions are too high. These costs arise because we have incomplete information about the intentions of other actors or because common cognitive limitations distort information to such an extent that we arrive at different conclusions from what would be logically expected. In the absence of institutions which could facilitate a flow and validity of information, and thereby lower transaction costs, particular actions could remain too costly to be undertaken. Investments would not take place and the economy would stagnate or at least stay under its growth potential. Therefore, Chang argues, that the ability of the state to create institutions which lower transaction costs was the crucial variable to state-led growth.³⁸

Peter Evans (1995) moved the debate to a sociological perspective of different state­society relations, by mapping the differences between developmental and other states. His research suggested that there were two dependent variables which were affected by the character of the state: the bureaucracy and the industrial sector. Depending on their value, they could bring forward three categories of states. First, predatory states. They patronise the bureaucracy to sustain political power and squander the economy to finance this structure. Second, developmental states. They have a Weberian bureaucracy which is insulated from short-term political pressures and able to make professional policy. The bureaucracy sustains close co-operation with the private sector, but simultaneously is following its own policy agenda, which aims to steer sectors towards more productivity. Third, intermediary states.39 These states either lack a politically independent and professional bureaucracy or a genuine, yet autonomous co-operation with the private sector.

Evans terms the delicate balance of co-operation and isolation which allows for the developmental state to emerge, embedded autonomy. While authoritarian elements of autonomy may help to resist populist pressures, it is embeddedness which facilitates the flow of information to enable the transition.^{39 40} For embedded autonomy to work, it is essential to have a Weberian bureaucracy, characterised by meritocratic recruitment, within a pilot agency. Its features allow it to act rational and follow the rules, instead of personal objectives or affections. Its esprit de corps, an informal institution, in which the self-regard of an elite-bureaucrat network rests on its high capabilities, pulls in the same direction, resulting in internal cohesion and low levels of capture.⁴¹

Almost more important than his classification was the unanswered question Evans’s focus on state-society relations had posed: what are the social mechanisms behind the adoption of different growth paths by states? The question was answered stepwise, with the first lead of scientists focussing on the demystification of East Asian developmental states. Cheng (1990), Kang (2002) and Moon and Prasad (1994) deconstructed the idea of a Weberian bureaucracy in East Asia by revealing the contentious character of policy formulation, which was permeated by politics and improvisation. A second strand of analysis focussed on the micro-level interactions in state-business relations, which were crucial to solve collective action problems . Despite the fact that in authoritarian states, rule of law and sanctioning of contracts are always limited by the unrestrained character of power, the private sector felt secure enough to risk investments. Causative for this trust were the deliberation councils, in which these interdependent actors were brought together to exchange their views. Policies were worked out together, which helped to reduce information asymmetries and lowered transaction costs. This ensured predictability of government action, which allowed the state to solve its credibility problem.⁴² What this research also brought to light was that the effectiveness of rent-distribution through such forums crucially depended on the organisation and exchange within business sectors themselves. Businesses which are collectively organised are more inclined to police one another on whether funds are distributed rule-consistently. Through aggregating the data on performance of members, they also discouraged single businesses to manipulate their data, in hope of collecting more subsidies. The more encompassing and diverse the association, the less it engaged in rent-seeking and the more it encouraged development.⁴³ However, MacIntyre (1994) has shown that such forums are not found in all developmental states. They are therefore not the only institution which can facilitate state-business relations.

The third strand of research took up the question of historical foundations of developmental states. These scholars have shown that the emergence of developmental regimes was a function of industrial capacities predating the actual take-off period and that the motivation to develop the economy rested on the interests of regimes to stay in power. Cummings (1984), Kohli (2004), Johnson (1982) and Wade (1990) all pointed out to the specific legacy of Japanese colonialism in Korea and Taiwan. Contrary to its European counterparts, Japan developed an industrial base in its colonies, which involved local owners and thus provided for an entrepreneurial class on which subsequent interventions could build upon.⁴⁴ The use of ISI and a modern education system allowed labour to acquire the necessary skills for production. Japan had also introduced modern bureaucracies, which worked efficiently, and it had installed repressive government institutions, which centralised power.⁴⁵ On the question of motivation, research suggested that local regimes took a rather instrumental approach to economic development. They seemed to be motivated by external threats arising from the fear of colonisation by Europeans (Japan), or popular mobilisations of communism (Taiwan, South Korea). External threats resulted in the urge of power holders to catch up with industrialised countries, which would bolster the regimes with the necessary legitimacy to stay in power. This ambition was supported by international power constellations of the cold war. East Asian countries were front states in the fight against communism and therefore profited from US- American support, which came in financial terms and via open markets for products.⁴⁶

With the research on social and historical foundations of developmental states, the debate had moved from its initial dominance by economics to arrive at questions of politics. On its course, the different strands of developmental state research have significantly broadened our understanding of the socio-economic micro-level workings of development. Heterodox economic policies can work, if they are based on institutions which solve the social dilemmas that are blocking co-operation. One avenue can be competent bureaucracies and collaborative state-business forums, which solve the problems of technological learning together. We will have the chance to recapitalise on these findings in the empirical chapters.

On the other hand, the focus on micro-level relations left open the simmering question if the East Asian developmental states could point to a more general model of economic convergence. There was little interregional comparative research on other successful developing countries in fundamentally different contexts, like Botswana or Mauritius. The condensed nature of rapid economic expansion in East Asia hindered a thorough understanding of how subtle differences in initial conditions can affect developmental performance.⁴⁷ To study these effects, we have to turn to the place where institutions are formed: the polity. The next section presents theories which relocate the problem of co-operation to a stage before social forces decompose in their professional roles of government and entrepreneurs. For these theories, civil society is not the residual of state-business interactions, but the pool from which those groups are selected which put a society on a specifc growth path. An integration of insights from micro-level developmental state research and macro-level political economy will provide us with a better understanding of how social forces create different conditions for development.

2.2 A Political Turn in Development Theory: Early Contributions of Adrian Leftwich

In a time where the Post-Washington Consensus⁴⁸ was just being established, Adrian Leftwich (2008, 5) had already pioneered the notion, that development is not merely a technical process; development is political. In this vein, he integrated insights from NIE with political science and development theory. In his conception, development is intrinsically linked to the historical legacies and internal and external political processes which form states. Politics involve ‘the many activities of co-operation, conflict and negotiation [...] in decisions about the use, production and distribution of resources [...]’ (Leftwich 2008, 6, my emphasis). Development is political, because the redistributive effects inherent in economic transformations, change the social relations within the polity. Therefore, the causality between politics and development runs both ways, political transitions can result in economic transformations and economic transformations in political transitions.⁴⁹

In line with NIE theory, Leftwich divides politics into two levels. First, the rules of the gam e ⁵⁰, which refers to formal and informal⁵¹ institutions, which shape interactions. Second, the games within the rules. This means the institutionally shaped interactions of actors on the micro level. The rules are agreed upon by settled consensus of political actors, either formally or informally. This means that rules may not be codified in any documents, from which we could easily comprehend, which rules are at play. The effect of such institutions on politics and economic development in the Global South is two-edged. On the one side, they have stabilised and civilised the political system and allowed it to produce more (public) goods. On the other side, informal institutions have sometimes overwritten and eroded formal institutions leading to the diversion of resources and insecurity for investments.⁵²

To understand these dynamics, it is necessary to look beyond states as single actors. For Leftwich, states consist of elites, which are rooted in social organisations. The former build elite coalitions to hold on to power. These coalitions then agree on the institutions which shape society. This agreement is called political settlement.⁵³ It structures the constraints and opportunities in which political agents can manoeuvre and thus sets the differential modes and powers of different social organisations to bargain. Hence, political actors are not merely confined by institutions, but possess agency to alter them. The development process starts exactly at that point, when elites are able to change certain institutions. Political analysis of such processes should therefore take place at these sub-national levels to find out what drives certain elites to establish growth-promoting institutions. ⁵⁴

At the same time, agency is confined by power. Elites are the most powerful actors in a society, especially those elites, which head the state institutions. Since their power rests on the given institutional structure, they are more likely to preserve than to change it. What is more, is that this structure rests on a set of informal rules of cultural attitudes and norms. In NIE theory, these informal institutions lower transaction costs, if they are compatible to formal ones. If they are incompatible however, they affect them negatively.⁵⁵ Since informal institutions are found to be changing very slowly, their continued persistence can undermine the performance of newly introduced formal institutions, even if they are found to be more beneficial. Therefore, any change is likely to be slow and many countries are locked into their historical structures, which results in their path dependency. Only in the rare cases, when contingent events are taking place, sudden and profound changes become possible. The main leverage for any outsider to support development in such contexts, is to support the lower levels of the polity - the poor. Raising their bargaining power, so that they can fight for benevolent institutions from below, will be more effective than to prescribe reform programmes to the elites.⁵⁶

It might be that in this assertion Leftwich is right, but for the wrong reasons. As Bardhan (2005, 210-225) has discussed, it is indeed true that the wealthy are likely to not co-operate in the production of technology-driven growth, even though their benefits from it are generally higher than for the poor. This is because the wealthy usually can find better exit options⁵⁷, which can raise their incomes or utility irrespectively of such growth. Whether technology-driven growth is pro-poor in the sense that it raises the poor’s bargaining power depends on how the different sources of power and their links are conceptualised. Unfortunately, Leftwich’s work misses to elaborate on such a concept. The next three sections will therefore turn to theories which have sought to model how different distributions of power can lead to different degrees of economic development. The first two sections will introduce the most prominent theories on this subject, while similarly explaining why they are insufficient if tested against empirics. The last section of the theoretical chapter will then present a theory which is arguably sufficient to explain how power, institutions and development are interlinked. A discussion of the sufficiency of this theory is provided in the conclusion of the paper, after the case study has been presented.

2.3.1 From Institutions to Development: a Framework by North, Wallis and Weingast

With their book ‘Violence and Social Orders’, North, Wallis and Weingast (2009) have become the first scholars to present a comprehensive model, which aims to explain why some countries are trapped in low growth paths. According to them, the fundamental problem which all social orders strive to solve, is how to preclude violence in society. While in small groups violence can be managed through repeated contact, larger societies have to establish institutions to contain it. The problem is how violence specialists in society could credibly commit to each other to refrain from violence, in absence of a third-party, which could sanction their contract. Since violence is closely connected to competition about resources or status, one obvious mode to check violence would be to limit competition.⁵⁸

In Limited Access Orders (LAO) the violent groups agree to build a dominant coalition, in which some elites join to respect the productive privileges of another. The core of these privileges is to establish organisations in different social sub-sectors like religion, trade or economic production. The elites agree to limit the access to these privileges for other groups and to provide their own organisations with exclusive third-party sanctioning through the state.⁵⁹ This enables them to extract a rent, which is conditional on their agreement and thus gives them an economic incentive to uphold it. Within the coalition, the exact share of rent for every member equals their bargaining power. Since the potential to violence is the source of this bargaining power, members of the coalition cannot disarm. If the coalition breaks down, they will employ their power to fight for their share in a new coalition. The function of organisations is to collect the rents of members and enforce the rules of institutions. For the system to be stable, the incentives they set have to be compatible with other organisations. Over time the institutions lead to the emergence of beliefs and informal institutions, which support their legitimacy. This results in all parts of the social order becoming mutually dependent and reinforcing, leading to a path dependency, which is difficult to overcome.⁶⁰

For North et al., Open Access Orders (OAO) have a fundamentally different way of managing violence. While LAOs were the dominant social order throughout most history, OAOs have just emerged recently, in wake of the industrial revolution. OAOs have monopolised the legitimate use of violence in a few distinct organisations. These organisations are controlled by the political system, which itself is institutionally constrained in how it is allowed to exercise violence. The legitimate possession of political power in turn is dependent on the support of broad economic and social interests. Since access to the economic system is open, new organisations can emerge anytime. This political competition lowers the incentives of the political system to abuse its privileged access. Within the larger society, the use of violence is checked by punishment and the threat to withdraw state services from organisations. In turn, the right to create social organisations is open to everybody. Every organisation can rely on a set of services provided by the state, for instance third-party sanctioning.

For open access to work, the right to found organisations has to be defined impersonally, for a large part of society, and organisations have to be perpetually lived, meaning they have to exist independent from the lives of individual members. The competition created thereby leads to, what Joseph Schumpeter called, creative destruction. Creative destruction describes the dynamic of innovation, which makes the profitability of products shift and always be highest with the latest production methods. That means that while one’s innovation and product may be the most profitable today, new entrants can challenge this profit with their own innovations. This ensures that an old innovation’s margin of profit will plunge back to average at least or worse. North et al. contend that this also holds true for political organisations. In OAOs, rents are created through innovations, not through monopolies, and can always be challenged by finding new rents. Thus, politics will be unable to protect its rents and control the power dynamics in society. While rents are a feature of OAO and LAO alike, they are significantly constrained in the former. Again, the structure of institutions, organisations and beliefs is mutually dependent and reinforcing.⁶¹

As a consequence of path-dependence, the transition between LAOs and OAOs is difficult. In LAOs a dominant coalition could always break down in contingent events of external shocks or unintended consequences of policies. Yet, this most likely leads to the creation of a new coalition, while the underlying social order is kept. According to North et al., a transition evolves⁶² in two steps and ultimately has to enable impersonal exchange between elites. LAOs first need to arrive at three doorstep conditions. First, the rule of law has to apply for elites. Second, private and elite organisations have to be perpetually lived. Third, there needs to be consolidated political control of violence in organisations like the military. Such LAOs are enabled to support a greater range of contracts, free elites from maintaining alliances with militarised fractions, allow organisations to engage in new activities and gain elements of impersonal identities.⁶³ Most importantly, the state has to be transformed from being a vehicle of personal rule to a contractual organisation ⁶⁴, which separates personal from legal interests, relies on a third party for contract enforcement, and allows for a continuation of enforcement, even after personal interests fade. Thus, it is important that it ‘is not simply the ruler that must be brought under the law but the state itself’ (North et al. 2009, 249).

What is less clear in the model, is when the transition proper will finalise the LAOs escape from the capture by vested interests. North et al. contend that it does not need a contingent event for this final step to happen. The authors only state that:

The transformation of privileges into rights occurs when elites in general perceive that their privileges will be more secure from intra­elite competition when those privileges are defined as commonly shared rights rather than personal prerogatives (North et al. 2009, 191).

The model of North et al. presents a new rational, for why some elites do not establish institutions which let economies prosper. It is the collateral of a civilisation process, in which powerful groups cease to use violence by agreeing to share a society’s available surplus. The model presents development to be not merely subject to greed or goodwill, but as the outcome of a non-co-operative gam e ⁶⁵, in which the degree of power concentration and the ability to support a sophisticated economy is intrinsically linked. Ultimately, it depends on the distribution of bargaining power of different players, whether a society is able to mature its social order.

However, the model runs into difficulties when applied empirically. To start with the obvious, North et al.’s conception seems extensively to be informed by Western liberalism. This becomes most evident when looking at the cases that the authors have found to be OAOs. They include the whole Western hemisphere, East Europe and Japan. Interestingly, Taiwan and South Korea are not counted as OAO. North et al. argue, that these countries have not yet reached the numerical threshold for OAO at USD 20.000 per capita income. Further, they lack a ‘vibrant civil society’ and their public holds beliefs which are inconsistent with their democratic constitution, like support for authoritarianism.⁶⁶ Frankly, this argument appears in a different light since the authoritarian turn in many Western countries. It is also not supported by other measurements, like Polity IV, which do not find significant differences in the quality of democracy of, for instance, Taiwan and the West.⁶⁷ The only extended case study provided in the book, is the transition of Great Britain in the 19th century. What would have been more enlightening to our understanding of transitions in the world of today, is a discussion of exactly these East Asian borderline cases, for instance by comparing them to Japan. This would have had the benefit to strengthen the causal claim of North et al.’s independent variables.

The most probable explanation of this inconsistency, is that there is an omitted variable at work, which is black-boxed by the concept of beliefs and informal institutions. The authors argue, that they are caused by institutions and organisations and reinforce them.⁶⁸ Yet, they provide no arguments why they perceive the beliefs of Japan, the USA and Germany to be similar, apart from the fact that all three countries are fully developed capitalist systems. Moreover, as Khan (2010) shows, formal and informal institutions can interact with another in both ways. The unobserved working of such mechanisms could be the reason why in other hemispheres, like in Taiwan, we may observe similar economic results with a different set of institutions, namely whenever informal institutions supplement for functions of missing formal institutions.

What the model lacks the most however, is a political economy of the transition proper. Despite the book’s sub-title of providing ‘a conceptual framework for interpreting recorded human history’, little is provided to draw conclusions for today’s history. The authors fail to explain why the multiplication of organisations and establishment of rule of law, would lead to an economy in which surplus becomes so abundant that the fights over its appropriation become formally institutionalised. Under which social constellation do elites share their powers with the common people? On this point, North et al. refrain from giving general conclusions:

Yet, the historical developments that bring a particular society to the doorstep may not be sufficient to propel it to complete the transition, nor will the same historical developments necessarily bring another society to the doorstep (North et al. 2009, 243).

North et al. contend that transplanting liberal Western institutions would not be fruitful. Rather, it would undermine the delicate balance of power in LAO by uprooting the dominant coalition’s rent mechanism.⁶⁹ Then which moments are the ones in which the balance of power tips? And would a dynamic understanding of change not also entail that social orders can regress? The model presents development in its classical depiction, as a one-way process of different stages. Once the transition proper is finalised, the institutions of OAOs become ‘perpetually lived’. The factors behind their permanence remain in the dark. As we have already learned from Leftwich, this may be an unduly ahistorical understanding of political economy. Similarly, Bates (2010, 755) criticises the ‘limited role micro-level-reasoning plays in their arguments’. The book would be largely ‘devoted to characterization and classification’ (ibid.). The authors are missing a clear account of what politics - the factional fighting and bargaining - is. The model of equilibrium-aimed bargaining within a dominant coalition may be a too consensual and narrow depiction of politics. Some actors have more options than waiting for concessions from ‘all powerful elites’, for instance by opting to exit.⁷⁰

In similar vein Mustaq Khan (1995, 80-85) pointed out, that the array of political veto players in some power constellations could be too large to allow for transitions. He claims that, contrary to NIE reasoning, institutional changes towards transition may be blocked from outside the dominant coalition, because institutional change always produces losers who profit from the status-quo. This assumption drastically enlarges the distribution of agency within a development theory. There would be a transition cost for walking over the doorstep, which calculates from the change attempted, the losers and winners of such changes and their relative power. In this light, a transition would be attainable when the relative power of proponents outweighs their opponent’s power. This decreases the contingency of contingent events by introducing a calculation method to assess the impact of sudden shifts of power. While it may not help to predict an outcome, it may help to determine the likeliness of success when introducing institutional reforms.

2.3.2 Institutions as Development Traps: a Framework by Acemoglu and Robinson

Daron Acemoglu and James A. Robinson’s (2012) book ‘Why Nations Fail’, developed a similar framework to North et al. (2009), but added an extensive array of case studies, to put NIE development theory on an empirical basis. It distinguishes countries by their political economy and explains thereby why some are more economically successful than others.

The authors find that the political institutions of a society are the ‘key determinant’ for their economic trajectory. Whenever they vest political powers exclusively in the hands of a few or allow for powers to be unconstrained, they are extractive political institutions. Their counterpart are inclusive political institutions which distribute power broadly and set it under checks and balances. Power is spread pluralistically onto a broad coalition, not held exclusively by a narrow group.⁷¹ It is in the processes of politics where institutional choices are determined:

Politics surrounds institutions for the simple reason that while inclusive institutions may be good for the economic prosperity of a nation, some people or groups [...] will be much better off by setting up institutions that are extractive. When there is conflict over institutions, what happens depends on which people or group wins out in the game of politics (Acemoglu and Robinson 2012, 79).

Either kind of political institutions will give rise to their counterpart of economic institutions. Inclusive economic institutions provide for secure property rights, an impartial execution of the rule of law and public goods, that allow a level playing field for people to exchange and contract. They allow new businesses to enter markets and people to freely choose their careers. All countries which experienced sustained growth and prosperity have adopted inclusive economic and political institutions. Extractive economic institutions in contrast benefit a small elite, while exploiting and suppressing the majority of the population. In colonial societies, property rights, the rule of law, public goods and the freedom to choose one’s economic activity were reserved for a small elite, excluding large parts of the population. Most societies throughout history have lived under extractive institutions.⁷²

Both kinds of institutional sets are mutually dependent and reinforcing. Inclusive economic institutions will give rise to inclusive political ones and vice versa, leading to virtuous or vicious circles of increased prosperity or stagnation. On the other side, any combination of inclusive and extractive institutions is incompatible in the long term. It will lead to either one of the two collapsing and giving rise to the compatible counterpart. Inclusive economic institutions thus will either bring forth inclusive political institutions or succumb to become extractive. The stickiness of extractive political institutions is even stronger. When political powers of extractive elites are challenged and the elites brought to fall, the incentive structure of extractive political institutions will most often lead the newcomers to continue with extractive politics.⁷³

Why do extractive elites not introduce inclusive economic institutions, when they know that the growth they will bring forward could raise their wealth to multitudes?⁷⁴ The reason is that these elites fear that economic growth will result in the Schumpeterian creative destruction. Elites who rest their power on particular modes of production, will oppose changes in fear of losing this power eventually. Since they face no incentives for abolishing their extractive institutions, the only possible way the authors see for change is in the erection of inclusive political institutions through the power struggles of the people. Acemoglu and Robinson set three conditions for this event to happen. First, the society has to achieve political centralisation. As long as there is violent conflict over state power, rule of law will be thwarted and thus a fundamental political institution missing. Second, there has to be institutional drifts which slightly lean the distribution of power towards inclusive interests. Third, there has to be a critical juncture triggering the transition.⁷⁵ These junctures are the historical turning points by which the ‘existing political and economical balance in one or many societies’ is disrupted (Acemoglu and Robinson 2012, 431).

Acemoglu and Robinson’s (2012) book impresses with its rich empirical content. This stands in stark contrast to the largely theoretical reasoning provided by North et al. (2009). The authors also allow for an internal heterogeneity of countries, like in their case of the US-American South which was still extractive, when the North was already inclusive⁷⁶ ; and for a reversal of development trajectories, for instance when European colonialism destroyed the basis of the slowly progressing economies of pre-colonial societies in the Global South.⁷⁷ The central argument of the book, that extractive institutions will only be challenged, when inclusive interests are strong enough to do so, is confirmed by most of development theory. However, the causality the authors put forward is certainly not. That inclusive interests need to establish political institutions first for their battle to succeed, does not withstand empirical tests. Since the falsification of Acemoglu and Robinson’s claims can give insights on how development has historically worked, it is fruitful to engage in thorough critique of their arguments.

For their central claim, that inclusive economic institutions will only be established if they are supported by inclusive political institutions, Acemoglu and Robinson argue with the classical case of England’s transition to capitalism. The authors contend that England’s transition started in the 17th century for two reasons: First, because of a labour shortage among the peasantry, caused by the plague, which allowed them to fight against their subjection by the nobles. Second, because the Crown’s ability to raise taxes was constrained by parliament. This was dominated by independent traders who demanded economic and political rights in exchange. Both conflicts are thought to have resulted in the successive establishment of first political and later economical inclusive institutions, the former being consolidated in the Glorious Revolution in 1689. Conversely, in France the parliament had no vote on taxes at all and in Spain, the king could rely on the gold supplies from its colonies, which lowered the bargaining power of the poor. In Eastern Europe again, the nobles were politically organised enough to capitalise on the plague’s decimation of the peasantry by subjecting them even further to their rule. Therefore, all these powers were politically unconstrained and continued to be extractive.⁷⁸

[...]

---

¹ Acemoglu and Robinson 2012; North et. al. 2009. For perspectives on Africa see: Bates 1981, Van de Valle 2001.

² Elsenhans 2011; Khan 1995; Khan 2018.

³ Marx claimed that capitalists had introduced capitalist institutions at the inception of capitalism, which would meant that they would be have been able to fully apprehend their macro-economic and sociological effects beforehand. In post-Marxism, Brenner (1977) has advocated the notion that such a knowledge would be unlikely. Instead, mid-term interests drove the adaption of institutions, which however had the unintended long-term consequence to consolidate the capitalist mode of production.

⁴ Brenner 1977.

⁵ See: Sundaram & Anis 2013.

⁶ See: Van de Walle 2016.

⁷ North 1995, 20-22.

⁸ See appendix 3.

⁹ Bates 1981, Van de Valle 2001.

¹⁰ Ono 2013, 268-298.

¹¹ In particular: Albert Hirschmann, Sir Arthur Lewis, Gunnar Mydral, Ragnar Nurske and Walter W. Rostow.

¹² Market failures occur in cases of: information asymmetries between economic agents; externalities (positive or negative effects of economic actions on third parties), natural monopolies (e.g.: infrastructure networks, like water pipe or railroad networks, which exist only once) and public goods. They lead to resource allocation below the economic optimum and social welfare losses (Cypher and Dietz 2009, 22; 165).

¹³ Backward linkages are the effects a production has on the production of its inputs, for instance leather production on husbandry or chemical industries. Forward linkages are the effects of a production on another production more towards the direction of the final consumer, for instance leather production on leather products, like shoes. Thus, investments in one sector can have a multiplier effect, when they induce investments in other sectors (Cypher & Dietz 2009, 148-149).

¹⁴ This policy is called import-substituting industrialisation (ISI). It started often with simple consumer goods, moving on to intermediate goods and more complex production. ISI requested the import of relatively expensive intermediate goods by paying with the exports of low-competitive and easy- substitutable products - mainly primary resources. There are diverging perspectives on ISI: NPE pointed to the high costs which inefficient state-protected industries put on consumers (through higher prices) and societies (through state budgets), while often not generating complementary progress in productivity growth (Cypher and Dietz 2009, 204-2017). Developmental state research however, stressed the learning effects for emerging entrepreneurs and workers engaged in such industries, who might otherwise not have had the opportunity to receive technical and managerial training in a practical environment (Wade 1990).

¹⁵ Neoclassical theory builds on the work of classical economists, like Adam Smith, David Ricardo and Jean-Baptiste Say, insomuch as it stresses the importance of trade and comparative advantage. However, neoclassicists focus less on production, supply and costs of national economies, but rather on consumption, demand and utility of individuals within society. They therefore highlight the importance of private property, individual freedom to satisfy personal demand and the limitation of government action to ensure the movement of labour and capital to areas of their greatest renumeration (Roll 1992, 336-402)

¹⁶ Cypher and Dietz 2009, 204.

¹⁷ Monetarist policy focuses on limiting the money supply and inflation, as well as averting deflation (Cypher and Dietz 2009, 205).

¹⁸ Khan (2000, 1) conceptualises rents as excess incomes: ‘a person gets a rent if he or she earns an income higher than the minimum that person would have accepted, the minimum being usually defined as the income in his or her next-best opportunity’. Rents do not need to be exclusively created through politics, but can also be created by economic actors, for example when branding or copyrights of goods make their substitution by similar goods more difficult. Elsenhans (2012, 14-15, 238) shows the utility of the concept for distinguishing capitalist from non-capitalist forms of appropriation. Rents are an economic surplus appropriated due to market imperfections, which can originate in natural conditions (resource endowments, climate), monopolies, policies, or other structural scarcities. Societies in which economic surplus is predominantly appropriated through politically sustained scarcities are called rentier-economies. Capitalist economies, are those in which economic surplus is predominantly appropriated as profit, by improved use of productive factors (capital, land, labour), based on ownership of the means of production, acquired through investment.

¹⁹ Krueger 1974.

²⁰ The concept of neo-patrimonialism was mainly developed through research in Africa (Van der Walle 2001; Erdmann and Engel 2006), but has been applied to describe other societies too. It combines notions of two Weberian types of rule: patrimonial- and rational-bureaucratic rule. The former actually described rule in pre-modern-state societies. All neo-patrimonial states have a stratified bureaucracy, which does not work along legal-rational principles, but is used by the ruler as a personal vehicle to sustain power. As will be shown later, Khan (2010) conceptualises neo-patrimonialism as an informal institution, which is not a social order in itself, but a form of relationship which can be found in different societies to different degrees and is embedded in different social orders.

²¹ World Bank 1983.

²² In many countries per capita income and purchasing power fell due to decreasing real wages. There was a decline in relative food production, expenditure on education, investments and the standard of living for the poor. Poverty incidence increased, while prosperity concentrated on fewer and fewer people (Cypher and Dietz 2009, 575-577).

²³ These are Hong Kong, Japan, Singapore, South Korea and Taiwan.

²⁴ In the sense of Elsenhans (2002) as explained above.

²⁵ Johnson 1982, 306-315.

²⁶ Johnson 1982, 20-21,102.

²⁷ Johnson 1982, 35-82, 155.

²⁸ Johnson 1982, 265-266.

²⁹ Johnson 1982, 27-28, 306, 314-315.

³⁰ Cypher and Dietz 2009, 217-220.

³¹ Amsden 1989, 14-17; Wade 1990, 350-58.

³² Amsden 1989, 21,76; Wade 1990, 363-369. See also: Amsden 2001.

³³ Amsden 2001,8.

³⁴ Public goods are contradictory in the characteristics of their production and consumption. On the one side, nobody can be excluded from their consumption, on the other side many public goods can easily be over-consumed or depleted. The costs of production of these goods could be reduced if all simultaneously invested, but since consumption cannot be monitored, it is easy for consumers to free­ride. Classical examples of public goods are environmental resources like clean air or water, peace or economic development (Corduneanu-Huci et al. 2013, 81-83).

³⁵ Collective action is the fundamental concept underlying the research questions of development economics since the developmental state research. It was first introduced by Mancur Olson, who also reintroduced the idea that it is the incentives created by institutions which cause or solve certain social dilemmas. It describes frequently occurring problems in producing public goods like development. Even though everybody would be better off if the good would be produced, the incentives individuals face usually discourage them from contributing to production. This is because there is nothing to ensure them that co-operation will be successful. There is a lack of mechanisms to generate trust and enforce co­operation by sanctioning defection. Such mechanisms or institutions, need to assure that benefits are shared as agreed beforehand and raise the costs of non-co-operation (Corduneanu-Huci et al. 2013, 79-105).

³⁶ The coordination problem describes one possible solution to resolve a sub-set of collective action problems. To work, individuals needs to have the highest payoff from co-operation, instead of conflict and agreements between players have to be enforceable by a third-party (Holzinger 2003). For example, industrial investments could be discouraged by small market size due to low purchasing power, which could only be alleviated by raising the payroll through investments. Rodrik (1995, 79-80): ‘From the perspective of an individual investor it will not pay to invest in the modern sector unless others are doing so as well. The profitability of the modern sector depends on the simultaneous presence of the specialized inputs; but the profitability of producing these inputs in turn depends on the presence of demand from a pre-existing modern sector. It is this interdependence of production and investment decisions that creates the coordination problem’. If the actions of the parties would be co-ordinated by a third party, which ensures that all parties know everybody's investment intentions, investment could take place.

³⁷ NIE has been pioneered by Douglas North. He presented it as ‘an attempt to incorporate a theory of institutions into economics. However, in contrast to the many earlier attempts to overturn or replace neo­classical theory, the new institutional economics builds on, modifies and extends neo-classical theory to permit it to come to grips and deal with an entire range of issues heretofore beyond its ken’ (North 1995, 17). It keeps the neoclassical assumption of the utility maximising individual as point of departure, but introduces the concept of procedural rationality, as opposed to the instrumental rationality underlying neoclassical analysis. Procedural rationality assumes that there are information asymmetries because of cognitive limitations of human beings. We cannot be certain that our information is true, complete and will be relevant for the future, which makes it difficult to measure the multiple valuable dimensions of goods. This difficulty is termed transactions costs and can preclude investments if too high. NIE finds that transaction costs are the source of market failures and need institutions which facilitate the flow of information to solve them (North 1995, 18).

³⁸ Chang 1994, 52-53, 61-78.

³⁹ His examples are India and Brazil. While India’s civil service was somehow aloof the economic actors it attempted to lead, Brazil suffered from too much political interventions in the workings of its bureaucracy (Evans 1995).

⁴⁰ Evans (1995) emphasised this condition in reference to a difficult debate on the relevance of authoritarianism for overcoming collective action problems. All of the East Asian developmental states were marked by some form of authoritarian centralisation of power. Authoritarianism’s autonomy from populist demands, its ability to mobilise people (Johnson 1999) and centralise rents (Cheng 1990), clearly had an impact on the pace of transformation. Displaying power can raise the credibility of commitments, while centralisation of power can reduce alternative options of players, by making the state the only player being left to play with (Haggard 1990). Restricted political access lowers costs for co-ordination and reduces the space for new rent seekers to establish themselves (Chang 1994). Fragmentation of power could instead reduce the incentives for politics to allow the bargaining power of the private sector to grow (Kang 2002; Schleifer & Vishney 1993). Despite the abundance of advantages, Evans typification of state models already points out that the link between authoritarianism and development is not univocally positive.

⁴¹ Evans 1995, 51.

⁴² Sending credible commitments to uphold co-operation is one mechanism to overcome collective action problems. In credible commitments the more powerful co-operation partner tries to assure a weaker partner that she will not abuse her powers to take advantage of the co-operation. If she would, the weaker partner would lose her investment in producing the good. Since co-operation always consists of multiple stages of interaction, power imbalances raise the risk of one player changing her mind. To be credible, the stronger partner can either restrain her own power, or raise her material or reputational costs of defecting, before co-operation starts (Corduneanu-Huci et al. 2013, 221-226).

⁴³ Maxfield and Schneider 1997, 7-30.

⁴⁴ Wade 1990, 73-74.

⁴⁵ Kohli 2004, 27-57.

⁴⁶ Kohli 2004, 88; Wade 1990, 346-347. See also Doner, Richie, Slater (2005), who show how scarcity of resources may lead to efficiency enhancing institutional reforms.

⁴⁷ See Mkndawire 2011.

⁴⁸ In context of the criticism on SAP and the emergence of NIE, with its refinement of neoclassical analysis, the WB and to some extent the IMF shifted their policy focus to the so-called Post-Washington Consensus. They integrated the idea that institutions shape micro-level actions of economic actors and thus extended their programmes to include institutional reforms. The new set of prescriptions, traded under the name of ‘good governance’, adds to monetarist policies (known from SAP) the (1) local adaption and ‘ownership’ of reform agendas (to take local scope conditions into account); (2) acknowledgment of market failures and the possible role of the state to counteract (however, also limiting states to that form of emergency intervention); (3) a greater attention to human development indicators; and (4) increased interest in corruption as a product of not only government, but also market failures (Engel 2010, 19-20). Similarly to SAP, the ‘good governance’ agenda had rather limited success in rooting out corruption and establishing more transparent, accountable and efficient institutions (Sundaram and Chowdhury 2013).

⁴⁹ Leftwich 2008, 10.

⁵⁰ This is in line with the well-established definition of institutions given by NIE.

⁵¹ Leftwich (2008, 7) describes informal institutions as culture, political culture and ideologies.

⁵² Leftwich 2008, 6-11.

⁵³ In political science, the term political settlement has been applied to describe at least three diverging concepts. However, one of the most common applications is in peace and conflict research, in which it describes a negotiated agreement between elites, fixed at a point of time to end an armed conflict. Such settlements produce codified rules and procedures from which their effects can be deducted. This paper will use a political economy understanding of political settlements. This concept describes settlements as a set of institutions, which constrain or facilitate certain actions of political actors and thereby enable us to understand in which direction a polity might be heading in the near future (Ingram 2014). The application in political economy inevitably contradicts its conceptualisation in peace and security studies, because the latter disregards lower level dynamics of political power (Kelsall 2018, 660-661). As will be argued later, the relevance of informal institutions renders the peace and conflict conceptualisation impractical and justifies the political economy understanding of the concept.

⁵⁴ Leftwich 2010, 97-103, 108.

⁵⁵ See: North 1995, 25.

⁵⁶ Leftwich and Sen 2011,328-335.

⁵⁷ Exit options are alternatives which provide the same or a superior benefit to any given functionality of a good or institution. In these cases, co-operation is precluded by exit of those actors which are needed to produce a public good (Bardhan 2005, 205).

⁵⁸ North et al. 2009, 1-17.

⁵⁹ It is implicit in this argument that there may be other economic entities in society not connected to the ruling coalition, but they are either active in sectors where profitability is low or they may be unable to protect their profits in cases of contestation, because they lack third-party enforcement.

⁶⁰ North et al. 2009, 15-20.

⁶¹ 61 et al. 2009, 20-25.

⁶² According to North et al. (2009, 21) the evolution of LAO proceeds in three different stages of Fragile, Basic and Mature LAO. In Fragile LAO the only organisation which can be supported is the state itself. The fragile elite pact can barely hold the state together and violence is always immanent (ibid., 42). Basic LAO can support other organisations but only within the framework of the state. Many feudal states were Basic LAO, where the possession of land was closely tied to control over government. Mature LAO can support organisations outside the state’s framework. Mature LAO in turn may be democratic and hold regular elections, but they lack an organised civil society which could challenge the state effectively. They are much more subject to populism and thus vulnerable to severe budget imbalances leading to crisis. They implement mechanisms to insulate themselves from (international) competition and the mobility of resources (ibid.,137-138). Mature LAO were found in the Roman Empire (ibid., 48-49.), 16th century absolutist France (ibid., 69.) and in today’s Latin America (ibid., 138).

⁶³ North et al. 2009, 20-21.

⁶⁴ Contractual organisations use contracts and third-party enforcement to ensure compliance, instead of relying on self-enforcing incentives like adherent organisations in LOA (North et al. 2009, 16, 260).

⁶⁵ Non-co-operative games are one of two sets from game theory, with the other being the co-ordination game introduced in the context of Chang (1994). In non-co-operative games, there is no third party available that would be able to enforce contracts. Instead, every move of a player is self-enforcing and results from strategic considerations. The most prominent example is the prisoner’s dilemma, which is the starting point of the model of North et al. (Holzinger 2003).

⁶⁶ North et al. 2009, 4, 23-27.

⁶⁷ Polity IV Project 2019.

⁶⁹ North et al. 2009, 264-265, 271.

⁶⁸ North et al. 2009, 15, 29.

⁷⁰ Bates 2010, 755.

⁷¹ Acemoglu & Robinson 2012, 80-83.

⁷² Acemoglu & Robinson 2012, 74-79.

⁷³ Acemoglu & Robinson 2012, 81-83.

⁷⁴ Acemoglu & Robinson (2012, 94-95) allow for growth in extractive states too, however they contend that it is doomed to bust, because it is not accompanied by the innovative force of creative destruction. They even go so far as to state that most extractive states will not be able to keep political control centralised. The exclusivity of state power would lead to continuous fighting of contending elites, inhibiting the establishment of the rule of law.

⁷⁵ Acemoglu & Robinson 2012, 81-94, 428-437.

⁷⁶ Acemoglu & Robinson 2012, 414-420.

⁷⁷ Acemoglu & Robinson 2012, 245-273.

⁷⁸ Acemoglu & Robinson 2012, 102-106.