Adapting Institutional Complementarity to Developing Countries: De jure and De facto Complementarity

As explained in the two previous sections, the institutional complementarity theory certainly constitutes the theoretical foundation of our empirical research in this book. In opposition with the CC approach of OECD capitalisms, however, we could not start the present study of developing countries’ capitalist systems by a priori defining ideal types based on fully-fledged models of complementarity. As discussed in Chap. 2, there have been too few prior works, either theoretical or empirical, on developing countries’ institutional complementarities that could have informed such an ideal-typical typology. Moreover, dealing with institutional design in developing economies, typically afflicted by policy and market failures, would require a second-best setting in which no institutional form should be condemned as being unable to achieve a socially desired goal or function (Rodrik 2003, 2008). Since many institutional settings might be considered as favourable to economic development, provided they manage to provide the correctly balanced mix of economic incentives and political support needed to ensure expansion of the economic system, we needed to implement an “agnostic” approach. Our characterization of developing countries’ capitalist systems had to rely, therefore, on a flexible notion of complementarity, one which is, in fact, closer to the idea of institutional coalescence. We consider throughout the book that observed sets of coexisting institutions might, in some cases, be self-reinforced because they present elements of complementarity reflected by good economic performance. Rather than starting from a definition a priori of complementary institutions, we have preferred looking at the institutions that tend to be regularly observed together across developing countries. Complementarities, therefore, emerge from the empirical analysis of institutional coalescences, before they can be justified or explained ex post.

Of course, the observed sets of coexisting institutions may also reflect a complex combination of domestic sources of influence, like cultural traits or political critical junctures, and external influence, like colonization or structural adjustment, that could have led to the diffusion of standardized hybrid systems across developing countries. Two types of sectoral governance are not necessarily complementary because they tend to be observed for a sufficiently large number of countries. In fact, they may all be submitted to political economies similarly conducive to this persistent and possibly socially inefficient configuration. Some of them can show signs of efficiency and internal consistency whereas others may finally be inefficient, but persistent because they serve elites’ vested interests. Truly assessing their degree of complementarity would therefore require measuring the average level of economic and social performance of each model, or of each regularly observed institutional configuration. This is precisely what we do in Chap. 12 in Part III.

The general set-up of CC, consisting of defining ideal-types delineated by typical institutional complementarities, needs to be adapted to developing countries, so that the models of emerging capitalism can be generated and characterized, ex post, as the outcome of a prior empirical analysis. More specifically, we argue later in in this book (Chap. 3) that the distinction between de facto and de jure complementarity can be useful in analyzing developing countries’ capitalisms and the a priori

undetermined institutional efficiency. We call de jure complementarity the form of complementarity that can be expected on purely theoretical grounds. For example, a flexible labour market is assumed to be complementary to a competitive product market, since product market firms’ entry and exit will be facilitated by higher levels of labour and capital mobility (Hall and Soskice 2001; Amable 2003). Conversely, we define de facto complementarity as forms of institutional efficiency that do not have a priori theoretical justification. This form of complementarity may, instead, appear ex post, with institutions that were not initially supposed to be specifically complementary, delivering unexpected positive effects.

China is the perfect example of a country which has associated market institutions in product markets, and statist forms of regulation in the labour and finance sectors, although the positive development effects of such a heterodox set of institutions cannot be justified by mainstream economic theory. China’s successful economic transition has been explained by the economic incentives delivered by a combination of promarket (FDI incentives) and statist (collective property) institutions that s imultaneously allowed for a massive rise in productive investment as well as the active support of local political elites (Qian 2003). The fundamentally dual nature of the Chinese institutional system, described by Rodrik (2010, 41) as “a market system on top of a heavily regulated state sector”, has exhibited strong de facto complementarities, with this hybrid system proving highly efficient in organizing the transition from a centralized to a capitalist industrialized economy (Lau et al. 2001). China is in no way an isolated case, since Rodrik (2007, 2010: 41) reports similar unconventional institutional configurations for South Korea in the 1960s and 1970s, for Mauritius during the 1970s and 1980s, as well as for India during the 1980s and 1990s.

Conversely, the articulation of the best-fitted institutions supposed to be de jure complementary; that is to say, theoretically complementary, does not necessarily imply that institutional systems work in a fully efficient way. From the mid-eighties to the late nineties, the Washington Consensus set of institutional reforms was seen as an internally coherent policy mix of a first-best type that should rapidly trigger economic growth and restore financial balances. Wholesale reforms, all inspired by the common principle of “getting prices right” on the different markets, were rarely implemented and, when they were, they did not produce the expected economic benefits (Stiglitz 2003; Berr et al. 2009). Neoinstitutionalist scholars then came to argue that reform efficiency could be improved by getting governance right (Rodrik 2001). Their theoretical set-up remained, however, strongly inspired by a first-best functionalist logic: each specific and isolated institution is supposed to be designed ex ante to minimize transaction costs for the sake of collective efficiency. Since the functionalist approach considers that each single function or goal should be assumed by only one type of institutional form—the best- fitted one—whatever the national context, conforming all developing countries’ systems to the mix of institutions featured by the institutional frontier, that is the best performing national system in terms of institutional outcomes,[1] has become a priority goal. The main justification for claiming that one given institutional form or configuration is better fitted than the others has been drawn indifferently from economic theory and from the observation of an international benchmark. According to this de jure approach to institutional fitness of shape, minimum level of enforcement of this best-fitted institution would automatically engender the highest expected economic outcome. Obviously, there would be no room for institutional experimentation of possible de facto complementarities in this context.

Proponents of institutional pragmatism and piecemeal reforms for developing countries have strongly contested this “one best way” vision on several crucial grounds. First, there is huge confusion about the correct set of alleged optimal policies to be implemented by developing countries. Naim (1999) or Rodrik (2006) have, for example, underlined the huge confusion characterizing the theoretical foundations of the Washington Consensus, which has consistently provided developing countries with an allegedly coherent mix of institutional reforms over 20 years. Second, it is difficult for developing countries to use wholesale reforms to set up fully consistent and efficient copycats of mature capitalisms’ institutional systems. This is because very few developing countries have the necessary administrative and legal capacity to implement such a comprehensive set of reforms (Andrews 2013). Equally, by disturbing prevailing sociopolitical equilibria, the institutional reforms required to modify existing institutions and regulations may trigger considerable resistance. Since the observed benefits of the new system may well prove insufficient to balance the heavy social and economic cost raised by the dramatic change in rules, the whole reform process might eventually be rejected.

Hence, even though their institutional components do not seem to be de jure complementary, certain, apparently inconsistent institutional systems may well correspond to efficient institutional systems for the simple reason that they are conducive to socioeconomic development. In this case, we could talk of de facto complementary institutions, in the sense that they are not universally complementary, but locally they are, both in time and space.[2]

Additionally, the long-term persistence of a given institutional configuration does not imply that the system is necessarily de jure or de facto complementary and fully efficient. Nolke and Vliegenthart (2009) contend that the stability of social preferences and path-dependency may constitute a first explanation of long-run institutional persistence of, sometimes inefficient, institutions. They notably report Esping-Andersen (1990) who argue that the variety of post-war welfare state “regimes” was promoted by the then emerging middle classes, which had different values and cultural norms concerning the style and extent of state intervention in social life.[3] Nolke and Vliegenthart (2009), however, advance a second explanation, particularly appropriate for developing economies. They argue that the existence of self-reinforcing clusters of institutions may cause the persistence of inefficient institutional systems, without abandoning the assumption of complementarity. Institutional externalities may reinforce or contradict one another, thereby generating distinct institutional clusters at equilibrium. Clusters of institutions might, consequently, be rather stable over time and only change very slowly, even though they should have been rejected by rational agents because their socioeconomic efficiency is low.

Hence, a second adaptation of the institutional complementarity theory to developing countries consists in opposing those forms of complementarity that are conducive to economic development and to high-level outcomes, and those that are akin to stable low-level equilibria where strongly consistent institutional systems will maintain poverty. We call the former progressive and the latter regressive complementarities.

As an illustration, some poor countries actually show sets of strongly complementary and self-reinforcing institutions—predatory state, low property rights protection, limited access to judiciary, education and political or economic organizations, repressed finance—that are very similar to the natural state ideal-type described in North et al. (2008) as a typical form of politico-economic system preliminary to modern states. These authors explain how the patron-client political equilibrium typical of the natural state tends to persist in poor countries, even though this stable equilibrium eventually hinders economic development. North et al. (2008) describe natural states as highly consistent and complementary sets of institutions generally showing efficiency in limiting the scope of sociopolitical and economic violence. However, their effect on economic development is less positive, since natural states eventually tend to trap the economy into a persistent low- or intermediary-level equilibrium. Here, de jure stable and consistent institutional configurations may prompt regressive mechanisms strongly adverse to economic development.

Similarly, institutional inconsistencies, that is to say, the persistence, in certain sectors, of institutions that are not complementary to the rest of the system, can be explained by the fact that those institutions have certain positive welfare effects, at least for some social groups. In nondemocratic developing countries, even more than in mature democracies, sub-optimal institutional configurations may well survive because they are culturally more acceptable, or because they provide distributive benefits to the dominant sociopolitical coalitions. If slow-moving institutions are often those that are strongly conditioned by culture (Kuran 2011; Roland 2004), they can also persist, independently of their economic consequences, because they serve the interest of dominant sociopolitical coalitions (Acemoglu and Robinson 2006, 2012; Amable 2003).[4] In this context, some core institutions can reinforce one another in ways that are supportive of the political equilibrium of the system, even though those institutions are inefficient. Schneider (2009), for example, has documented the survival, in Latin America, of an intermediary system, the hierarchical market economy (HME), combining features from the coordinated market economy (CME) and liberal market economy (LME) (for example, externally liberalized economies and highly-regulated and protected labour markets) in an inefficient way, albeit benefitting from the support of strong sociopolitical coalitions. This combination of contradictory regulations has actually introduced strong hierarchical links between and within firms, supported by transnational corporations (TNCs) and big domestic companies. As a consequence, increasing labour market dualism, supported by unionized TNCs and big national companies’ workers, has generated high unemployment levels throughout the Latin American region. De facto institutional complementarities, therefore, could well turn into a regressive process whereby the presence of one institution (labour market rigidity) reinforces the adverse economic effect of another one (external liberalization), whilst also strengthening sociopolitical support for the entire system, however socially suboptimal.

By contrast, some developing countries have, during the last two decades, been busy introducing a high dose of experimentation into their institutional reform-making process (Ahrens and Junemann 2009). Their institutional sets were neither designed nor implemented to be complementary ex ante. Speaking of developed countries’ institutional systems, Crouch et al. (2005) underline that complementarity is in fact often discovered, ex post, at a later stage in time. A similar observation is made for developing countries by Rodrik (2007, 2010) who speaks of institutional reforms as a process of experimentation of heterodox sets of institutions, with the term “heterodox” suggesting that the observed complementarities are not based on standard theoretical grounds. Country case studies and historical records show that developing countries’ institutional systems articulate sectoral regulations that are the product of multi-layered processes of serendipity, incremental adjustment, politically oriented reforms and globalization-led hybridization. Therefore, observed sectoral institutional arrangements should not be considered as being necessarily the most efficient, but, instead, as the result of a complex and open process of incremental and highly contingent institution building and formalization. Put differently, institutional complementarity is not the outcome of a centralized design but is the result of a constant process of discovery and incremental adjustment that introduces a great deal of slackness in economic system design (Crouch et al. 2005: 363, 366). In his most recent papers, Rodrik (2010) suggests that developing countries might make more intensive use of experimentation to test the institutions and regulations that best match their own national conditions. He even argues that assembling orthodox and unorthodox institutions or regulations, as China has done during the last three decades, has proven efficient to solve incrementally the most binding constraints to economic development. This amounts to saying that setting up systems of noncomplementary institutions in the developing countries context may bring about higher social benefits than trying to directly emulate fully complementary Western institutional configurations, like the CME or LME, or else to implement the full package of reforms coined by the Washington Consensus.

Table 3.3 summarizes the argument by combining of de jure and de facto institutional complementarity, on the one side, and their observed economic efficiency, namely whether they are progressive or regressive, on the other side. Each combination is illustrated by examples drawn from the present section.

Table 3.3 De facto and de jure complementarities

De jure

De facto

Progressive

LME, CME

Experimentation Chinese market socialism

Regressive

Washington Consensus Patron-client systems Natural state

Reforms as signals inconsistencies HME

  • [1] Thus defined, the institutional frontier is generally the US, and sometimes Switzerland.
  • [2] It is worth remarking that de facto complementarities are implicit in the series of country-casestudies brought together in Rodrik (2003). Each of those studies, as Dani Rodrik emphasizes in hisintroduction to the book, underlines the pragmatic and adaptative nature of the selected developing countries’ trajectories of institutional change during the 1980s and 1990s.
  • [3] Likewise, Greif (2005) and Kuran (2011) have explained how religious culture has durably influenced the design of economic and trade institutions in the Islamic world and the Jewish traders’community, with long run detrimental effects on those communities’ trajectories of economicdevelopment.
  • [4] According to Boyer (2011) institutional persistance is either explained by the higher economicperformance induced by the institutional complementarities, or by the sociopolitical process ofinstitutional hierarchy by which an institutional configuration persists because it is favourable tothe dominant sociopolitical groups, whatever is its economic efficiency.
 
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