Part III - Institutional Obstacles to Structural Transformation

Introduction To Part III

This last part of the volume puts together the lessons learned from the in-depth case studies undertaken within the Institutional Diagnostic Programme, and the more cursory analysis of the success development stories of South Korea and Taiwan at about the time when they were at a broadly similar level of development as our four case studies today. In doing so, the objective is to provide a kind of analytical list of potential institutional obstacles to development based on the conclusions reached in our analysis of the case study material at hand, whether those obstacles still prevail nowadays or have been removed in one way or another. We also rely on other development experiences, whenever links to them are suggested by our base material, in terms of either similarities or contrasts. Even though our knowledge of those additional country experiences is more superficial, it may still supply valuable insights that complement or enrich those obtained from our main analysis. In other words, from the institutional diagnostics established on Bangladesh, Benin, Mozambique, and Tanzania, as well as the central messages emerging from an institution-focused approach to the early development experiences of South Korea and Taiwan, we are able to extract a set of summary ‘generic institutional issues’. Awareness of these issues should help us to better understand the nature of the most important institutional constraints on economic development in general, and to provide a guide to identifying the most binding constraints in the case of a particular country at a particular point in its development.

This list of critical institutional problem areas should assist experts and analysts in uncovering the factors which slow down the development of a country, and the deep institutional reasons behind them. By perusing these generic issues one by one, experts and analysts will have their attention drawn to potentially important impediments to growth and development, and should then reflect on how constraining they actually are in the particular country they are interested in. Even though several items in the list can apply to countries at varying levels of development, it should be borne in mind that the whole research programme on the basis of which these generic institutional issues have been established deals with low-income or lower middle-income countries. Other institutional issues might have to be considered at later stages of development.

The analysis we provide below is nevertheless more ambitious than simply listing generic institutional issues or obstacles. On the basis of our four (plus two) case studies, it also offers an in-depth analysis of their possible causes and economic consequences, and, most importantly, the political economy factors that spark resistance to reforms that could mitigate or remove their adverse effects. Beyond mere identification of institutional weaknesses, we thus aim to supply a framework that will enable analysts to reflect on these weaknesses by placing them in their own specific context and their own set of institutional interactions, including those linking formal and informal rules and organisations.

This last part of the volume is organised into three chapters. The first chapter (Chapter 7) focuses on the nature of the economic obstacles to development which may be found in a low-income country, with special attention to those that can only be surmounted if some institutional dysfunction is addressed. A key lesson from the case studies is that this inquiry must imperatively be based on an approach that views development as a process of structural transformation by which the great mass of poor people gets out of poverty by moving into decent formal jobs or accessing modern technology. This approach was formalised by the fathers of the discipline and is at the heart of the tradition initiated by the seminal works of Arthur Lewis (1955) and Simon Kuznets (1966), in particular. An aggregate approach in the spirit of Hausman, Rodrik, and Velasco (2005) is helpful in revealing problems in the way the economy works and, possibly, in shedding light on their institutional underpinnings. Yet it is bound to miss key sources of blockage located in the structural dimensions of development. Based on what we learned from the four IDP case studies and two East Asian success stories, the first part of our discussion thus summarises the various types of economic factors which may block, slow down, or accelerate the process of structural transformation, as well as the broad institutional domains involved.

The second part of our synthesis work is presented in the next two chapters. It delves into key institutional factors by following a conceptual approach that starts by regrouping them into generic institutional issues, as defined above, and then proceeds by probing each of them methodically. By conceptual approach we imply that, beyond a mere listing of these issues, we provide a framework of analysis that goes into the details of each institutional problem area in an orderly and meaningful manner, using concepts borrowed from the existing social sciences literature, and economics literature more particularly, as reviewed at the beginning of this volume. More fundamentally, in the light of our in-depth case studies, and the comparison between the latter and the successful early development experiences of South Korea and Taiwan, we intend to reflect on the proximate and deep causes of institutional dysfunctions, and on how they can be reformed. This concern about reforms makes it necessary to examine the political economy environment in which the country operates. Although the deep causes behind the generic institutional issues, and the directions for reform, inevitably include country-specific elements, care is taken to identify what may be of more general relevance for low-income or lower middle-income countries.

The above logic leads us to divide the strictly institutional part of the analysis into two chapters. The first one (Chapter 8) deals precisely with the role of institutional factors of a political nature, as well as politics per se, in interfering with the process of structural transformation. As for the second one (Chapter 9), it addresses the same issue from the more functional perspective of the capacity of the state to efficiently deliver public goods and services, and to regulate the private sector so as to make it compatible with the long-term interests of the country, including through the protection of property rights.

7 The Challenge of Modernising the Economic Structure

I Introduction

Whether in the four IDP case study countries or in the successful Asian development stories at the time these countries were at a comparable level of income per capita, development consists first of providing the great mass of poor people with either decent jobs or access to other income-generating facilities, which can help them to exit poverty. As an overwhelming majority of these poor people operate in the subsistence agricultural sector or other subsistence activities, a central issue of development is the structural transformation of the economy. Such a transformation may take the form of people moving out of agriculture and other low-productivity activities to higher-productivity jobs in metropolises, middle-sized cities, or even so-called cottage industries in the countryside. But it may also involve technological or organisational changes that progressively modify a subsistence agriculture into a market-integrated commercial farming sector exhibiting higher yields and incomes. This chapter summarises what the diagnostic exercises conducted in the four case study countries – Bangladesh, Benin, Mozambique, and Tanzania – reveal regarding the type of economic obstacles that hinder faster structural transformation, and the major institutional weaknesses involved.

A basis of comparison is needed to evaluate the nature and the strength of these obstacles in a particular country. In what follows, this is provided by the benchmark of two of the East Asian tigers, South Korea and Taiwan, considered as they were several decades ago in the 1960s, when the process of their startlingly rapid structural transformation was only just starting. The idea here is not to suggest that the path followed by those development champions could or should be imitated some forty or fifty years later by low-income or lower-middle-income countries as of the late 2010s. Rather, it is to allow for an easier evaluation of obstacles to, and facilitators of, structural transformation by comparing the present situation of the case study countries to the situation prevailing in the two tigers when they were taking off, or shortly thereafter.

With this objective in mind, we proceed in two steps. The first step (Section II) consists of reflecting on the conditions which surrounded the start and then the acceleration of the structural transformation and development in South Korea and Taiwan. One effective way to approach this question is by looking at their performance in the light of the canonical model of ‘dual economy development’ proposed by Arthur Lewis and amended or refined by other scholars. This approach is especially attractive because this model has been extensively used to analyse the mechanisms of structural transformation in the two countries. Owing to its relative simplicity, it provides an analytical framework which makes it somewhat easy to identify the contextual factors impinging on the structural transformation of a country. In a second step (Section III), we then consider the main economic obstacles on the path to structural transformation as we can ascertain them in the IDP case study countries, and we offer some first clues about their possible institutional causes.

II The South Korean and Taiwanese ‘Miracles’ Through The Lens of The Lewisian Framework

As just mentioned, we begin this brief review of the early development of Taiwan and South Korea by recalling the basic economic mechanisms underlying the structural transformation process as modelled by Lewis and his followers in the ‘dual economy’ tradition.¹ In effect, an important part of the subsequent development literature used the South Korean and Taiwanese early development experiences as good illustrations of this line of development modelling, which then acquired in the development literature a rather universal connotation, very much undue.² By laying bare the basic structural transformation mechanisms, the Lewisian framework also supplies a helpful analytical guide to diagnose potential obstacles to structural change in other countries.

A The Dual Economy Model of Arthur Lewis

The Lewisian representation of development is based on an observation that seems universal among countries in the early stages of development: the coexistence of a mass of poor people sharing the income of low-productivity activities in subsistence agriculture or informal retail and handicraft occupation in rural or urban areas, on the one hand, and modern firms using more productive technologies and employing salaried workers at a higher level of earnings, on the other hand. The ‘dual economy’ model thus distinguishes between a modern or formal sector, essentially made up of firms organised according to a capitalist mode of production, and a traditional or informal sector, generally constituted by family farming or small family businesses in retail trade or handicrafts. Capital accumulation at the country level is taking place in the modern sector, which thus recruits an increasing number of workers at some given wage level. The marginal productivity of labour in the informal sector is assumed to be small, possibly zero if there is ‘surplus labour’ – meaning that the overall labour force may diminish in that sector without affecting the volume of production. Informal workers therefore receive earnings which, albeit low, are disconnected from the marginal productivity of labour. Various assumptions have been made about the level of these earnings. In Lewis, it is conveniently conceived as ‘customary income’, which remains roughly constant as long as the marginal productivity of labour in the informal sector is below that obtained in the formal sector.³ More rigorously, competition in the labour market across the whole economy implies that the modern sector must pay a wage equal to, or somewhat above, earnings in the informal sector to attract workers, which modern firms can afford thanks to their capital-using technology. This assumption is of course the basis of the ‘dualism’ observed in many developing economies. Modern firms thus operate as if faced with what Lewis called, in his famous 1954 paper, an ‘unlimited supply of labour’. In alternative specifications, the wage is exogenously fixed in the modern sector at a level above the average income in the informal sector, which is allowed to vary with the size of the labour force operating in this sector. Various justifications have been adduced for such an apparent absence of competition on the labour market, in particular efficiency wage setting⁴ or the imposition of a legal minimum wage in the formal part of the economy.

Within such a framework, development involves a structural transformation of the economy. Through a process known as ‘capital-widening’, capital accumulation in the modern sector leads to proportionate increases in the demand for workers, which help to gradually reduce the pool of excess labourers pumped into the informal sector. If accumulation proceeds at a rate faster than population growth, the share of employment and output originating in the informal sector falls with capital accumulation (in the modern sector). This process stops when there is no surplus labour left, or, roughly speaking, when the average productivity of labour in the informal sector has risen enough to catch up with the corresponding productivity in the formal sector. The reserve of labour becomes depleted and competition for workers forces the modern sector to raise its wage rate so as to remain able to attract additional labour force from the informal sector. It is then the case that earnings increase in both sectors, with the effect of prompting modern employers to use increasingly labour-saving and capital-using techniques, including in previously informal activities.⁵ This process, called ‘capital-deepening’, succeeds the ‘capital-widening’ mechanism characteristic of the labour-surplus economy.

In this highly simplified description of the development process, the modern sector is the engine of growth of the economy and the structural transformation it generates is another way of describing the modernisation of the economy. Practically speaking, however, there are many ways in which this transformation process may be hindered or even halted. Let us mention a few of them. First, the accumulation rate in the modern sector may not be high enough, or population growth may be too fast, so that the volume of employment in the informal sector rises, even though its share in total employment may fall. Second, complementary production factors such as skilled labour or infrastructure may not be available or may grow too slowly. Third, the same may happen with imported inputs, such as key capital goods, if the capacity to export is insufficient or grows too slowly, unless foreign funds are available. Fourth, (unskilled) labour-saving technology imported from advanced countries may be so effective as to be technically efficient (or technically superior), so that it will be adopted by profit-maximising employers in spite of a relatively low cost of labour.⁶ As a result, the labour absorption capacity of the modern sector is reduced.

In addition to structural transformation stalling for the preceding reasons, other complications may also arise in the simple dual model of development when amending it to accommodate different country contexts. An omitted factor in the model is land. As a matter of fact, Lewis stipulates that his theoretical framework is adapted to ‘overpopulated’ countries where land is scarce and fully used, so that labour in the agricultural subsistence sector is likely to be redundant. A priori, the situation is expected to be different in countries where land is abundant, which would still seem to be the case today south of Sahara. Yet, because of imperfect market integration caused by a deficient transport and communication infrastructure, lack of access to adequate technology or inputs, or the presence of institutional factors responsible for inefficient land allocation, farming may remain a low-income-earning activity in these countries in spite of its rich potential. Characteristically, such a situation will be reflected in the under-utilisation of both land and labour.⁷ Structural transformation from low-productivity agriculture to higher-productivity sectors along the Lewisian mechanism would then remain a possible development strategy, but the promotion of a more efficient use of available land and a dynamic agriculture form another strategy for growth-cum-structural transformation. In the latter case, thanks to the removal of barriers to agricultural expansion, notably the physical isolation of remote areas, subsistence farming would progressively transform into a commercially integrated sector oriented towards domestic and/or foreign markets. As a matter of fact, the structural transformation would somehow be operated through informal production units being modernised or modern firms taking over traditional activities in rural areas. In the context of sparsely populated countries, because of the high per unit cost of connecting isolated areas in terms of providing not only transport and communication links but also social amenities, schools, health centres, and various agricultural support services, this second strategy may be deemed inferior to the Lewisian labour reallocation mechanism.⁸ Yet it can certainly not be discarded a priori.

The simple model can be extended to take into account the demand side of the economy and the constraints that it may impose on growth and the structural transformation. In a closed economy, the expansion of the modern sector requires that the demand for its products expands at the same rate as it grows. If not, the relative price of modern products will fall, lowering the profitability of the whole sector. Capital will then tend to flee and the structural transformation to stall. This will also happen in an open economy if the modern sector is not able to compete with foreign produced goods in domestic and/or foreign markets. Even if effectively protected from foreign competition domestically, a point will be reached at which domestic demand will be saturated, so that any further extension of the modern sector will require operating on export markets, which will not be possible if it is not internationally competitive. To be sustainable, the structural transformation thus necessitates not only capital accumulation at some minimum pace but also competitiveness gains that will allow the modern sector to effectively compete with foreign producers in some product lines.

These product lines depend on the comparative advantage of the country. They may consist of labour-intensive manufactured goods, agro-industrial products – which require that the modern sector operates in agriculture or sources its inputs in traditional farms – or services such as tourism. What matters for the structural transformation to keep going is that no demand constraint bears on the expansion of the modern sector, even if this means a constantly evolving product mix.

This diversification of production may be uneasy because the external competitiveness of the modern sector is restricted to a narrow set of products, typically agro-industrial, or mineral and energy natural resources. The extraction of the latter employs little labour so that it does not directly contribute to structural change. It does it indirectly, however, thanks to the domestic demand that it generates through the income it brings to local agents, including the state, and the outlets it provides to the rest of the modern sector. Without export diversification, or possibly import substitution at some early stage, the pace of development of the economy is thus determined by the growth of primary commodity export net receipts, which may be lower than desired.

Despite its apparent simplicity, the Lewisian framework, as well as its extensions or variations in the development theory literature, offers a most useful guide to the understanding of a development process viewed through the lens of the structural transformation of the economy and the constraints weighing on it. This of course requires that the framework is sufficiently enlarged to fit the specific features of the country examined. As will now be seen, it is quite remarkable that the general dynamics of the model, suitably adapted to the context, has proven to be appropriate to describe the successful early development of East Asian countries such as South Korea and Taiwan between the mid-1950s and the mid-1970s, a period during which both countries would have been classified as low- or middle-income according to today’s international income scale. Differences between the two countries stem from the initial conditions, the pattern of structural transformation, and some major policy orientations associated with this pattern.

Back in the early to mid-1950s both countries had a level of real GDP per capita around US$1,400 at international 2017 prices – see Table 7.1. Taiwan had a slightly higher level of income than South Korea, and its share of GDP originating in agriculture, generally considered in the development literature as the main component of the informal sector and the reserve of surplus labour in the dual economy model, was then lower. Both on the aggregate and from a structural development point of view, Taiwan was thus slightly more advanced. In the two countries, however, the structural transformation in the following twenty years was astounding. The GDP share of agriculture went down by 25 percentage points in both South Korea and Taiwan, while the GDP share of manufacturing increased by 25 percentage points in Taiwan and 15 per cent in South Korea. It is more difficult to conduct the same calculation for employment because available data are not comparable across the two countries.⁹ Nonetheless, it has been estimated that, helped by a slowdown of population growth, both countries reached the Lewisian turning point – at which the absolute volume of employment in agriculture starts declining – at about the same moment, in the early 1970s. By 1980, the GDP share of the industrial sector was as high as 45 per cent in Taiwan and 33 per cent in South Korea – in both cases, a high level by today’s standards. In the two countries, the dynamics of structural transformation by which low-productivity workers in agriculture and elsewhere in the economy were progressively absorbed into the growing modern sector of the economy, including manufacturing, thus appeared to work according to the Lewisian mechanisms set off by an extremely fast accumulation rate of capital in the latter sector. If the manufacturing export-driven expansion was a powerful engine of growth in the two countries, however, there were clear differences in the way it was activated and then sustained, and, as a matter of fact, in the way the Lewisian logic unfolded.

Table 7.1 Comparing the development and sectoral economic structures at equivalent levels of GDP per capita of the four IDP case studies and the Southeast Asian tigers

	Mozambique	Taiwan	South Korea	Benin	Taiwan	South Korea	Tanzania	Taiwan	South Korea	Bangladesh	Taiwan	South Korea
Year	2018	1950	1955	2018	1960	1965	2018	1965	1970	2018	1970	1975
Income per capitaa	1133	1460	1410	2160	2160	1920	2870	2880	2970	4020	4040	4360
Growth rate (ten-year average)	3	5.3	2.3	1.4	4.3	6.7	3.1	6.5	8.6	5.3	6.9	7.4
GDP shares (%)
Agriculture	24.6	36	42.3	27.1	28.5	34.4	27.9	22	27.1	13.1	15.5	23
Industry	23.6	15.6		14.6	26.9		29.5	31.8		28.5	36.8
Including: manufacturing	8.7		10.9	9.7		16.7	9.1		16.7	17.9		21
Others (incl. services)	51.8	48.4		58.3	44.6		42.6	46.2		58.4	47.7	56
Employment shares (%)
Agriculture	70.6	56		39.1	50.2	59.4	69.7	43	50.4	40.1	36.7	45.8
Industry	8.2	16.9		18.3	20.5		9.2	24.2		20.5	28
Including: manufacturing						9.2	3.2		13.2	14.2		18.6
Others (incl. services)	21.2	27.1		42.6	29.3		21.1	32.8		39.4	35.3

^a In US$ at 2017 purchasing power parity.

Source: World Development Indicators, ILO statistics for the sectoral structure for employment, Statistical Yearbooks of various ears for Taiwan and South Korea

B Taiwan

In the case of Taiwan, the expansion of the manufacturing sector relied on a dynamic group of small and medium-sized enterprises (SME), a sizeable proportion of them being located in the rural sector and functioning symbiotically with an agricultural sector that was stimulated by a radical land reform and vigorous accompanying policies (see Park and Johnston, 1995). The early emphasis on, and dynamism of, the agricultural sector in Taiwan are worth emphasising as they constitute a departure from the straight structural transformation model where overall productivity gains result from the mere sectoral shift of labour from agriculture to industry. Here, productivity gains within agriculture contributed to the aggregate gain, too. In any case, both in rural and urban areas, the SMEs provided rising employment opportunities to surplus agricultural workers, who were absorbed in labour-intensive manufacturing activities directed towards the domestic market, under tariff protection in a first stage, and then increasingly towards foreign markets.

The SMEs were incentivised to export by a set of policies which included a favourable exchange rate reform – a 60 per cent devaluation between 1958 and 1961 – and tariff relief for imported equipment and other inputs. The whole sector was highly competitive and financially autonomous in the sense that it could rely on internally generated savings and a small-scale private credit market, rather than on state bank credit (see Chu, 1999). Quickly, a whole integrated network was formed, made up of SMEs buying and selling from each other in a highly efficient way. On the other hand, large firms, which were inherited from the era of Japanese colonisation and then nationalised, also contributed to the production and export of manufactured goods. Yet they proved less dynamic than the private sector and the expanding network of SMEs.

At the macro level, it must be reckoned that US assistance played a huge role in the early stage of Taiwan’s development, covering as much as about 25 per cent of public expenditures in the 1950s. However, as the Taipei government faced huge defence expenditures during that period, it is not clear how much foreign aid contributed to bridging the trade balance gap. What is certain, however, is that the trade balance regained an equilibrium position as early as 1963, and non-military US aid fell drastically after 1965.¹⁰ The price stability achieved during these two decades, and later, is another achievement that needs to be stressed.

In short, the dramatic structural transformation of Taiwan from the mid-1950s to the mid-1970s relied on a powerful industrial export growth engine, itself based on the dynamism of a network of SMEs enjoying various favourable conditions: a stable macroeconomic context, undistorted prices and competitive market mechanisms, and a sound regulatory policy. The SMEs were also helped by several initial conditions: (i) an efficient agricultural sector made up of small and medium-sized farms and prior export experience in agricultural products, obtained during the colonial period; (ii) a dense transportation network, again inherited from the Japanese colonisers; (iii) a literate labour force and a population eager to achieve educational progress, so that an increasing supply of skilled labour became available when it was needed later on in the development process; and (iv) a relative advantage in gaining access to the US and Japanese markets. From the network of SMEs, progressively emerged larger companies which would take on the next stage of industrialisation with more capital- and technology-intensive lines of production and exports.

In twenty years, Taiwan was able to multiply its income per capita by three, thanks to an average growth rate close to 6 per cent. What is remarkable, moreover, is the fact that this fast growth and a drastic structural transformation of the economy could be achieved with apparently no change, and possibly a drop, in the degree of inequality of the distribution of income. In other words, all people saw their living standards grow in the same proportion, and possibly those at the bottom of the distribution more than others.

As a final observation, it should be noted that if Taiwan’s process of development followed the Lewisian pattern of a rapidly growing, self-financing labour-intensive modern sector that absorbed low-productivity workers from agriculture, it differed from it in one major respect. Instead of being confined to the passive role of a provider of cheap (excess) labour to the modern urban sector, the traditional informal sector, here equated to the rural sector, itself actively participated in labour surplus absorption, capital accumulation, and productivity growth. This was the result of an early modernisation of agriculture, both in terms of techniques and crop choices, and of a uniquely successful programme of rural industrialisation (unique, if we except Japan). In short, dualism in Taiwan was reduced rather rapidly both through productivity gains of the lagging sector and the rising employment share of industry.

Another point which deserves attention yet tends to be underplayed in the dual economy literature, is the export orientation of Taiwanese development, without which, most plausibly, the country could not have undergone the drastic structural transformation it experienced. This feature prevented domestic demand, the size of which was limited because of the low income of the population, from forming an obstacle to the exploitation of scale economies and the growth of the manufacturing sector. For this to be possible, the economy had to quickly become internationally competitive in a few lines of products.

Reflecting on the institutional features of the Taiwan of the 1950s, it makes little doubt that its dramatic transformation is first of all the result from a well-thought centrally elaborated strategy, which largely rested on decentralised private incentives and was implemented by an able bureaucracy. In short, at the heart of Taiwan’s success lay a successful combination of central planning and market mechanisms. It appears to owe much to the past history of the Chinese Nationalist leadership that settled in Taiwan after losing the war against the communists on the mainland.

C South Korea

The same structural transformation engine operated in South Korea, where several initial conditions were shared with Taiwan, some of which originated in their common past as Japanese colonies. These included a competent and disciplined bureaucracy, an early progressive land reform made possible by decolonisation, a relatively advanced educational system, and a population eager to learn and to acquire advanced skills. However, compared to Taiwan, South Korea had less developed infrastructure, partly because the core of economic activity before separation was located in the north of the peninsula. What deserves to be underlined is that the patterns of the structural transformation and the policies mobilised to activate the industrial export engine were substantially different in South Korea from those used in Taiwan. If the development path was similar, the engine was somewhat different, and it was activated later.

The real start of the South Korean structural transformation can be dated back to 1961, and it was after a chaotic period of slow growth and intense rent-seeking activity. It was under the leadership of General Park and his team of experts that the export-led manufacturing strategy was launched. In their vision, there was no future for development based on import substitution because this was bound to be constrained by a domestic market of limited size, due to the low (initial) income of the population. By contrast, a labour-intensive manufacturing export strategy could expand the size of the market, provided that domestic producers succeeded in becoming internationally competitive. Similar to Taiwan, this could be achieved through a favourable exchange rate and duty-free imports of equipment and intermediated goods. In contrast to Taiwan, however, the strategy also included generous credit allocation at a liberally subsidised interest rate and state-guaranteed foreign loans. To make these incentives effective, they were granted conditionally to exporters who complied with targets set in agreement with the ministries or state agencies in charge of the export strategy and in conformity with the Development Plan. The various export ventures were undertaken mostly by business groups that emerged in the previous period. This strategy also required complete control of bank credit, which had been made possible by the early nationalisation of the entire banking system. The strength of the industrial export engine thus depended not only on the dynamism of business groups but also on the volume of resources made available to them, the nature of their conditionality, and their effective and rigorous monitoring by a competent and non-corrupt bureaucracy.

Since the saving capacity of the country was initially very limited, accumulation at the aggregate level had to rely on foreign funding. Most resources were initially provided by US official assistance. Yet domestic savings increased rapidly, partly through forced savings policies. However, because accumulation was accelerating too, foreign funding was still needed. After 1965, this consisted mostly of foreign loans so that the external debt of the country started to rise. Yet because of the fast rate of GDP growth, it was possible to maintain the debt-to-GDP ratio at sustainable levels. Within the country, moreover, the expansion of credit facilities to exporters was responsible for a high level of money creation and a high rate of inflation. The financing of export business ventures and heavy public investments in infrastructure were thus implicitly secured through an inflationary tax on households.

The strategy worked well. South Korea grew very quickly from the early 1960s onwards, while the manufacturing sector and its forward and backward linkages absorbed an increasing proportion of surplus agricultural workers in a typically Lewisian manner. In contrast to Taiwan, however, the agricultural sector was rather passive in the initial stages of development. It was only in a second stage, and in view of the growing development asymmetry between the rural and urban sectors, that specific efforts were made in favour of agriculture and rural areas, through extension services, building infrastructure, and the creation of special industrial zones in rural regions.

It would have been possible to pursue this labour-intensive manufacturing export strategy and, as a matter of fact, exports of clothes, wigs, footwear, and plywood continued to increase at a fast pace and to diversify for an additional decade or so. Yet Park thought that the prospects of such a growth path were limited and that, like in Japan, investment in heavy industry should take over from light manufacturing without waiting any longer. To a large extent against the advice of experts and advisers, he then embarked on the so-called ‘heavy and chemicals industry’ (HCI) programme. At the same time, and possibly linked to that controversial decision, he strengthened his grip on South Korean civil society by imposing a new constitution that granted him quasi-dictatorial powers.

The HCI programme was implemented through two channels. First, a state-owned enterprise (SOE) was created, which would be responsible for creating a giant steel production unit. This strategy was similar to the one followed in Taiwan, where, as a legacy of Japanese colonisation, a group of nationalised enterprises were specialised in heavy industrial production, but it was to some extent bolder in South Korea because of the lack of experience of the country in this line of production and the huge size of the planned venture. Second, big business groups, known as chaebols, which had emerged in the previous phase of the export-led growth strategy, were tasked with undertaking heavy manufacturing export ventures. Towards that purpose, they benefited from considerably enlarged incentives, notably in terms of subsidised credit allocation and foreign borrowing, when compared to those offered to light manufacturing exporters.

Against the expectations of many observers, and possibly because of the rigorous control exercised over the chaebols, Park’s HCI gamble succeeded. Among the most daring successes was the setting up of shipyards able to build tankers and other heavy vessels for foreign marine transport companies as soon as in 1974. Meanwhile, the steel producing SOE started operations in 1972.

The achievement of the production and export targets of the HCI programme entailed a high social cost, however. Not only were the incentives provided to chaebols especially important, but also investment failures were not infrequent: against the rules initially set, some chaebols had to be bailed out by the state, essentially because they were ‘too big to fail’. There was thus a double burden on the national budget, and foreign debt rapidly increased. When the second oil price boom hit in 1979, the year President Park was assassinated, the macroeconomic situation became critical. The government nevertheless succeeded in surmounting the crisis, and in restructuring the chaebol network so as to put them on sounder financial grounds. At that time, the structural transformation of the country was complete, and South Korea was quickly advancing on the path to becoming an industrial country.

Institutionally, the South-Korean take-off experience shares with Taiwan the reliance on centrally designed strategies resting mostly on private business, except for key activities such as steel production, and under the close control of an effective and competent bureaucracy, including, in the case of South Korea, the direct involvement of central leadership. Again, the successful combination of authoritarian economic management, market mechanisms and business incentives was the key to success. In South Korea, the export targets set by the planning commission, the state control of banks as a way of allocating credit and rewarding successful chaebols through generously subsidised interest rates, or the direct bargaining between the president and chaebol owners about export targets and the provision of resources came clearly under central planning. On the other hand, exporting firms operated in a strict market environment both at home and abroad.

Both the Taiwanese and South Korean take-off experience are good illustrations of the Lewisian transformation at work: an extremely dynamic modern sector absorbed the surplus labour in the traditional part of the economy in a little more than a decade. In both cases, the potential limitation arising from domestic demand has been overcome through the successful export orientation of the domestic production apparatus. Such a strategy was initially facilitated by an easy access to the US and Japanese markets and, at least in South Korea, by generous export subsidies and powerful incentives. If the South Korean case fits the Lewisian model of a single growth engine that pulls the whole economy forward by progressively absorbing its lagging segments, the process has been slightly different in Taiwan. There, the traditional sector, assimilated to agriculture, has shown an impressive internal dynamism which allowed it to be modernised and to increase the earnings of the workers who remained in it.

Such were the early development experiences of the two East Asian tigers, South Korea and Taiwan, at a time when their income levels and their formal-informal structures were comparable to those presently found in the low-income or lower-middle-income countries that we selected for intensive study. Relying on our previous analysis, we now set off on the following exercise: to summarise the features specific to those latter countries that could either enable them to pursue a similar path towards structural transformation, possibly at a different pace and according to somewhat different patterns, or derail their development process and perhaps drive them into a deadlock.

III Obstacles to and Enablers of Structural Transformation in The Four Case Study Countries

Equipped with a flexible analytical model of structural transformation and with two major historical Asian benchmarks, we now review the experience of the four case study countries of the Institutional Diagnostic Project. The main question asked is that of the nature of the obstacles that prevent structural transformation from taking place or proceeding faster, and what kind of policy could overcome them.

A comparison of the four IDP case studies with the two benchmark countries is offered in Table 7.1. The situation of each case study today is compared to that of both South Korea and Taiwan at a period where the latter had a level of income per capita roughly comparable, that is in the 1950s or 1970s depending on the country. In each case, the table shows the level of income per capita, its growth trend, and then the sectoral structure of both total GDP and employment, even though data for early periods are scarce regarding the latter.

What is striking is that both the structure of GDP and employment differs, in some cases radically, between the case study countries and the Asian benchmarks, even though they are observed at a comparable level of development. The only common fact is the higher share of manufacturing among the Asian tigers than among IDP countries both in terms of employment and output. The shares of other sectors may be quite different, which may partly be due to statistical problems in defining them, but also reflect strongly different initial conditions or institutional settings. The conditions for the structural transformation to proceed successfully in the IDP countries differ from what they were in the Asian benchmarks. This is what we intend to analyse in the rest of this chapter, relying on country studies in the other volumes of the IDP project, and their summaries presented in previous chapters.

A Bangladesh: Sustainability of Structural Transformation under Threat

In comparison with most developing countries today, Bangladesh may be considered as a success story. Since 2000, its income per capita has been multiplied by a little less than three and poverty has fallen by two thirds. The country has recently graduated from the low-income status in the World Bank classification. Its debt is at a manageable level, and it boasts a rather stable macroeconomic situation over the last three decades.

It is evident from Table 7.1 that, as of 2018 Bangladesh was coming rather close to Taiwan and South Korea in the 1970s: the level of GDP per capita and the sectoral structure of GDP and employment are roughly the same. It also shares with these countries several important historical, geographic, and economic features: a violent nation-building war, an egalitarian land reform, a high population density implying an acute land scarcity, and, today, a powerful labour-intensive Ready-Made Garment (RMG) export growth engine. Yet growth proceeds in Bangladesh at a slower pace than during the take-off of the Asian tigers, and the manufacturing sector is significantly smaller in relative terms.

Structural transformation in Bangladesh has also progressed at an impressive speed. If surplus or low-productivity labour is assumed to be essentially located in the agricultural sector, then Bangladesh would seem to have passed the so-called Lewisian turning point where the absolute number of workers in the agricultural sector starts falling and surplus, or low-productivity labour starts vanishing around the turn of the millennium. As a matter of fact, agricultural employment has been declining by 2 million people over the last three decades, especially during the 2000s. Accounting for demographic growth in rural areas, we can estimate that some 12 million people have left the agricultural sector in the last two decades.

Yet it would be wrong to believe that all these people went to work in the rest of the economy. To assess the structural transformation capacity of the Bangladeshi economy, the role of temporary migration must be brought to the fore. An estimated 10 million Bangladeshis were working abroad in 2019. Judging from the evolution of remittances, the total net outflow of migrant workers may have summed up to 9 million people over the last three decades. This is much more than the observed drop in agricultural employment, so that, absent migration, agricultural employment would have been increasing throughout that period. This remains true even if we assume that, say, half the migrants came from non-agricultural sectors. In short, the growth of the modern sector, driven by manufacturing, does not appear to have been fast enough to absorb the agricultural surplus labour defined as agricultural workers with the lowest productivity.

Of course, migration also contributed to economic growth via worker foreign currency remittances and induced demand effects on the domestic economy. If the overall growth of the Bangladeshi economy has been rather satisfactory over the last three decades, at close to 6 per cent a year and 4.4 per cent per capita, it has partly stemmed from the increasing flow of migrant remittances. It was estimated that remittances contributed to approximately a fourth of GDP per capita growth (see Raihan et al., 2023). Yet this observation about the significant role of remittances as a source of national growth raises several issues. Should the sending of a sizeable portion of a country’s population to work abroad be considered as a valid development strategy or as a second-best policy aimed at compensating for the possibly temporary failure of the domestic modern sector to create enough jobs? To what extent is such migration-based development strategy sustainable in the long run? Relatedly, there is a social cost in migration, even when it is temporary, and this should be accounted for in evaluating development.

Even imputing migrants to the agricultural sector, the outflow of workers towards the rest of the economy would still amount to at least 5 million people over the last twenty years. Were all these workers, plus those resulting from the growth of the non-agricultural labour force, absorbed by the modern sector, the RMG export sector in particular? Or did they go to work in informal non-agricultural activities with a labour status and an income level little different from those prevailing in the informal agricultural sector? The answer is provided by the following estimate: 87 per cent of the labour force was informal in 2010 and this share has apparently not changed much since then.¹¹ These are high proportions, which might suggest that the structural transformation was less pronounced than it would appear on the basis of a simple agricultural/non-agricultural dichotomy.

A large part of the urban informal sector may be considered as complementary to the modern sector of the economy. However, its mode of operation follows a different pattern with self-employment or micro-firms as the dominant type of production organisation. Somehow, that part of the urban informal sector may be thought as a subsector of the modern part of the economy, whose informality is mostly motivated by the possibility it offers of evading taxes and labour regulation. It is difficult to say which portion of the informal urban sector must be thus assimilated to the modern sector. There is, indeed, some ambiguity about how to measure structural transformation, or, equivalently, about how the type of jobs and the levels of earnings within the non-agricultural sector should be accounted for. In any case, this does not lessen the transformative importance of the huge shift of labour away from agriculture that took place in Bangladesh during the last decades.

As in South Korea and Taiwan at the time of their take-off, the main growth engine behind the structural transformation in Bangladesh’s economy over the last three decades has been the labour-intensive manufacturing export sector, mostly ready-made garments (RMG). It grew at an annual rate of 11 per cent since 1990 and created a little more than 2 two million jobs, close to 10 per cent of the whole increment in the labour force. Bangladesh is now the second global RMG exporter after China. Directly or indirectly, through backward and forward linkages as well as foreign currency receipts, the RMG sector contributed in a major way to the growth of GDP and living standards. Its overall contribution to GDP growth has been estimated to be as high as 40 per cent (by Raihan et al., 2023). Its transformative impact, most notably on and through female employment, has also been substantial. Yet, if it had not been for outmigration, this would not have been enough to absorb the surplus labour present in the agricultural sector. To the extent that there is uncertainty about future migration opportunities (India’s present political regime is hostile to Muslim migrants, which hurts Bangladeshi migration), sustaining the structural transformation at its current pace, may thus prove difficult.

There is also some uncertainty about the future development of the RMG sector. Technological change seems likely to drastically reduce its relative labour intensity and the comparative advantage it draws from particularly cheap and repressed labour, whereas exports will soon lose their Least Developed Countries preferential trade status in advanced countries because of the recent graduation of Bangladesh to (lower) middle-income country status. As a matter of fact, such a slowdown can already be observed in the volume of exports – since the 2008 crisis and particularly the 2013 Rana Plaza accident where 1,100 workers died when their factory collapsed. The slowdown in employment growth is even more pronounced.

If the Bangladesh economy seems to share many features and follow the same path as the Southeast Asian newly industrialised countries at the time of their take-off, there is a risk that its growth rate decelerates and even that its structural transformation dynamic gets jammed. At the same stage of development in the benchmark countries, the manufacturing sector was larger and was growing faster. In short, the growth engine was more powerful. Moreover, it was gaining more power still through diversification, both within their initial area of excellence (RMG and other labour-intensive exports) and without. On the contrary, manufacturing exports in Bangladesh tend to concentrate everyday more on RMG products, and within RMG, on a limited set of product lines.

This issue of the diversification of labour-intensive manufacturing exports is the main challenge that Bangladesh will soon face in trying to sustain its rates of growth. This has been recognised, now for quite some time, by observers and policymakers. On several occasions and in several official documents, the government has committed to adopting such a strategy. But no tangible results were delivered yet, even though the continuation and the needed acceleration of the structural transformation depends on this diversification. From the point of view of the relationship between development and institutions prioritised in this volume, the question is: what is the institutional cause of this apparent blockage of measures that would benefit the national community?

Various factors can be mentioned, including the endemic lack of a clear development strategy and implementing capacity, a culture of business-government informal ‘deals’, a notoriously corrupt public and private financial system, and very limited public resources due to an exceptionally low average tax rate. In that context, a major impediment to a strategy of diversification seems to be the size of the RMG sector and its critical importance, up to now, in the overall development of the country. As a result, the leverage that it can bring to bear on the government is particularly strong, leading to the pre-emption of the development of other sectors of the economy and the monopolisation of public support and credit. On the other hand, the lack of diversification within the RMG sector itself seems to result from a strong specialisation in those product lines that make most use of exceptionally low labour costs.

In summary, there is a risk that, even though it has been rather effective over the last two or three decades, the growth engine that feeds the structural transformation of the Bangladeshi economy will slow down in the close future. There are some signs that this has already started, especially with respect to job creation. Remedying that situation would require the RMG to increase its global market share by expanding the scope of its activity or supplementing it by other lines of labour-intensive manufacturing exports. The first option would require a substantial improvement of the competitiveness of the RMG sector, which has relied until now mostly on the low cost of labour and poor working conditions imposed through the co-option of trade unions. Enhanced RMG competitiveness or diversification of the export manufacturing sector also requires progress to be made in various areas: (i) better production infrastructure in a country where land is particularly scarce – a priority that is acknowledged by the present government; (ii) a more educated and skilled labour force, not only in quantity but also in quality terms, which requires significant progress on the latter; (iii) the laying down of clear and well-thought-out development policies, and the setting of an effective bureaucracy apparatus to implement them, rather than the reliance on informal deals that essentially favour dominant economic actors; and (iv) an efficient and non-corrupt financial system. It is not clear, at this stage, that all these requirements for the pursuit of an autonomous and fast structural transformation of the economy and the society, possibly one that is less reliant on migration, will soon be met.

B Tanzania: An Uncertain Growth Engine

After a difficult transition from a socialist development experiment to a market economy, growth has proceeded at a rather satisfactory rate of 6 per cent annually over the last two or three last decades in Tanzania. But population growth has curtailed that rate by a little less than half when considering GDP per capita. Since the turn of the millennium, living standards have approximately doubled and poverty has fallen, although at a slower pace lately. The structure of the economy has also changed with the GDP-share of agriculture falling in favour of services and, to a lesser extent manufacturing. The share of agriculture in employment has fallen too, but it is still high at 70 per cent. Somewhat surprisingly, however, labour was reallocated primarily towards the construction sector, retail trade and hospitality services with a noticeable fall in labour productivity in the latter two sectors.

Such an evolution is hardly consistent with a powerful engine of growth moving low-productivity agricultural workers to higher-productivity jobs in the rest of the economy. It resembles more a process of demand-driven growth where income gains, partly stemming from the expansion of mining (gold) and favourable changes in the terms of trade, are spent on domestic production, including construction investments and services.

Although limited, the relative increase in the output and employment shares of the manufacturing sector sends a positive signal. That it has come with a significant expansion of labour-intensive manufacturing exports is especially encouraging. But it is still too slow, and the sector is too small to have a major impact overall. There was also some promising progress in tourism before the COVID-19 pandemic struck.

The fall in the employment share of the agricultural sector conceals a limited reallocation of labour to the rest of the economy and, because of population growth, an absolute increase in the size of the agricultural sector. There were 10 million workers in the agricultural sector in 2000 – 82 per cent of the whole labour force. Demographic growth would have raised this figure to 17 million by 2018, but because of net migration to other sectors or to foreign countries, they were only 15 million. Discounting foreign outmigration, the absorption capacity of the non-agricultural part of the economy was thus quite limited. Somehow, the structural transformation worked backwards since population growth, at the rate of 2.8 per cent annually, overcame job creation in the dynamic part of the economy. Things would even look worse if part of the observed increase in the employment share of urban informal sectors were considered as participating in the accumulation of surplus labour in the non-agricultural part of the economy.

The preceding argument needs to be seriously qualified, though. As already pointed out, the Lewisian model presupposes the full utilisation of land in the context of densely populated countries, and it is in this specific context that the concept of an unlimited labour supply in the rest of the economy makes sense. In most African countries, including Tanzania, Benin, and Mozambique in the present project, this condition does not seem to be satisfied, so that the rural population may grow without labour productivity falling. If it did so, the low absorption capacity of the non-agricultural sector would not be a problem, and the economy’s structural transformation could rest not only on the growth of the non-agricultural sector but also on an extension of the agricultural sector and on agro-industrial development.

It turns out that the Tanzanian agricultural labour productivity has been increasing during the period under analysis without it being possible to distinguish autonomous gains in yields per hectare and changes in the cultivated area. In any case, the average labour productivity in agriculture remained much lower than in the rest of the economy – the gap even slightly increased – which means that the structural transformation argument above remains correct in the sense that absorbing agricultural labour contributes to growth and to the reduction of agricultural low-productivity pockets. From that point of view, it remains the case that the absorption capacity of the non-agricultural sector was limited, and Tanzanian development has been little transformative. On the other hand, this discussion, and the evidence on productivity in agriculture suggest that this sector holds development opportunities that may presently be underexploited.

The situation of Tanzania today clearly differs from that of Taiwan or South Korea when those countries were at the same level of real income per capita – see Table 7.1. If the GDP share of agriculture is of the same order, the employment share is much higher in Tanzania, whereas the share of manufacturing in GDP and in employment are substantially smaller. These contrasts imply that differences in labour productivity between agriculture and other sectors are more pronounced in Tanzania, this being particularly true for the industrial or manufacturing sectors. This suggests that the structural transformation was already more advanced among the Asian tigers when they were at the same level of GDP per capita as Tanzania today. Of course, this advantage essentially reflects their higher level of industrialisation and the various circumstances and conditions that made it possible, including the accumulation of physical and human capital or their institutional setting.

The above type of transhistorical comparative exercise should obviously be interpreted with caution. There is no reason to expect history to repeat itself across countries or regions and it would be naïve to believe that the only pathway to development and structural transformation is the one followed some fifty years ago by the two East Asian countries. This being acknowledged, the above comparison provides diagnostic insights that can be helpful in gauging, almost mechanically, the development potential of Tanzania, and in highlighting the consequences of a missing engine of long-run growth.

Even with continuing favourable terms of trade, and possibly with the benefit of rents accruing from presently untapped reserves of natural gas, Tanzania’s known natural resources are not sufficient to ensure the future prosperity of the country. Moreover, the labour content of such a strategy would be limited. To be effective and sustainable, especially in view of the fast population growth expected for still a few decades ahead, the structural transformation must additionally rely on a solid growth engine based upon the production of labour-intensive goods and services, the demand of which is not constrained by the size of the domestic economy. Obvious candidates are labour-intensive manufacturing exports, agroindustry, and tourism, the two latter corresponding to clear comparative advantages of Tanzania. As a matter of fact, the last three administrations committed to pursue a development strategy based upon industrialisation and export diversification. Yet, as of the late 2010s, results have been quite modest.

What can explain the limited success of this industrialisation strategy? Many factors should be mentioned. The most important one seems to be the difficulty of disciplining business. The big business sector is highly monopolistic, and, because of the fractionalisation of power within the dominant party, it had, until recently, a powerful leverage on state decisions that would go against their short- or medium-run interest. Things may have changed with the Magufuli administration in the late 2010s but, even then, the relationship between state and business was a difficult one. In theory, appropriate incentives, duly conditioned on results should permit to align business interests with the government’s strategy. Such incentivising policies may infringe international WTO trade rules, which did not exist at the time of the East Asian industrialisation. Yet the subsidisation of credit at the firm level, duty exoneration on inputs, or the provision of critical infrastructure, are perfectly legal, and may help Tanzanian firms to become competitive on foreign markets where they are not present. However, managing such incentives and their conditionality on results requires a skilled and uncorrupted administrative apparatus, which may not be up to the task in Tanzania.

Other factors that hinder the diversification of exports include the limited public resources arising from a low overall level of taxation, the slow accumulation of soft capital – progress has been made in enrolling nearly all children of schooling age, but learning outcomes remain disappointing – and the slow rate of infrastructure building – until recently, Tanzania was a laggard in energy production and distribution, ports, roads, and rail transport facilities. With respect to the agroindustry, the complexity and ineffectiveness of the law governing land user rights is also often cited as a major impediment to commercial production and exports.

Moreover, excessive financial dependency on foreign countries or organisations may be considered as a source of uncertainty for future development. Foreign assistance has continued to account for 5–8 per cent of GDP since the late 2000s. One can therefore worry about what would happen to public investments if the volume of aid were to fall in line with the recent announcements made by several donors.

In summary, Tanzania’s growth performance since the turn of the new millennium provides reasons to celebrate, although optimism must be tempered. Tanzania is still in the middle of the dualistic stage of development and the problem is whether it has the potential to reach in the foreseeable future the next stage of the structural transformation where the cross-sectoral labour productivity gap starts narrowing down. The evidence suggests that it lacks a clearly identifiable engine of sustainable long-run growth, and, more worryingly, an institutional setup appropriate to develop such an engine and meet the challenges ahead. More will be said about these institutional aspects in Chapters 8 and 9.

C Benin: Informal Growth as a Delusory Development Strategy

Benin’s development over the last few decades has been characterised by modest growth performance and a rather atypical sectoral structure of employment. Although some acceleration has been observed during the last five years, the average annual GDP growth rate has been slightly below 5 per cent since 2000. With an almost 3 per cent rate of growth of the population, income per capita has grown rather slowly, and in any case at a slower pace than in the rest of the continent. Concerning the sectoral structure of the economy, it can be seen in Table 7.1 that the share of agriculture is of the same order as in South Korea and Taiwan when those economies were at the same level of income, but also that the share of the manufacturing sector is well below that of these Asian tigers. Benin’s sectoral structure of GDP is close to that of Tanzania and, as a matter of fact, that of most sub-Saharan low-income or lower-middle-income countries. Where Benin is atypical relative to both sub-Saharan countries and the Asian comparator countries, however, is in the structure of employment. It exhibits a substantially smaller proportion of the labour force employed in agriculture – and therefore a higher proportion in other sectors – and a somewhat higher average labour productivity in that sector relative to the whole economy. The latter is partly the consequence of the importance of cotton production and exports in the Beninese economy, even though productivity in this activity has gone through sharp cycles since the turn of the century.

The modest rate of growth of the Beninese economy has its roots in an investment rate which has been below 20 per cent over the 1995–2017 period, except in the very last years of that period. As a matter of fact, the overall growth of GDP owes more to the movement of labour out of low- productivity agriculture than to sectoral productivity gains, except perhaps in agriculture, which benefits from a rather weak population pressure on available land. In effect, productivity has gone down in all non-agricultural sectors due to population growth, limited investment, and the inflow of labour coming from agriculture.

Despite the slow rate of growth, the structural transformation of the Beninese labour force has been substantial, but in a direction and according to patterns that are quite peculiar. In the decade from 2006 to 2015, it is estimated that 30 per cent of the agricultural labour force went to work in other sectors. As population growth was slightly higher, the total volume of agricultural employment went slightly down. What makes this restructuring so particular, however, is that, instead of going to work predominantly in the modern part of the economy, most workers went to the commerce and service sectors, which are the lowest productivity sectors outside agriculture. In commerce, new entries caused such a significant decrease in the mean income that it became hardly higher than in the agricultural sector.

There is ground to believe that the transfer of informal employment from agriculture to the rest of the economy has been caused by the largely informal cross-border trade (ICBT) with Nigeria rather than by the growth of the informal non-agricultural sector in tandem with the development of the formal sector (as observed elsewhere). This is a major specificity of the Beninese economy and the consequence, as well as a possible cause, of slow formal development. ICBT was first encouraged by differences in tariff and non-tariff barriers between Nigeria and Benin, which, as a member of the West African Economic and Monetary Union (WAEMU), applies the Union’s rules. These differences create arbitrage opportunities for products legally imported into Benin and re-exported to Nigeria, where they enter illegally, and vice-versa for certain products smuggled illegally from Nigeria, where they are cheaper, into Benin. Such informal, and mostly illegal, trade activity is estimated to account for a little more than 10 per cent of GDP, only slightly less than official cotton exports, and to employ directly at least 2 per cent of the labour force, but much more indirectly. Both figures are thought to have sizeably increased over the last ten years.

By itself and through its upward and downward linkages, ICBT has huge effects on the Beninese economy and society. First, it contributes to increasing the incidence of informality and to nurturing a culture of corruption. Informality follows from the illegal nature of the activity, while corruption is used to buy the complicity of state executives and bureaucrats at various levels of the administration (including customs officers), and to obtain credit facilities from banks. This is particularly true for the large-scale smuggling of gas and other materials from Nigeria. Second, ICBT displaces some formal activities and diverts entrepreneurs from potentially more socially profitable lines of formal business. Several smuggled products outcompete domestic producers, most notably in gas distribution and cement production. Third, the failure of the state to curb this illegal activity entails a loss of intervention capacity in other areas indirectly affected by the cross-border trade. For instance, incentives to develop other activities are rendered inoperative, despite the presence of a dynamic entrepreneurial class. Fourth, at the macro level, illegal trade with Nigeria makes Benin dependent on the former’s oil revenues and subject to oil price fluctuations in international markets. The macroeconomic shortcomings of this dependence are well known, especially for a country, which being a member of the WAEMU has adopted a fixed exchange rate system.

Cross-border trade with Nigeria is a revenue-generating opportunity and it is natural that some entrepreneurs have been eager to seize it. Yet its overall contribution to development may end up being negative, because of the informality and the culture of corruption that it has brought about, the uncontrolled smuggling that it has triggered, its unsustainability, and the marked dependence that it has created vis-à-vis Nigeria’s trade policy. In effect, the ICBT activity has very much expanded between 2005 and 2014, due to the high price of oil. Yet GDP has not grown much faster during that period and poverty has changed little.

The fact that Nigeria recently decided to close its border with Benin, and has effectively stuck to that decision, is a sore reminder of the high economic dependency of Benin on its giant oil-exporting neighbour.

As mentioned earlier, cotton is the main formal activity in Benin, representing 12 per cent of GDP, and providing most of the country’s formal export revenues. The organisation of the whole sector, and the respective roles of the private and public sectors, have gone through several changes over time, with direct effects on production and exports. Except for farming, the whole chain of production is structured as a monopoly and has been very much under the control of a single business group, headed by Patrice Talon, an entrepreneur who was elected president of the Republic several years ago and has just been re-elected. The monopolistic structure of the cotton sector necessarily entails significant efficiency costs. It is fair to recognise, however, that the sector has done rather well since its organisation has been stabilised, and this despite the monopolistic organisation of input provision, ginning, and commercialisation.

Since cotton exports or cross-border trade can hardly be conceived as powerful and sustainable vectors of development, it must be acknowledged that there is no engine of growth nor any real structural transformation process presently at work in the Beninese economy. For a while, it may have been the case that one could earn more by selling bottles of smuggled gas on roadsides than by working in the family farm, but this is not what development is about and such a restructuring is essentially unstable. More seriously, it is not clear that an effective growth engine able to trigger genuine structural change is about to be developed.

Benin has clear comparative advantages in agriculture, not least because there is plentiful land available, particularly in the northern part of the country, which has been largely neglected by successive governments in Cotonou. Developing agro-industrial exports is a real possibility as some encouraging starts are attesting. However, to push these further and to create an impetus that can spread to other areas and other lines of products requires a better provision of public goods, including a competent and non-corrupt bureaucracy, better infrastructure, more investments in quality schooling, and, most importantly, a clear and consistent development strategy.

The economic diagnosis about the stalled structural transformation – and about the kind of wrong-headed change that has taken place – is evident. The nature of the development strategy that should be pursued, whether on the agricultural side, by looking for complements to cotton, or possibly on the manufacturing side, by substituting domestic production for smuggled goods, is equally clear. The issue is why no such strategy had been implemented.

The answer must be found in the governance of the country, at least until Talon became president. There were then two major sources of rents, cotton exports and ICBT with Nigeria, and a rent-sharing agreement had been reached between the oligarchs who controlled these two sectors, including Talon, and those in power. Here is a perfect case of state capture. The equilibrium between the main players of that rent-sharing game got disrupted at some point, which led the oligarchs to compete for political power. One of them won. Precisely because political and economic power are now in the same hands, the nature of the equilibrium has changed, and new development strategies may emerge.

Although controversial, the present administration seems to be making progress in that direction. But there is still a long way to go before a genuine structural transformation and a definitive dent on poverty can take place in the country.

D Mozambique: Natural Resource Curse or Structural Transformation?

In comparison with other case study countries and a fortiori with South Korea and Taiwan, the combination of development advantages and shortcomings in Mozambique is quite specific. First, both its geography and ethnic composition are extremely fragmented. The country extends over 2,300 km from north to south and its population includes ten main ethnic groups, rather clearly differentiated by geographic region. From the latter point of view, Mozambique is comparable to Benin, except that the groups are physically more distant from each other, their isolation being amplified by a limited development of transport infrastructure. Second, the country obtained its independence much later than other African countries – as a matter of fact, not long after Bangladesh in 1975 – but it fell quickly into a long civil conflict which paralysed economic development for fifteen years. Third, similar to other case study countries in the Institutional Diagnostic Project (IDP) project, Mozambique adopted a socialist approach to development at independence, which delivered poor results, especially in the context of the domestic conflict. A transition towards a market economic system was made under the supervision of the international financial institutions, yet it proved more difficult and painful than elsewhere because it was launched at a time when the conflict was still ongoing.

Despite these hindrances, and largely thanks to an unusually high level of foreign development assistance, the Mozambican economy was able to grow at a fast rate until a few years ago. Growth was first triggered by the recovery from the civil war, and it then proceeded via more standard economic mechanisms. GDP per capita has thus grown at a little more than 4 per cent annually since the turn of the new millennium, and until 2016 when a major economic crisis struck for reasons which are detailed below.

Focusing on the last two decades, when the economy and the population have fully recovered from the civil conflict, two very different structural growth regimes were observed. Both the sectoral structures of GDP and employment varied little during the 2000s, except for some progress of the manufacturing sector. Overall growth originated in labour productivity gains across the board, including in agriculture. Things then changed radically during the 2010s: aggregate growth resulted essentially from a major sectoral restructuring away from agriculture, both in terms of GDP and employment, and in favour of non-agricultural sectors, except manufacturing.

This structural transformation has indeed been significant. During the six-year period from 2009 to 2015, just before the recent crisis, 1.5 million workers left agriculture to go to work in the rest of the economy. They represent 16 per cent of what would have been the agricultural labour force at the end of the period. This outmigration from agriculture has been so large that it overcame population growth and total agricultural employment fell. Yet the difference with the Southeast Asian countries and Bangladesh, and to a lesser extent Tanzania, is that the main sector of destination for those workers leaving agriculture was not manufacturing but private services, a sector where informal low-productivity jobs coexist with formal high- or median-productivity jobs. The issue then arises of the type of job taken up by agricultural workers, whether belonging to the former or to the latter category.

That labour productivity fell drastically in the private service sector suggests that employment increased for both types of job, probably more in the subsector based on informal low-productivity jobs. Yet the average labour productivity in the private service sector remained much above that in agriculture, so that the structural transformation mechanism kept working even though with some uncertainty about the exact nature of the process.

The manufacturing sector that came to represent 14 per cent of GDP in the 2000s did not contribute to the absorption of low-productivity labour in agriculture. This is not surprising given its lines of production. A major part of its initial growth has actually come from the production of aluminium made possible by the availability of cheap hydroelectric power on the Zambezi River. But this activity, very much akin to the exportation of natural resources, employs only a small number of workers and has limited linkages with the rest of the economy. Moreover, its capacity stopped expanding around 2008, and since few other lines of manufacturing activity have developed afterwards, the GDP share of the manufacturing sector has fallen continuously since then. Over the last decade, the dynamic part of the Mozambican economy has been the extraction of coal and natural gas. The latter is expected to expand drastically in the future when the huge reserves discovered in 2010 will enter into full exploitation. Together with aluminium and electricity sales to neighbouring countries, coal and natural gas represent today some 70 per cent of total exports and their share of GDP may be estimated at around 12 per cent.

It is thus fair to say that Mozambique has become an exporter of natural resources and has tended to live on the related rent over the last few years. This explains why slow progress has lately been made in the production of tradeable goods, since the largest part of domestic growth has been accommodating the rent-based increase in the aggregate demand for non-tradeables, including private services. Quite telling in this respect is the fact that both agricultural and manufacturing output per capita have stagnated since 2010, and even somewhat earlier for manufacturing.

A possible reason for the lack of dynamism of the manufacturing sector is the absence of an entrepreneurial class in Mozambique. After independence, a period characterised by central planning, bureaucrats came to oversee the production apparatus, as Portuguese entrepreneurs had left the country. When the transition to a market economy took place a little before the end of the civil conflict, production units were privatised in favour of political personnel with little or no business experience and relying more on political connections and rent creation than commercial flair. Now that the country can live on the rent arising from natural resources, incentives for the appearance of an ambitious class of industrial entrepreneurs are weak and might become even weaker in the future. The demand arising from the rent will be mostly addressed to domestically oriented sectors such as services and construction and, presumably, it will mostly benefit the urban part of the country, and Maputo, the capital city, in particular.

The prospect of huge rents related to the future exploitation of natural gas has also exacerbated the appetite of rent-seekers and revealed the extent of corruption in Mozambique, at the same time as the ineffectiveness of the state apparatus to control it. A major scandal struck in 2016 about a US$2 billion embezzlement involving senior officials. It led donors to cancel foreign assistance payments, which plunged Mozambique into a deep financial and economic crisis. Yet the worst damage was created by the surging awareness of the pervasiveness of rent-seeking and corrupt practices, and their prevalence over entrepreneurship and bureaucratic effectiveness.¹²

Finally, we need to turn our attention to the agricultural sector and the issue of poverty, which affects more than 60 per cent of the population and is concentrated in rural areas. Given that the present and future engine of growth lies in natural resources whose exploitation is based on capital-intensive techniques, there is little hope for a quick absorption of low-productivity agricultural labour by the exporting sector, and for rapid advances on the poverty front. Can we witness a repetition of the structural transformation scenario that was observed in the early 2010s when a huge outflow of agricultural workers towards the service sector was observed? There is great uncertainty in this respect. Moreover, it was seen above that there was some ambiguity about the productivity of the jobs created in the service sector. Given the present size of the agricultural labour force, its low level of incomes and the absence of an autonomous labour-intensive growth engine outside agriculture, any reasonable development strategy must include an agricultural component.

An important challenge that Mozambique will face in the future thus lies in its capacity to use its forthcoming rents from gas exports to boost the traditional agricultural sector. This alternative to industrial development as the main engine of structural transformation, which befits land-abundant countries, must find its way into the minds of Mozambican policymakers if they want to make a real dent in poverty and establish a broader base for the country’s development. However, agricultural or rural development in Mozambique is made more difficult than in most other countries by the geographic stretch and the ethnic fragmentation of the country. Combined with largely insufficient and inefficient transport infrastructure, both factors reduce labour mobility and limit the gains that could be obtained from inter-regional trade. Agricultural productivity increased at the same pace as the rest of the economy in the first decade of this century, when the recovery from civil war times was most likely completed. Its pace slowed down since then. Efforts should be made to revive this earlier period, possibly accelerating productivity gains while avoiding Dutch disease phenomena, which will unavoidably manifest themselves as natural resource exports increase.

In summary, the key development issue in Mozambique is whether existing institutions and the structure of political power will allow a structural transformation of the country that will simultaneously absorb part of rural labour, increase agricultural productivity, and expand local markets through a deeper physical integration of the country. The recent evolution of the economy and the reappearance of social and political tensions, including recent terrorist attacks in the coastal area facing the offshore gas fields, are worrying in this regard.

IV Conclusion

Several general conclusions can be drawn from the preceding brief diagnostic of economic impediments to long-run structural transformation in the countries covered by the IDP project and their comparison with Taiwan and South Korea at the time of their take-off.

First, the diversity of national experiences bears emphasis. It originates in different geo-economic contexts and initial conditions across countries. In all cases, a structural transformation has accompanied economic growth in the sense of a declining share of agriculture in GDP and total employment, and therefore a relative fall in the share of agricultural low-productivity labour reserves. In some cases, the process went far enough for the volume of agricultural employment to start getting smaller, as expected in Lewis’s model. In others, the structural transformation was not strong enough to reach that result, but the question then arises as to whether this should be an absolute objective in countries where the land availability constraint is not binding, and agricultural labour productivity is increasing despite rising employment. In some countries, the engine of structural transformation is the manufacturing sector, or in effect manufacturing exports. In other countries, workers who leave agriculture find jobs in other sectors of the non-agricultural economy, including in the informal urban sector. This still contributes to overall growth and less poverty provided that the labour marginal productivity gap between agriculture and the sector of destination is large enough. But, of course, the impact of structural change may be limited if the domestic labour reallocation flow is between informal agricultural and informal urban production units.

Second, the nature of the ‘growth engine’ able to push the structural transformation forward is essential. South Korea and Taiwan’s take-off stemmed from a growth engine operating in labour-intensive manufacturing exports. Bangladesh has followed the same path, even though the engine there was proved less powerful. Without the help of outmigration, it would not have been able to achieve the structural transformation that has been observed and is still far from being completed. By contrast, there has been some significant growth in Tanzania over the last decades, yet without a clearly identified growth engine, except perhaps a modest one in manufacturing exports. Instead, growth over the last two decades seems to have been mostly the result of the economy responding to the increasing domestic demand arising from favourable terms of trade, rising rents from natural resources and large inflows of foreign capital. The same can be said of Mozambique over the last decade when it started exploiting more intensely its natural resources, and of Benin which took advantage of its proximity with Nigeria. In all cases, there is much uncertainty about the sustainability of such growth regimes. Comparatively, there is less risk, more autonomy, more direct labour absorption capacity and more positive externalities on the rest of the economy in a growth pattern grounded in the exports of labour-intensive goods whose prices are more stable and global demand unlimited for relatively small economies.

Exports need not be exclusively composed of manufacturing goods. Land abundant countries may have some comparative advantage in agro-industrial exports – or import substitution in some cases – provided the adequate infrastructure, especially of transport, is available.

Third, the identification, and then the sparking and the maintenance of a growth engine require the designing and effective implementation of a clear state-managed development strategy. The provision of essential public goods and services for business activity is an absolute necessity. But it is unlikely to be sufficient. The presence of numerous market failures, of scale economies – which cannot be exploited in domestic markets – or of sunk costs – which slow down the adoption of new technologies or the opening to foreign markets – require more than such a minimal approach. In this respect, the industrial policy followed by the Asian tigers and the strong incentives they provided to manufacturing exporters are telling, as is the strong support brought by the state to the RMG sector in Bangladesh. They contrast with what is observed in the other countries. To be sure, ‘development plans’ are ubiquitous in the developing world, but they are not always well and realistically designed, and their implementation is often ineffective.

The design and implementation of such state-led development strategies require well-functioning institutions, and this is where serious institutional obstacles are likely to appear. They will be analysed in depth in the next two chapters, but it is hard to deny that a competent, honest and dedicated bureaucracy have been crucial assets in the success of East Asian development strategies. They often have been, and still are, in many instances, liabilities in the development of the four IDP case study countries.

Fourth, the need for well-thought strategies should not conceal the critical role of infrastructure, both hard and soft, in structural transformation. After all, it is because it could rely on a competent and effective bureaucracy, a population with a middle educational level, a dense transport network and power plants – inherited from the Japanese colonial era – that the KMT was able to launch an ambitious development strategy in Taiwan in the early 1950s, despite the country being then almost as poor as Mozambique is today. In South Korea, Park seized power in 1961 in the context of an economy which was as poor, inefficient, and corrupt as several low-income or lower-middle-income countries today. However, he could count on a strong bureaucratic apparatus and a sufficient number of highly skilled people to permit the quick elaboration and the rigorous implementation of a bold development strategy. Investments in this kind of soft infrastructure and education are necessary to establish basic initial conditions without which valuable opportunities cannot be seized when they arise.

Developing these instruments also calls for institutional prerequisites. The identification of the main obstacles to effective state capacity and the exploration of the role of politics in establishing and implementing structural change in developing economies are the two central issues addressed in the subsequent chapters.

8 Behind the Veil of Institutions Where Politics Matters

As is evident from our accounts, Taiwan and South Korea represent clear model cases of structural transformation and sustainable development. This does not mean that their experiences are easily replicable, but that they are inspiring in the following sense: they draw our attention to pivotal dimensions of the development process and to critical problems that a country willing to develop must face and solve as satisfactorily as it can. It is with respect to these generic issues that the confrontation between the experiences of Southeast Asian tigers and our four case study countries can prove illuminating and insightful. That replicability is necessarily limited already becomes evident when we look at the initial conditions that Taiwan and South Korea enjoyed at the time of their independence, be they historical, geographical, or socio-political.

It is essential to realise the existence of significant differences in initial conditions between these two countries and many others (including Bangladesh, Benin, Mozambique, and Tanzania), if only to help us mitigate our expectations regarding the scope and timing of development achievements in the latter. In the subsequent discussion, we therefore start by taking stock of initial conditions before addressing the generic issues that our institutional diagnostic approach has highlighted. In this chapter, the focus is on issues that involve politics. More specifically, we look at the role of political leadership and state autonomy in development. The institutions involved determine the quality of governance in a country, but they are not the only ones to have this effect. Institutions influencing state capacity constitute a second type of governance-related institutions. In order to keep the size of the present chapter within a reasonable range, however, we have decided to deal with state capacity issues in the next chapter.

That we devote a full chapter to the role of politics reflects the huge importance of political forces in shaping or constraining development. This is probably the most salient lesson to draw from our six case studies, and also the most original insofar as this dimension is largely neglected or under-estimated by many institutional analyses. Especially worthy of attention is the type of relationships that exist between state authority and business interests, with the possibility that the latter capture the former. Incidentally, the empirical relevance of political factors confirms the importance of the political economy approach to institutions that we have discussed in Chapter 1. In this regard, it is interesting to bear in mind that when the East Asian miracle was retaining the attention of the economics profession in the 1960s and 1970s, the key controversy was centred on the question of the respective roles of the state and the market in economic development.

With few exceptions, the arguments were about the advisability of an approach stressing the need for a developmental state to guide the market, and of an industrial policy in particular. Doubts about not only the capacity but also the readiness of the state to take up such a role were rarely expressed. In the following, fully informed by the trend of the growth and development literature that emphasises the critical influence of political economy constraints, we set off to revisit the comparison between East Asia and presently developing countries. The perspective that our contribution adopts is thus very much the same as the one used by Robert Wade (1988, 1990a, 1990b), a political scientist, in his seminal works devoted to the role of institutions in development.

I Initial Conditions

Taiwan and South Korea were colonised by the Japanese, not by European powers. In the case of Taiwan this is reflected in a unique combination of strong central (colonial) power and decentralised development based on the modernisation of agriculture and the creation of rural industries, in sugar-processing in particular. Foundations for the physical and institutional infrastructures required for the purpose were laid in the colonial period and it is therefore no exaggeration to say that the development path of Taiwan (and, to a lesser extent, South Korea) was born in this period. Unsurprisingly, this path resembles the Japanese approach to development, which was initiated during the Meiji era and which T. C. Smith (1959) so vividly and accurately described.

Moreover, after the defeat of the Japanese in World War II and the subsequent advent of independence, US development assistance came in a big way to both Taiwan and South Korea. In the case of Taiwan, the US government was ready not only to go along the colonial path of comprehensive rural development but also to support, financially and through technical advising, the most radical land reform that the non-communist developing world has ever successfully implemented (from then to the present day). Its main component, the Land-to-the-Tiller Program, practically eliminated the upper tail of land distribution. The United States adopted the same policy line for South Korea where at independence land was redistributed from Japanese and domestic landowners to small farmers and tenants whose status was abolished. The apparent paradox of such a policy, which contrasted so strikingly with the approach adopted for other countries in Africa and Latin America, is unveiled as soon as we bear the geopolitical position of the above two countries in mind. Indeed, the central objective of US foreign policy, of which development cooperation policy was a part, consisted primarily of countering the communist influence from mainland China. This implied the need to help Taiwan and South Korea become an alternative model of rapid growth-cum-equity. The egalitarian approach was all the easier to adopt as the indigenous landlord class had collaborated with the Japanese colonial authorities and was therefore not seen as an ally whose interests had to be protected.

These exceptional circumstances contrast with those prevailing in most developing countries whose sheer existence was effectively guaranteed by the charter of the United Nations, and which did not feel such a direct challenge from communism as Taiwan and South Korea. Yet the latter were not the only countries that occupied a key geopolitical position during the Cold War era, and thus benefited from abundant development assistance from the United States. In particular, Egypt and Pakistan were also privileged recipients of foreign aid and yet their development performances have not been anything near those achieved by the two East Asian tigers.

With respect to geophysical conditions, mixed conditions prevailed in Taiwan. The mountainous terrain in a large chunk of the country has caused concentration of the population along a North–Southeastern axis, thereby easing connectivity throughout its inhabited portion. The other side of the coin is a strong population pressure on land resources, itself enhanced by the relatively poor fertility of many agricultural soils. South Korea was also characterised by high population pressure on land resources.

We are now ready to turn to the issue at the heart of the present chapter, namely the role of politics. As it is argued below, a relatively high degree of state autonomy and a high-quality political leadership are critical conditions conducive to effective and sustainable structural transformation and development of poor countries.

II Quality of Political Leadership and State Autonomy: Two Polar Situations

It is almost trivial to say that promising development prospects are conditioned by the quality of a country’s political leadership. There can be no development without a developmental state that is led by a mission-driven leadership with a clear view of long-term objectives, a competent assessment of realistic ways of achieving them, and sufficient autonomy to implement its policies and reforms. This condition is especially important in an international catch-up environment in which development latecomers feel a strong pressure to bridge the gap with development leaders or pioneers, if only because national autonomy and external weight would be jeopardised by relative economic and technological stagnation. When a high-quality leadership is available from the beginning and is sustained over a sufficiently long period of time, the omen are good. And they are still better if the political elite or the ruler benefits from a strong measure of initial legitimacy, so that sacrifices and discipline are more easily accepted by the population. Yet the condition of strong initial legitimacy is not necessarily fulfilled, as epitomised by the cases of Taiwan and South Korea.

A The Successful Experiences of Taiwan and South Korea

There are historical examples of enlightened elites or rulers enjoying a strong initial legitimacy and using this advantageous position to build a modern state, foster the emergence of a nucleus of industrial capitalists, transform traditional institutions, regulate the market, and harness the country’s resources for the long-term advantages. Think of the Meiji elite in Japan (made of lower-level samurai and the intelligentsia), or of Atatürk and the Kemalists in Turkey. Having gained a lot of prestige from his military victory against Greek troops in the battle of the Dardanelles, Atatürk was in a position to embark upon radical reforms aimed at educating the people, removing the hold of religion on their minds, and totally transforming the Turkish legal system, even though a large part of the population was still immersed in a traditional Muslim culture (Kuru, 2009: 214–15; Zürcher, 2012: 136, 214). In the Middle East, this approach was later adopted by President Bourguiba in Tunisia, who was not supported by an army but by a strong single political party (Platteau, 2017, 2022). Even more recently, in the People’s Republic of China, the far-reaching market-oriented reforms initiated under the paramount leadership of Deng Xiaoping in 1978 marked a critical turnaround for a country just emerging from a radical left-wing deviation and the ensuing chaos of the Cultural Revolution. They played a decisive role in launching China on a path of rapid catching-up with the advanced countries of the Western world (see, e.g., Wu, 2005).

The case of Taiwan illustrates a somewhat different situation: here, an enlightened elite from the KMT, the ruling party defeated by Mao’s communists, settled down in Taiwan with the firm idea of one day reconquering continental China. On the island, it did not initially enjoy strong legitimacy because, unlike a common view that sees all (Han) Chinese people as forming a homogeneous group, its seizure of political power was considered with a lot of suspicion by the indigenous inhabitants, most of whom left China during the last centuries, starting in the seventeenth century (To this date, around 90 per cent of Taiwan’s inhabitants are Han Chinese).¹ Bloody riots quickly erupted which were harshly put down by an authoritarian KMT-dominated regime. However, thanks to impressive economic achievements and to effective dissemination of a national ideology, the same regime succeeded in overturning the situation by becoming much more popular than it was at the beginning of independence. Development success was obtained on the basis of a strong one-party state system, which can be described as one of ‘authoritarian corporatism’ and, paradoxically enough, had adopted important features of a central planning system. Convinced by the importance of its mission (regaining control of mainland China), it did not hesitate to impose strict controls on the population and was little inclined to bargain with established groups or organisations. Since the latter were rather weak, the task of the new masters of the country was relatively easy, much like the task of the Japanese colonisers had been before. Still, although the regime cannot be described as totalitarian, it was under martial law until 1987.

There were at least two main lessons drawn by the KMT from its failure to stay in power in China: the defeat was caused by both party indiscipline and business capture of the nationalist government. To solve the first problem, the party’s organisation was tightened and purged of all unreliable elements. As a result, factionalism inside the party was bridled and the party state became a coherent entity placed under the paramount leadership of general Chiang Kai-shek (1949–75) and, later, Chiang Ching-kuo (1975–88). As for the second problem, the regime was determined to keep all business groups on a short leash, treating them like all other social groups. Again, this was all the easier to do as almost all the established business firms from mainland China had chosen to migrate to the United States and Hong Kong rather than to Taiwan. It is thus revealing that the Taiwanese policy network hardly included representatives of private business, allowing the government to retain a striking degree of autonomy in setting the directions and details of policy. As a matter of fact, the powerful economic technocrats were largely free from societal pressures, being answerable only to the party’s top leadership and responsible mainly for the overall performance of the economy and the success of the targeted sectors.

There were thus no intimate state–business relationships, and the KMT party state did not actually encourage the creation of big private industrial concerns. In fact, most industrial assets under the Japanese colonial administration and most zaibatsu were converted into SOEs, implying that key sectors of basic industry (power, cement, steel, heavy machinery, shipbuilding, defence-related industries, etc.) were under state control. Elements of political patronage were clearly present since political loyalty was a major consideration behind the choice of managers of state firms. Moreover, when state firms were allowed to go private or to be transformed into semi-public concerns, or when the state itself created new upstream undertakings, choice of owners was based on the same considerations: priority was given to loyalist mainlanders, members of a few politically well-connected native families known for their loyalty to the regime, or local county-level patrons with a stake in region-based oligopolies. Therefore, recruitment was not unambiguously based on competence under the KMT regime. The central principle was rather that only once political loyalty is assured can selection be made primarily on the basis of competence criteria. In other words, obedience to the top political leadership and compliance with its prescriptions were the most highly praised virtues. Because rules were strict and corruption was put severely under check, the system did not degenerate into widespread and uncontrolled cronyism.

Finally, the Taiwanese economy has a dual structure: coexisting with relatively large firms are SMEs, most of which are family firms located in both urban and rural areas, and largely owned and run by islanders. Institutionally, it is through industrial associations shaped and managed by the party state that the latter communicated its regulations and that performance-based incentives for investment, production, and export were negotiated. The overall picture is therefore one in which the state was largely autonomous vis-à-vis social groups and business interests, in particular. It was thus able to orient the destiny of the country, devising and implementing effective development policies, the success of which served as a sound basis for the emergence of an integrated economy, society, and polity. If clientelism was allowed, it was essentially of a competitive kind because the party state was eager to keep rent-seeking activities under tight control. In practice, this meant that it typically cultivated at least two competing factions in a given county, thus preventing a single faction from reaching a position of political monopoly over the distribution of economic rents.

Like Taiwan, South Korea could rely on an autonomous state. Yet the beginnings were more laborious. The first autocrat, Syngman Rhee, had no vision for the future of his nation and was more preoccupied with enriching himself and his ruling clique. His deeply corrupt and ineffective regime was heavily contested, particularly when students organised themselves toward that purpose, and he was forced to resign when he lost the support of the army. Convinced that civilian politicians would be unable to end the prevailing mayhem, re-establish order, and root out corruption, the army eventually came forward with another candidate who was to prove much more enlightened and long-lasting (two decades) than his predecessor, General Park Chung Hee. In order to achieve its objectives of fighting against corruption, poverty, and public sector ineffectiveness, he equipped himself with two powerful organisations: the Korean intelligence services (the KCIA) and the EPB. While the former’s function consisted of controlling all segments of the civil society and ensuring law and order, the latter’s role was to design and manage growth strategies based on development planning. To enable the EPB to fulfil its mission, Park staffed it with highly competent technocrats, and did not hesitate to grant its head a rank practically equivalent to that of prime minister.

Park’s rule was no doubt harshly repressive and deeply authoritarian, and military personnel operated in most high- and medium-level tiers of state decision units. However, it is under his regime that South Korea embarked on a remarkably successful growth strategy. Having inherited a strong sense of discipline from the Japanese army doubled with a national patriotism reinforced by the threat of communist North Korea, the South Korean military, and the KCIA in particular, were able to build a rigorous, corruption-free administration where competence and discipline were the predominating virtues. In order to finance development along the priorities set by the EPB, and to eradicate corruption, all banks were nationalised. In addition, SOEs were created or strengthened in strategic sectors, such as energy, water, and transport infrastructure. Simultaneously, big private concerns, known as the chaebols, were brought to heel.

Because of its critical importance for the country’s development, the relationship between state authorities and the chaebols deserves a few more words. Under Rhee’s regime, when imports played a dominant role in the South Korean economy following the end of the Korean War and the demise of Japanese rule, big trading businesses were consolidated (e.g., Samsung, which was born under Japanese rule) or formed, which benefited egregiously from their privileged connections to the state. Privileges were obtained in the form of exclusive import licences in some key sectors. Progressively, and again under privileged conditions – in this case, high import barriers – these big trading companies started to expand their activities into local production. Collecting huge rents, the chaebols became dominant players in a political economy pervaded by bribery, vote rigging, and intimidation. A major turning point came with the advent of Park to supreme power. To avoid being nationalised outright, the heads of these firms accepted a deal according to which they would fully cooperate with the new authoritarian regime lest they should be expropriated. That the threat was credible was soon proven true when Samsung was caught in a corruption affair and immediately punished by being coerced to transfer its fertiliser company to the state. From then on, the chaebols became the main instrument of the state to push development in the direction set at the highest political level.

The South Korean model was born, which combines a mix of state-guided development centred on the task of coordination in macro resource allocation, on the one hand, and coordination in micro-corporate strategies managed by big private companies, on the other hand. While the former task aims at coaxing private economic activities so that they help move the economy in a certain direction, the latter is intended to improve the internal strategies of the private firms (product and process innovation, marketing, quality control, product standardisation, etc.) with the purpose of enhancing their efficiency (Okuno-Fujiwara, 1997). It is nonetheless interesting to notice that, on the occasion of the heavy industry programme launched by Park, the chaebols increased their bargaining power tremendously, to the point of challenging the state authority. It was actually in the logic of export incentives that they would raise the leverage of exporters since a major incentive to drive firms to enter the new heavy industry sector was the provision of credit at highly subsidised interests (which tended to be significantly negative in real terms) and state-guaranteed foreign loans. It was then unavoidable that some failures, sometimes major ones, occurred. What was unanticipated, though, is that because they had become ‘too big to fail’ as a result of a considerable expansion of their investments and operations, several chaebols had to be bailed out by the state against the terms of the contract struck between the two parties. Chaebols had acquired a real but ominous autonomy vis-à-vis the executive and the EPB. Still, the macroeconomic crisis that followed, itself accentuated by the second oil price boom, allowed the government to impose restructuring measures aimed at putting the chaebols on a sounder financial footing.

From the political economy standpoint adopted above, it is easy to imagine circumstances susceptible of derailing the development process. Two of them retain our attention here: (i) a leader enjoying strong initial legitimacy and authority makes flawed economic policy choices that cause the erosion of his/her political capital; and (ii) a leader who does not enjoy strong initial legitimacy and authority or prestige, and cannot be accused of having followed inept economic policies, is unable to resist the pressures and influences of powerful business interests. Strong initial legitimacy, it may be noted, means that a ruler is in a good position to achieve national integration, an objective especially challenging in the case of countries abruptly emerging from colonialism and comprised of disparate populations. It could be argued that inefficient economic policies are the price to pay for the building of a new nation, implying the existence of a trade-off between economic and political objectives. But this is not the sort of situation we have in mind under scenario (i), where economic policies and development strategies involve costs that could have been avoided, not costs justified by the need of national integration or political stability.

The ensuing discussion follows three successive steps. In the first step, pursued in the next subsection, we illustrate the possibility of faulty economics as understood under scenario (i). In the second step, pursued in Section III, we consider a number of important trade-offs between economic efficiency and political stability or social harmony, whether they arise from the challenge of nation-building or not. Finally, in the third step, pursued in Section IV, we address the pivotal issue of state capture by business interests, which corresponds to scenario (ii).

B Faulty Economics

A common feature of most faulty economic development policies is their excessive reliance on central planning and ignorance of the role of individual incentives. We begin with the regime of Julius Nyerere in Tanzania. Head of the party which led to the country’s independence struggle, Nyerere soon became prime minister (in 1961) and then president of the newly formed country in 1964. Endowed with the considerable prestige and authority of the ‘father of the nation’, he embarked upon an ambitious development programme announced in his famous Arusha Declaration in 1967. The ideological orientation was clearly socialist as it provided for the state control of the means of production and exchange, implying the nationalisation of a major part of the non-agricultural sector. As for the agricultural sector, a top priority under the programme, a major approach to its modernisation consisted of exploiting scale economies through the regrouping of dispersed subsistence farms into the so-called Ujamaa villages. Lastly, Nyerere aimed at rapidly expanding education and health among the masses, as well as increasing equality and participation in public decision making.

Things did not go according to plan, though. For one thing, nationalised enterprises were inefficient as a result of bureaucratic mismanagement, constant meddling of politicians in the running of state firms, and mounting corruption among the managers themselves. For another thing, agricultural reforms yielded so disastrous results that Tanzania shifted from being a net exporter to a net importer of food crops in just a few years. Major problems arose from the coercive displacement of rural populations, which were attached to their traditional land location, and from the collectivisation of agricultural services, including the marketing of crops that were traditionally disposed of through rather effective networks of small and medium-scale merchants. Although Nyerere initially resisted the pressure exerted by international donors and organisations to modify his socialist strategy, he had eventually to give in and accept both a stand-by agreement with the IMF in 1985 and a Structural Adjustment Programme with the World Bank. That his over-confidence in the guiding role of an all-powerful state and his consequent denial of the potential role of market forces in the economy were misplaced and doomed to failure became evident when the income per capita of the Tanzanians started to fall after 1976. At the time of Nyerere’s retirement (in 1985), Tanzania was actually among the poorest countries in the world.

This being reckoned, it bears emphasis that, if Nyerere thus lost the control of economic development policies, his political capital was not completely wasted because of his indisputable achievement as the builder of the Tanzanian nation. He succeeded not only in disbanding the multiple traditional chiefdoms existing in the country, but also in bringing cohesion and national unity to the country. Furthermore, this successful national integration drive was fostered and complemented by major social investments in literacy, education, and health, all areas in which Tanzania appeared as a rather exceptional performer on the scale of sub-Saharan Africa. Finally, Nyerere has been a major factor behind the country’s political stability, a feat that owed much to his personal integrity and his respect of constitutional rules. The latter became plain when he decided not to run for a new presidential mandate, preferring to let his successors manage the transition to a market economy.

In Benin (then known as Dahomey), the long-lasting regime of Lieutenant-General Mathieu Kérékou (1972–90) bears some similarities with Nyerere’s regime. Even though his ascent to power came as the result of a military coup (the sixth one in succession since independence), Kérékou wanted to lead his country to a new destiny by undertaking a Marxist-Leninist revolution. This came at a time when, understandably, people aspired to more political stability without which development is impossible to achieve. Kérékou thus started his political career with a good measure of popular support, yet mainly in the north from where he originated. Therefore, his nationwide legitimacy was not as strongly established as that enjoyed by Nyerere (or Nkrumah in Ghana). His regime, inspired by the same ‘socialist’ vision, ended calamitously.

His leftist revolution involved the creation of a one-party state and single workers’ and youth organisations, the nationalisation of production units and the development of collectivism. Democratic centralism and state economic interventionism became the new watchwords. The former principle implied restrictions of fundamental freedoms while the latter was to be applied with special vigour to agriculture where massive investments were contemplated to attain food self-sufficiency. Hopes were soon shattered as the poor economic performance of the new regime were coupled with its propensity to nurture corruption and rent-seeking. Top-down corruption and widespread inefficiency were noticeable in virtually all parastatal organisations, which turned out to be highly bureaucratic and hierarchical, as well as full of employees who, besides being corrupt, were in many cases unqualified or ill-qualified, and tended to be idle, undisciplined, and arrogant. Growing frustrations about the suppression of freedoms, corruption, months of salary arrears, and deteriorating living conditions resulted in street protests and general expressions of anger against the ruling clique by teachers, civil servants, workers, and church groups, in particular.

Mozambique’s experiment with Marxist economics yielded basically the same results as those highlighted above. It was carried out by the Frelimo, the party which came out victorious of the independence struggle and many of whose members were opposed to private sector development. It is in 1977, three years after independence from Portugal, that Frelimo declared itself a Marxist-Leninist vanguard party in charge of establishing state farms, imposing agricultural mechanisation, and forcefully resettling important population groups, among other things. As could be easily anticipated, support for the regime among the peasantry sank as a result of these policies, and Frelimo was forced to quickly backtrack. The opposition party, the Renamo, which was historically supported by Apartheid South Africa and Rhodesia, did not miss the opportunity to exploit people’s frustrations. Its base was enlarged from people with roots in the central part of the country and who had serious grievances, ethnic and religious, against the regime, to people who had become increasingly critical of its top-down orientation. And even though Renamo did not succeed in displacing Frelimo from power, probably due at least in part to electoral manipulation, there is no doubt that the nation-building efforts of the latter party were undermined by its misguided economic policies.

There are two important differences between Nyerere’s regime, on the one hand, and the regimes of Kérékou and the Frelimo (in the socialist period), on the other hand. The first difference lies in the widespread corruption which characterised the latter regimes but not the former. Second, the success of the nation-building project of Nyerere contrasts strikingly with the fragmentation of Benin and Mozambique along ethno-regionalist lines. Under Kérékou, in particular, state rents disproportionately favoured his own region and network of supporters. Let us now delve into this second issue, which affects many developing countries, especially but not exclusively in sub-Saharan Africa.

III Quality of Political Leadership and State Autonomy: The Issue of Nation-Building

To gain a proper understanding of the institutional constraints on development, we must reckon that political forces are frequently at work that hamper economic efficiency in a significant way. This is particularly evident when politics intrudes because of the need to build a cohesive nation and a viable polity, but other trade-offs may also be present which are related or not to the nation-building imperative. In the following, we start by highlighting the main challenge behind nation-building. We then proceed by referring to different situations involving a clear trade-off between economic efficiency and political stability or social harmony.

A The Challenge of Nation-Building

As Clifford Geertz (1973: 239) has pointed out a long time ago, the formative stage of nationalism essentially consists of ‘confronting the dense assemblage of cultural, racial, local, and linguistic categories of self-identification and social loyalty that centuries of uninstructed history had produced with a simple, abstract, deliberately constructed, and almost painfully self-conscious concept of political ethnicity – a proper “nationality” in the modern manner’. In any nation-building process, therefore, the new states, or their leaders, must contain or domesticate primordial attachments instead of wishing them out of existence or belittling them. They must be able to reconcile them ‘with the unfolding civil order by divesting them of their legitimizing force with respect to governmental authority, by neutralizing the apparatus of the state in relationship to them, and by channelling discontent arising out of their dislocation into properly political rather than para-political forms of expression’ (1973: 277). Clearly, a nation-building effort can succeed only if a sustainable compromise can be struck between the need of a country to modernise its social, political, and economic structures so as to adapt to the world environment, on the one hand, and the need to win a mass-based legitimacy and to involve traditional interests that play upon primordial attachments, on the other hand. In other words, there is a need to somehow overcome the severe horizontal cleavages inherited from the past, and which Basil Davidson (1992) called ‘the black man’s burden’.

Whereas in Taiwan and South Korea, the adoption of an effective and inclusive development model that did not ignore agriculture and the rural sector helped integrate the nation at a rapid pace, in most of sub-Saharan Africa, the daunting task pointed out by Geertz has only been partly accomplished and, in some countries or regions (e.g., Somalia and the Democratic Republic of Congo), it has not even started to be seriously addressed. If, at the supra-territorial level, pan-African ideologies and pan-African political movements (such as the National Congress of British West Africa, with branches in the Gold Coast, Nigeria, Sierra Leone, and the Gambia) had gained currency toward the end of the colonial period, ‘tribal patriotism’ (Iliffe’s words) generally prevailed at the infra-territorial level, resulting in the spawning of innumerable local associations of traders, commercial farmers, teachers, clerks, and clergymen. Although their official purpose was to promote the development of the country, in actual practice they defended particularistic interests and did not hesitate to foster tribal identities to better achieve their objective. Nationalism was often a veil behind which many parochial interests concealed themselves. In the words of Iliffe (2007: 258), ‘as predominantly local people, most Africans saw nationalism in part as a new idiom for ancient political contests’.

In sum, nationalist movements were frequently plagued by factional conflicts that put local issues in the forefront while minimising the importance of national party affiliations. The fact of the matter is that ‘nationalism only partially aroused many of Africa’s deepest political forces’, and that ‘responses to it depended on local circumstances’ (Iliffe, 2007: 257). It is thus revealing that the political driver of many African insurgencies during the colonial period, such as the Mau-Mau rebellion in Kenya and the Teso rebellion in Uganda, was ‘parochial rather than regional in orientation’ (Jones, 2009: 50). Instead of being directed at district and regional officers, grievances typically originated in local conflicts between rival ethnic groups and clans, between different age groups (often youngsters against elders), or between ordinary people and traditional chiefs or village council chairmen. And they often turned around land issues (see Platteau, 2014: 190–6, for more details). Precisely because it was thus absorbed into local political rivalries, the nationalist movement was able to gather the support needed to remove the colonial rule. Yet it is for the same reason that after independence people continued to perceive national issues in terms of local interests and to judge their representatives and the state on the basis of their contributions to local advancement (Iliffe, 2007: 258, 267). As pointed out by Basil Davidson (1992: 112): ‘From being instruments of pressure against foreign rulers, the new parties at once became instruments of rivalry within the nation-statist political arena’, implying that the competing interests of the elites ‘took primacy over the combined interests of the masses’ (our emphasis).

When put in this broader perspective, Tanzania’s success appears quite remarkable. A careful examination of the history of its nationalist movement sheds interesting light on the reasons behind this success. At the same time, it provides another illustration of the importance of initial conditions. The first thing to point out is that many African countries did not obtain independence after a protracted anti-colonial struggle (think of South and Southeast Asia by way of comparison), as the abdication of colonial power came rather abruptly and unexpectedly.² With the notable exception of Portuguese colonies, their nationalist movements were therefore of rather recent origin at the time of national emancipation. A direct consequence of this situation is that the African elites were confronted with the hard challenge of abruptly shifting from the comparatively easy task of claiming national freedom and sovereignty by uniting against an external power to the much more complex task of building a modern nation endowed with sufficient cohesion.

In this regard, Tanzania occupied a relatively enviable position because of the exceptionally widespread support enjoyed by the nationalist TANU party thanks to its use of the widely spoken Swahili language and the absence of strong tribal politics, conditions largely inherited from Tanganyka’s nineteenth-century experience (Iliffe, 2005, 2007: 256).³ The nationalist movement was also helped by the existence of multiple ethnic groups of comparatively equal strength – a feature at variance with the situation of many African colonies where the presence of a few dominant ethnic groups created a fertile ground for polarised conflicts. As a result, leading political figures functioned ‘as companions rather than as rivals’, in contrast to, say, Nigeria where they went at each other’s throat for the spoils of office (Davidson, 1992: 112). Inside TANU, moreover, the radical and activist faction represented by the Youth League was remarkably effective in constructing a nationalist discourse, and defining the content of a national identity and common destiny. In pursuing its aim of gaining independence swiftly, it did not hesitate to openly blame the ruling clans for protecting unqualified officeholders and denying positions to educated individuals, for preventing appeals against the decisions of the chiefs’ courts, and for perpetuating inefficiency, nepotism, and corruption (Giblin, 2005b: 143–4; Monson, 2005: 109–10).

These historical antecedents do not diminish the important role of Nyerere who, thanks to his outstanding leadership qualities, was able to give a decisive impetus to the process of Tanzania’s nation-building after independence. Still, a balanced account must also acknowledge the influence of the Youth League on the leader, as well as the pre-independence dynamic of a strong and strictly disciplined nationalist movement.

B Trade-offs between Economic Efficiency and Political Stability

The social cost incurred as the result of the wrong-headed economic policies followed by Nyerere in Tanzania cannot be considered as the necessary price to pay for advancing the nation-building project: they represented a sheer waste of scarce resources. The same actually applies to another outstanding figure of a ‘father of the nation’ in Africa, Kwame Nkrumah in Ghana. Interestingly, the latter entered into a vivid controversy on precisely this kind of issues with his special economic adviser and Nobel Prize winner in economics, Arthur Lewis (see Tignor, 2006, for a detailed review). Indeed, Nkrumah argued that politics should have primacy over economics, and therefore refused the idea that his actions can be rated in terms of economic efficiency yardsticks since their objective was political. Lewis was particularly disturbed by the fact that Nkrumah was ready to justify some expensive and inefficient policies by the need to crush the opposition and put an elite political party in the position of the supreme authority of the country (Lewis, 1965: 30).⁴

It is nevertheless possible to look at the issue in a way more charitable to Nkrumah’s standpoint (Kanbur, 2017). As hinted at above, we would then stress that building a new nation is hard in societies riven by intersections of horizontal cleavages of region, ethnic group, language, and religion. In such contexts, adopting policies that cut across the most important group divides in a nation may well be justified even though they involve efficiency losses from a conventional economic standpoint. In other words, reaching political compromises and maintaining a proper horizontal balance can be a top priority, especially at the early stages of state formation. In the following, we elaborate on this proposition by referring to four different issues, the last of which will deserve a rather detailed illustrative discussion.

Examples 1 and 2. Coming to mind here are (temporary) positive discriminatory policies in societies polarised between elite immigrant groups and the mass of native residents, or between elite and subject castes, or between historically favoured and traditionally backward regions (think of positive discrimination in Malaysia, India, and South Africa, as examples). Such policies are not first-best efficient, since they erode incentives to effort for both categories of people, yet they are arguably constrained-efficient in societies suffering from strong horizontal cleavages and lacking a minimum level of cohesion. Land and family laws are other policies or rules that reflect a trade-off between economic efficiency and political stability in societies fraught with horizontal cleavages. It is often the case, indeed, that the lawmakers willingly forsake the benefits of uniformisation and standardisation of local norms and informal rules in order to avoid head-on conflicts with local communities and their cultures (more on this in Chapter 9).

This is especially evident when states choose to accept and even institutionalise the coexistence of modern laws and their associated courts, on the one hand, and traditional norms and practices and their informal conflict-settlement mechanisms, on the other hand. Known as legal pluralism, this system has been implemented with remarkably positive effects on social and political stability in a country such as Indonesia where it dates back to the post-independence secular military regime of Suharto (see Bowen, 2003; Platteau, 2017). In that country, the same pluralistic principle has been followed in matters of schooling, since madrasas (formal religious schools) have been allowed not only to survive but also to expand side by side with secular public schools (see Marx et al., 2020). In such instances, inter-cultural harmony and social cohesion have clearly been prime objectives dominating economic efficiency concerns.

Example 3. Along the same line, a valuable insight is suggested by an analysis of the demand for wealth redistribution in the presence of ‘communities’, when the latter are conceived as so many social networks or informal organisations that provide local public goods specifically targeted to their membership.⁵ The idea is that, if these public goods are largely funded by rich members, the poorer ones may not demand a reduction of the former’s wealth, even when they directly benefit from the ensuing transfers. The reason is that they would then lose access to local public goods, which they value. In such a setup, Dasgupta and Kanbur (2007) show that in societies with multiple communities, each with its own exclusive public goods, pro-poor income growth would dampen or eliminate incentives to demand radical wealth redistribution whereas pro-rich income growth would have the opposite effect of generating incentives for the poor to support cross-community redistributive alliances along class lines. Moreover, pro-rich growth can turn opponents of redistribution in the middle class into its supporters. A possible lesson to draw from this analysis is that a government eager to avoid the turbulence arising from demands for radical wealth redistribution has an interest in opting for pro-poor growth, even if it means that capital accumulation may be slowed down and that informal agencies beyond the grasp of the state will continue to play an important role in maintaining social order. Otherwise, pro-rich growth may be its preferred choice of development strategy.

A serious problem with the pro-poor growth solution, however, is that communities are and remain separated in the sense that the members of a given community do not have access to, or do not value the activity (or public good) constitutive of another community’s identity. In these conditions, they have an incentive to support the expropriation of other communities, thereby creating a fertile ground for sectarian political platforms and communal strife. Fortunately, such a forbidding state of affairs can be potentially avoided if, rather realistically, some individuals are ready to relate to other communities or have multiple identities. Even more promisingly, they may want to contribute to a public good that transcends communal divisions and incorporates a ‘meta-communal’ element to their self-identity, assuming that such a good exists or can be created. In a two-community framework in which intra-community wealth differences (i.e., vertical inequality) are abstracted away, Dasgupta and Kanbur (2005) show that the two communities will contribute to the meta-public good provided that the wealth gap between them (i.e., horizontal inequality) is relatively small. In addition, while they remain separated at the level of their own specific public good, no individual has any incentive to support expropriation of the other community. The reason is that the capacity of the latter to contribute to the meta-public good, which both communities value, would then be reduced.

By contrast, a wide wealth gap implies that only individuals in the richer community will contribute to the meta-public good, an outcome that entails the risk of communal tension. In this instance, what happens is that ‘even non-communal forms of identity, such as nation, class or language, would become identified with the dominant community, and would not have the capacity to hold distributive conflicts in check’ (Dasgupta and Kanbur, 2005: 160).⁶ Illustrative of this possibility is Indonesia (and, we could add, Myanmar) where, despite attempts at developing a national identity, ethnic tensions have remained strong because of persisting inter-community wealth disparities (2005: 164). Malaysia offers a better picture, probably thanks to the aforementioned positive discrimination policies, which have helped mitigate wealth inequalities between the Bumiputera and the Chinese communities. The central message is therefore the simultaneous importance of a meta-communal public good, which is essentially tantamount to a nation-building project, and a moderate inter-community inequality in wealth. Deliberate efforts to create these two conditions, even if they involve significant losses of economic efficiency, hold the key to communal harmony in societies fraught with deep divisions of race, ethnicity, religion, or language (2005: 164).

Example 4. Concessions which a civilian ruler or regime makes to the military with a view to preventing them from seizing power through a coup, and following their own vision of the country’s destiny, provide yet another illustration of how economic efficiency may be sacrificed to maintain political stability. In most instances, such concessions take the form of allowing the military to participate in lucrative business activities on terms that are generally very generous. Bangladesh is a case in point: since 2009, after a short and disastrous return to the forefront of politics, the army retreated to its barracks and agreed to support the civilian government, yet not without becoming a major beneficiary of contracts for large-scale infrastructural projects, in particular.⁷ Involvement of the military in business is even more massive in countries such as Pakistan, Myanmar, Syria, Egypt, and Sudan (see Siddiqa, 2017; Sayigh, 2019). Because contracts, licences, monopoly rights, and other advantages are typically granted to the army as political favours, implying that they are unaccompanied by performance-based conditions, and because the beneficiaries have been selected for their status in the military hierarchy and not for their management qualities, losses of economic efficiency are unavoidable. Often revealed as time delays, cost overruns, and poor quality of the works supplied, they are actually the price which the civilian regime is willing to pay in order to co-opt the men in uniform and keep them inside their barracks or on the backseat of politics.

In reality, the political game is more complex than what has been suggested above. As theorised by Auriol, Platteau, and Verdier (2021), and explained in Chapter 1, the political game played out in countries where radical religious movements are present is a triangular game between the ruler, the military, and religious clerics. An important implication of this more complete perspective is that in order to stabilise his power and avoid a state coup, a ruler may choose to reduce the strength of the military and simultaneously co-opt religious leaders. This strategy of double co-option is likely to involve even higher efficiency costs than the strategy of exclusive military co-option because religious authorities are typically opposed to key institutional reforms that would encroach on their traditional prerogatives. Such reforms include those aimed at removing land access rules which hamper efficiency or maintain many people under feudal shackles; at emancipating individuals from the sway of communal or collective prescriptions; at replacing rules emphasising status or loyalty by merit-based selection; or at combating forms of social discrimination, against women and low caste members in particular.

The cost of religious co-option is particularly evident in the case of Pakistan, a country founded on the idea of a Muslim identity distinct from the Hindus of India. Unsurprisingly, Muslim movements and organisations of a conservative puritan kind (the Deobandi school of Islam) were active from the beginning, pressuring successive governments to decide how far they would go in the direction of creating a Muslim state. On the other hand, because of its geopolitical situation and, more specifically, because it has borders not only with India but also with Iran, China, and Afghanistan, Pakistan has attracted a lot of attention from the United States. Economic cooperation and, above all, military assistance, have thus been willingly provided by the US superpower, which had the effect of reinforcing the influence of the Pakistani military (Haqqani, 2005; Shah, 2014). Interestingly, and in broadly similar geo-political circumstances, General Ayub Khan (1958–69) pursued a course that seemed to replicate the regimes of Chiang Kai-shek in Taiwan and Park Chung-hee in South Korea. He thus pursued active industrialisation policies that made the country’s economy the fastest growing one in Asia, and major infrastructural projects (hydroelectric stations, dams, and reservoirs) were completed under his watch. In addition, he cracked down on religious hardliners, banned the Jamaat-e-Islamic fundamentalist party, and checked the political influence of Sufi orders. This allowed him to enact remarkably progressive family laws. Lastly, he inherited a colonial legacy of strong bureaucratic state and weak representative institutions: elected politicians only had an advisory role and were effectively subordinated to an executive rule where the military and the civilian bureaucrats called the shots. A combination of circumstances caused his downfall: corruption of his family and the clique around him, accusations of vote rigging and political murders, an unpopular peace treaty with India, popular uprisings in East Pakistan (today’s Bangladesh), and food demonstrations (Abbas, 2005: 37–54; Wilder, 2009).

A major turning point happened somewhat later, under the regime of another general, Zia ul-Haq (1978–88). In the wake of his predecessor, Zulfikar Ali Bhutto, Zia reinforced the subordination of the bureaucracy to elected politicians, so much so that the latter acquired the power to suspend and transfer uncooperative civil servants and gained unprecedented access to district officials inside strategic departments. Under his watch, the administration thus became highly politicised. Also worth singling out are Zia’s pandering to emerging business elites constituted as political families ready to play by the new rules of the political game, as well as the Islamisation at his behest of the administration, the army (and the intelligence services), the judiciary, and the education sector (Malik et al., 2022). All these steps meant that, in spite of indisputable economic accomplishments – he oversaw the highest GDP growth in the country’s history – Zia deeply undermined key Pakistani institutions with ominous long-term consequences (Cheema et al., 2005; Platteau, 2017: 217–23). The country’s change of direction brought about by Zia led Pakistan astray, as none of his successors, including not only General Musharaff but also civilian presidents (Benazir Bhutto, Nawaz Sharif, Imran Khan), would really dare question the new orientation chosen for the country, namely a model based on a close military-religious alliance.

Since Zia, Islamist clerics have been systematically instrumentalised by the army and the intelligence services (known as the ISI) for the purpose of serving their foreign policy objectives, particularly in Kashmir and Afghanistan. In their view, indeed, India has always constituted a serious threat to the very existence of the Pakistani nation whose defining feature is Islam. To counter this presumed, and in fact much exaggerated threat, it was deemed important to intervene in neighbouring countries with a view to stirring up trouble or promote the interests of Pakistan. It is for such tasks that extremist militias acting as surrogates in the defence of national identity confounded with the Muslim faith proved highly convenient. However, if radical religious clerics trespass the limits set by the army, they are quickly called to order, as has been recently demonstrated by the repressive military campaign along the Afghan border (in North-West Frontier Province). In the end, it is the prominent role of the army (and the ISI) as the carrier of the national project, and its continuous manipulation of Islamist movements, that have forced the civilian authorities of Pakistan to grant egregious privileges to the men in uniform and to let radical clerics wield an outsize political influence (Platteau, 2017: 209–22). The long-term efficiency costs have been considerable.

When Bangladesh, then East Pakistan, seceded from (West) Pakistan, Islamist movements, the Jamaat-e-Islami in particular, took sides with the central government against the pro-independence fighters backed by India. Being considered as traitors and even war criminals, they invited the opprobrium of a large part of the population and wielded much less power than their counterparts in Pakistan.⁸ And, yet, because authoritarian rulers chose to cynically court them in a way reminiscent of Zia’s strategy in Pakistan, they were able to gain unexpected political influence. Whereas under Sheikh Mujibur Rahman (1972–5) the new nation was constitutionally defined as Bangali, that is, alongside an ethno-linguistic secular dimension, Generals Ziaur Rahman (1977–81) and Ershad (1983–90) opted for transforming ‘Bangladesh identity from ethno-linguistic Bengali culture and secular polity to religious-cultural Muslim Bangladeshi identity and Islamic polity’ (Sheikh and Ahmed, 2019: 11–12). Such a move, as stressed by the same two authors, was part of a tactic consisting of portraying political rivals as intended to make Bangladesh into a satellite state of Hindu India, and of reviving an Islam-oriented Bangladeshi nationalism susceptible of gaining the support of religious and conservative parties. In the same move, Ziaur Rahman created the BNP, a party which was also joined by many members of left-leaning political parties with links to China and anti-India sentiment.

It is thus by presenting the secular Bengali identity as pro-Indian or pro-Hindu in a context where Indian domination was resented by popular masses, that the regimes of Ziaur Rahman and Ershad attempted to obtain their legitimacy. Despite successfully gaining public support, the former was nevertheless unable to ensure the backing of the armed forces and he was eventually assassinated by a group of army officers, thereby replicating the tragic fate of the nation’s founder himself.⁹ What deserves to be stressed, however, is that in stark contrast to Zia’s regime in Pakistan, the use of Islam under Ziaur Rahman and Ershad was more a matter of ostensible symbols than real substance. It rested on displays of Quranic verses and Prophet’s sayings on posters hanging in government offices, telecasting of principles of Shariah on radio and television, frequent visits of mosques and Islamic shrines by high-level officials, regular attendance by the same to religious festivals and events, establishment of a new Islamic university and provision of generous grants to religious institutions, promotion of Islamic learning, and the like (Sheikh and Ahmed, 2019: 13).

After a prolonged period of authoritarian rule with generals at the helm of the country, Bangladeshi politics became essentially the arena for contest between two major political parties, the BNP and the AL, led by two dynastic figureheads (the so-called begums), Khaleda Zia and Sheikh Hasina, respectively. Even though in 2013 the Jamaat-e-Islami was banned from registering and contesting in elections (by a High Court order), twenty-two Jamaati candidates obtained tickets to run under the BNP banner. A lot of turmoil ensued, and the BNP eventually decided to boycott the 2014 elections. The AL won an easy victory and a few years later, in 2018, Sheikh Hasina threw her rival begum in jail. There then began an era of uncontested political dominance of the AL, backed by the army and the intelligence services, duly purged of all BNP elements and properly remunerated for their support (see above).¹⁰ As for the Jamaati leaders, they were not only excluded from politics but also sued for crimes committed during the independence war.

As can be seen from our examples, Example 4 in particular, efficiency losses may result not only from the pursuance of political objectives such as the imperative of nation-building, but also from the possibility that the strategy designed toward that purpose is misguided or unnecessarily costly. In this matter, unfortunately, it is practically impossible to make out whether a specific strategy is constrained-efficient in the sense of minimising efficiency losses given the need to attain a certain political objective. Quality of available leadership and the international environment are critical determining factors and are essentially exogenous. Nonetheless, a central lesson from the experiences of Taiwan and South Korea must be borne in mind: to a non-negligible extent, nation-building can be achieved gradually as the consequence of successful long-term development strategies. In short, nation-building is partly endogenous to sound development policies. To carry out these policies, however, there is still need for minimum state capacity and a strong commitment of the country’s leadership to the idea of development as a lengthy process embodying structural transformation and deep societal change. The former condition, state capacity, will be examined in detail in Chapter 9. As for the latter condition, commitment to development, it implies that the interests of business oligarchs or Big Men are kept at bay so that they do not intrude on the domain of policymaking. Unfortunately, as argued in the rest of the present chapter, it is often the case that the state is captured by powerful private interests.

IV Quality of Political Leadership and State Autonomy: The Risk of Business Capture of The State

State capture by business interests, as we have found out, is a critical and much neglected obstacle to structural transformation and development. To present our findings effectively, we have opted for a two-step approach. First, in the light of the successful experiences of our two comparator countries of East Asia, we propose a general framework enabling us to shed light on the conditions under which business interests can be tamed for the benefit of general development. Second, we examine the way state–business relations work and impede development in Benin, Tanzania, Bangladesh, and Mozambique in that order.

A Sketching a General Framework

We now turn our attention to the first task, which amounts to highlighting what is perhaps the most critical institutional difference between Taiwan and South Korea, on the one hand, and many poor developing countries, on the other hand. To recall, the state in the two Southeast Asian tigers has been effectively insulated against potential pressures from private sector interests. In this sense, there were strong states, able to impose a coherent and sustained direction on the economy and the society. Because their leaders did not initially enjoy great popular legitimacy, their power had to rest on authoritarian rule whose effectiveness depended on the support of a powerful organisation such as a political party (the KMT in the case of Taiwan), the army, or the police and intelligence services. And it is only after the regime’s economic and social achievements became largely visible that its legitimacy was gradually building up, thereby making relaxation of restrictions on freedoms, political liberties in particular, eventually feasible.

In many poor developing countries, rulers with relatively low initial legitimacy and no strong supporting organisation at hand were forced to seek access to political power through elections of some sort, whether in the open space of the whole nation or in the restricted arena of a single party. If, indeed, there is no strong ruler or autocrat at the top of the state and the dominant (single) party, competition for the leading position inside this party is typically stiff. In such conditions, and particularly on the occasion of elections, ambitious politicians need to court wealthy individuals or Big Men (men with deep pockets) to finance their political campaigns and the distribution of perks to the heads of their voting blocs and their clientelistic networks between election rounds. In return for their financial support, the Big Men demand advantages and privileges which only politicians can provide, such as import, trading or manufacturing licences, public procurement arrangements and direct adjudication of juicy government contracts, privileged access to on-sale state assets, tax exemptions, licences, special land grants, favourable labour laws, interference in the settlement of judicial and administrative cases, and so on.

When open electoral contests take place in the above-described context, a major feature of political parties is that they are not organisations articulated around a clearly defined programme, but rather loose setups based on the strong personality of the leader and whose main role is to establish electoral alliances for the purpose of winning the forthcoming election. They are single-purpose vehicles designed solely to catapult their leaders to power (Economist, April 2, 2022b 36). Not surprisingly, party switching is a common phenomenon, sometimes called ‘turncoatism’ (in the Philippines, for example), and electoral alliances made in every legislature are essentially opportunistic (for illustrations, see Qerubin, 2012, 2016, for the Philippines; Malik et al., 2022a, 2022b, for Pakistan). Just take the example of the three most important politicians of Kenya: Mr Odinga has belonged to six political parties, Mr Ruto to five, and President Kenyatta to four. Moreover, in February 2022, Kenyatta endorsed Mr Odinga, once his bitterest rival, and denounced Mr Ruto, his deputy for the past ten years. Politics in Kenya, as in many other countries, such as Benin and Tanzania in our sample (see details later in this chapter), is thus like looking through a kaleidoscope: ‘the bits are still the same but every time you shake it they form different patterns’ (Economist, 2022b: 36).

The outcome of this personalised and non-programmatic political system, in which politics is pervaded by clientelistic practices and electoral strategies are focused on contingent political exchange such as patronage and vote-buying, is the loss of autonomy of the state and its consequent inability to guide the country on a path of sustained development compatible with the general interest. In addition, there is the deleterious effect of corruption and sleaze inherent in crony capitalism: public trust in public institutions such as the judiciary, tax authorities, and customs service is gradually eroded while perceptions that the country’s political economy is rigged in favour of Big Men and their political associates inexorably undermine support for the regime.

An important determinant of the Big Men’s bargaining power is the relative demand for politics money, that is, the ratio of politicians seeking to reach top-level positions to the number of business people susceptible of financing their ambitions. An immediate implication is that the more fractionalised the political space – the higher the number of political candidates – the greater the ability of business oligarchs to dictate their conditions on these candidates. And, conversely, when the political arena is less competitive, either because political parties or groupings are rather few or because the number of factions within the dominant party is rather low, we expect the bargaining strength of the business oligarchs to be relatively weak. The relationship between the relative number of political candidates and the scope for business capture is not monotonous, however. As a matter of fact, if the number of these candidates is high compared to the number of business oligarchs, the latter will be unwilling to finance the former because the probability of their being elected is then too small. This incentive dilution mechanism can be overcome only by driving politicians to regroup and form coalitions for the purpose of elections, an outcome which they should quickly understand is in their own interests. If that does not work, powerful business people may be tempted to run for elections themselves, a last resort solution which they are typically eager to avoid, especially if they belong to foreign communities. As we are soon going to verify, Beninese politics aptly illustrates the two possibilities, political regrouping and the move of oligarchs to the forefront of politics.

For reasons easy to understand, the endogamous relationships between state and business are intrinsically opaque. Lack of transparency is especially valued by businesspeople belonging to ethnic minorities, such as Chinese entrepreneurs in Malaysia and Indonesia, Indian entrepreneurs in Tanzania, Kenya, Uganda, and South-Africa, or Lebanese traders and businessmen in West Africa. Being vulnerable to xenophobic attacks when they are economically successful, they are eager to act behind the stage, believing rightly that the more occult their power and their influence the more effective they will be. Deviating from this strategy can be extremely costly, as recently epitomised by the sudden flight of the Gupta brothers from South Africa, where they publicly appeared as the financial arm and the policymaking brain of the highly corrupt President Jacob Zuma. It is only under exceptional conditions of political uncertainty that Big Men – typically not members of ethnic minorities – can consider it rewarding to personally claim the supreme position of political power. President Talon of Benin vividly illustrates this possibility.

Table 8.1 schematically presents and illustrates the political regimes that arise under different combinations of initial conditions and effectiveness of social and economic development policies. Two types of initial conditions are considered: the initial level of legitimacy of the ruler and whether the latter could rely on a strong supporting organisation when starting his/her rule. By strong organisation, we mean an organisation, such as a single party, an army, or police and intelligence services, which meets the following requirements: (i) it fulfils a public function and does not enjoy an electoral mandate; (ii) it possesses a unified internal structure; and (iii) it is not subservient to particularistic interests, business interests in particular, whether domestic or foreign. Thus, an army or a political party lacking a strong leadership and fraught with factionalism, or an army at loggerheads with the intelligence services or the police, or a puppet army at the beck and call of foreign interests, are all examples of weak organisations according to our definition.

Table 8.1 A summary table of potential political regimes as per their initial conditions and effectiveness of development policies

Initial conditions crossed with quality of development policies	Initial legitimacy
	Strong		Weak
	Supporting organisation: Strong	Supporting organisation: Weak	Supporting organisation: Strong	Supporting organisation: Weak
Developmentally sound policies	Atatürk (Turkey, 1923–38)	Ellen Johnson Sirleaf (Liberia, 2006–16)	Chiang Kai-shek and Chiang Ching-kuo (Taiwan, 1950–75 and 1975–88)	Patrice Talon ? (Benin, 2016–)
	Habib Bourguiba (Tunisia, 1957–87)	Pravind Jugnauth (Mauritius, 1983–)	Park Chung-hee (South Korea, 1962–79)	John Magufuli ??(Tanzania, 2015–21)
	Deng Xiaoping (People’s Republic of China, 1982–7)		Ayub Khan (Pakistan, 1958–69)
	Xi Jinping (People’s Republic of China, 2012–)		Paul Kagame (Rwanda, 2000–)
Developmentally flawed policies	Julius Nyerere (Tanzania, 1964–85)	Zulfikar Ali Bhutto (Pakistan, 1971–8)	Mathieu Kérékou (Benin, 1996–2006)	Failed states:
	Kwame Nkrumah (Ghana, 1952–66)	CCM post-Nyerere (Tanzania, 1985–)	Anwar al-Sadat (Egypt, 1970–81)	Somalia
	Frelimo (Mozambique, 1975–)		Zia ul-Haq (Pakistan; 1978–88)	Post-Gaddafi (Lybia, 2011–)
	Gamal Abdel Nasser (Egypt, 1952–70)		Omar al-Bashir (Sudan, 1993–2019)	Haiti
	Houari Boumediene (Algeria, 1967–78)

We distinguish between two types of policies, developmentally sound or developmentally flawed or, equivalently, enlightened and non-enlightened. Developmentally sound policies have four characteristics that must be simultaneously observed, although to varying degrees: (i) they rely on private initiative and the associated individual incentives, meaning that the market mechanism is allowed to operate and static efficiency considerations are given due attention; (ii) they create the physical infrastructure needed to make private initiative profitable; (iii) they provide for human capital accumulation, thereby laying the basis of dynamic efficiency; and (iv) they ensure that income inequalities are held in check, so that whatever national integration exists is reinforced rather than eroded.

Developmentally flawed policies are those that fail to satisfy at least one of the above four conditions. For instance, economic and other policies driven by dogmatic ideologies rather than by pragmatic considerations cannot meet requirement (i), even though they may well satisfy some or all of the remaining requirements, sometimes to an admirable extent. The ideology guiding economic policymaking is political when a government rigidly adopts socialist policies of central planning, which repress the market mechanism and give pride of place to a bossy state. This situation is observed in most so-called socialist regimes, including states bent on social achievements and emancipation at the expense of competitiveness considerations (the state of Kerala in south India comes to mind here). Ideology is also political when a radical laissez-faire approach is advocated without due consideration to the need for redistribution and sufficient attention to the importance of collective goods, including human and physical capital. In these instances, objective (i) is pursued at the expense of all the other requirements. On the other hand, ideology is religious when rules and policies are governed by religious prescriptions and when recruitment or promotion (at least in public organisations) is based on profession of faith allegiance and not on competence criteria. Regimes that ground their policies in religion are likely to fail with respect to both conditions (i) and (iii). Finally, regimes dominated by big business interests, often referred to as crony capitalism, may be lacking not only with respect to (i) – since market competition is then throttled – but also, possibly, with respect to (iii) and (iv).¹¹

Before looking at country-specific lessons, two important remarks are in order. First, the actual effectiveness of enlightened or developmentally sound policies depends on the existence of an enabling international environment in the form of economically advanced countries allowing poor developing countries to temporarily gain special access to their markets and shield their domestic industries from the effects of foreign competition. Second, the question of democracy has been deliberately eluded, the main reason being that development has often been pursued in contexts where individual liberties were initially restricted. The historical experiences of Taiwan and South Korea, as well as the contemporary examples of communist China and Vietnam, are cases in point. Whether the trampling upon individual liberties is justified by long-term development objectives is an immensely complex issue that clearly lies beyond the scope of the present book.

Clinging to our dichotomous categorisation, there are eight possible regime configurations. For the sake of illustrating all of them, we provide examples drawn not only from our four case studies but also from other regime/country experiences. It turns out that endogamous state–business relationships have created serious obstacles to stable and sound development in all our country case studies. Benin is particularly worthy of attention not only because of the aforementioned exceptional feature (the rise of an oligarch to the presidency), but also because it has been analysed in comparatively great depth. We therefore start our discussion by telling the Beninese story. Thereafter, our attention will be turned to Tanzania, Mozambique, and Bangladesh in that order.

B Benin

Until recently, Beninese politics has been characterised by a profusion of political parties: their number thus reached the astronomical figure of 250 during the 2010s. Considerably exceeding the number of ethnic groups in the country, these parties were designed as true vehicles for power by ambitious politicians backed by wealthy businessmen forming factions inside ethno-regional groups. Obeying a clientelistic logic, they do not confront each other on the level of programmes and policies based on varying visions of the country’s future. Instead, inter-party competition is really a struggle for power conceived as a zero-sum game, the payoffs of which consist of the huge rents associated with state control. Opportunistic coalitions made before presidential elections ensure that the contest is actually limited to a few Big Men or oligarchs. Besides causing important allocative and dynamic inefficiencies as well as encouraging all sorts of malpractices, this system has created a lot of political instability underpinned by regular shifts of alliances and acts of personal treason vis-à-vis political allies. It is therefore not surprising that the country’s press has been rife with accusations of embezzlement and rent capture related not only to prestigious construction projects but also to pro-poor programmes and the delivery of essential local public goods (water, electricity, and other vital infrastructure projects).

The business career and political role of Patrice Talon, the present president of Benin, is illustrative in this respect. By betting on the right presidential candidate at each critical stage of his personal capital accumulation process, even when this implied dropping support for the incumbent in favour of another candidate deemed to have better chances of winning the subsequent contest, Talon succeeded in gradually gaining control of the main sectors of the Beninese economy, including the customs service. Of course, maintaining control is as important as gaining it, hence his continuing interest in politics. In a major turning point, however, Talon decided to eventually run for presidency himself (in 2016). Political instability and increasing uncertainty about results in an atmosphere fraught with extremely tense interpersonal rivalries between a few oligarchs persuaded him that the usual tactics of pushing frontmen onto the political stage to represent one’s interests had become far too risky. To exert direct control over the state apparatus appeared as the only reliable solution, and one justified by the need to bring back law and order, fight against corruption, and end instability.

Talon’s winning gamble caused the defeat of the old political elite, and the question then arises as to whether this major political change can be a game changer. On the one hand, because Talon has succeeded in consolidating his power and taking a firm control of the polity and the economy of Benin, democracy has suffered. This has caused a major stir in a country where freedom of expression is highly valued and where free elections and changes of incumbents had become a regular feature of the political scene during the last decades. On the other hand, precisely because he holds key decision-making levers in his hands, he might perhaps become an enlightened autocrat eager to promote his fame and reputation as the man who rescued his country from stagnation and pervasive corruption. This is actually the image of himself that he is keen to project, as he declares that his role model for leadership is Paul Kagame, the authoritarian but effective president of Rwanda. In contrast to Kagame, however, Talon is an oligarch, which raises serious doubts about his ability to design enlightened policies oriented toward the general interest of the Beninese people. It could nevertheless be retorted that precisely because he exerts a large control over the economy, and has now become immensely rich, he does not need to bother any more about wealth accumulation. Therefore, he can devote all his energies to a high-order mission susceptible of bringing him superior satisfaction. It is of course too early to form a judgement on such a thorny issue, but the forthcoming future will be particularly interesting to watch.

So far, the signs are rather good. Surrounded with a team of highly competent technical collaborators – many of them assembled in a special office directly attached to the presidency, somehow in the manner adopted in Taiwan and South Korea – Talon has established sound priorities for reforms that address key constraints on the country’s economic development. They include reforms of the education system (with emphasis on the creation of technical schools and training institutions), plans for infrastructure expansion (including the improvement of the generation and distribution of electricity), and measures aimed at diversifying the economy and adding value to agricultural and raw material (e.g., cotton) products. Moreover, Talon has made efforts to keep the streets clean and clear the rubble in big cities such as Cotonou. Even more importantly, he has declared war against corruption. In just a few years, the petty corruption that was so extensively observed under all the previous regimes appears to have been significantly reduced as a result of drastic sanctions imposed by his government. Since day-to-day extraction of bribes by officials (the police, in particular) hits poor and ordinary people especially hard, energetic steps to combat this practice is bound to earn him popular support. What remains to be seen, however, is how a president-cum-oligarch will be able to surmount the serious conflicts of interests inherent in his double capacity (hence the question mark in the cell of Table 8.1 where Talon’s regime is featured).¹²

C Tanzania

Tanzania offers an interesting contrast to Benin in the sense that, instead of proliferating political parties representing micro ethno-regional groups, a single party (the CCM, formerly TANU) has largely dominated national politics since independence.¹³ The central lesson, though, is that this setup has not prevented the same clientelistic logic as in Benin from operating inside this party: in this restricted arena, bitter struggles oppose faction leaders backed by different businessmen, foremost among whom are big entrepreneurs from the Indian community (and, at a later stage, from the Arab trading community).¹⁴ Because it is essential to maintain the unity of the party at election times, the head of CCM refrains from expelling powerful party members who illegally trade business money against undue privileges. This is a game with a bad corruption equilibrium where, given his belief about how other party members behave, no player has an incentive to play a clean move. Some members make illegal deals while others refuse to sanction bad behaviour, and the head of the party does not have the power to break this equilibrium owing to his fear of causing its dissolution in the transition to a new equilibrium. Incidentally, this situation resembles that observed in Malaysia where, as the dominant party (the United Malays National Organisation, UMNO) became increasingly fractionalised, the financial support of Chinese businessmen became more crucial for political campaigns (Jomo and Gomez, 1997: 364). This is in line with our earlier prediction that fractionalisation of the political space helps to enhance the power of big business interests vis-à-vis the state.

Even across parties, political clientelism prevails. This is illustrated by the 2015 presidential election for which the CCM nominated John Magufuli as its candidate instead of former prime minister Edward Lowassa. The latter was actually the front-runner but had been displaced after his involvement in a big corruption scandal was made public. Revealingly, rather than withdrawing from politics, Lowassa defected to the main opposition party who selected him as its candidate for the presidential race. This choice attests how much the opposition plays the same game of political clientelism and cronyism as the incumbent party. By contrast, the CCM’s choice of Magufuli was vindicated by his anti-corruption image acquired while minister of public works in the previous government. This decision was probably not a reflection of a genuine desire for changing the rules of the political game, but a rather opportunistic defensive move. As a matter of fact, the party had been badly discredited by a wave of resounding corruption affairs, especially toward the second term of Kikwete (Magufuli’s predecessor), which led donors with a pivotal role in the funding and designing of Tanzania’s development strategy to suspend their aid programmes. As in many countries emerging from a socialist planning regime, news about corruption scandals actually started to proliferate after the process of transition to the market economy was initiated (that is, in the post-Nyerere period).

Because of his premature death from COVID, Magufuli’s mandate at the helm of the country was dramatically shortened. There is no doubt that his rule was deeply authoritarian, and his methods echoed those used by Kagame in Rwanda: intimidation and disappearances of critical journalists, jailing of political opponents, and so on. Yet, at the same time, Magufuli was bent on stamping out corruption, stopping the internal disunion inside the CCM, and imposing a strict discipline on its leaders. His idea was apparently to re-establish full control of the party in the hands of its president (implying a return to Nyerere’s system), to terminate the practices of political clientelism, and to reduce the influence of the oligarchs by prohibiting deals with private firms. This last strategy led him to be especially tough with both domestic and foreign business concerns. Moreover, he launched a vigorous anti-corruption campaign for which some success was beginning to show during his shortened mandate. Similarly for Talon, therefore, we put a question mark in the corresponding cell of Table 8.1.

D Mozambique

The Frelimo in Mozambique, which also benefited from strong initial legitimacy as a successful anticolonial movement, occupies about the same dominant position as the CCM in Tanzania. And, most relevant for our discussion, its internal politics is also dominated by fierce struggles for access to power. Financial strength being a key determinant of the ability to rise within the party’s machine, this intra-party elite rivalry creates a fertile ground for the spread of money politics and influence peddling. The interpenetration of business and politics was reinforced after the liberalisation and privatisation drives imposed by the IMF and the World Bank in the 1990s. What happened was sheer political capture of the privatisation process itself. Thus, privatised firms were taken over by party members, civil servants, and army officers, thereby ensuring de facto continuity with the previous state of affairs.¹⁵ As for entrepreneurs with ties to the opposition, they were systematically excluded. Given its overwhelmingly dominant position, whose persistence is partly caused by its ability to manipulate elections, the Frelimo was in a position to effectively rein in the country’s business community, since the latter was deprived of any credible alternative to protect its interests. In the quid pro quo at the heart of a circular and self-reproducing patronage system, the Frelimo machine was thus oiled by the money obtained from the rents it itself awarded to supporters-turned-businesspeople. In other words, the corruption money and equivalent in-kind advantages flow up and down the ladder of political clientelism and, as long as the gives and takes are predictable, a corruption equilibrium is well established.

The rent-awarding process is based on internal competition. It takes place at the level of presidential primaries in which business leaders seek political frontmen with whom to forge an alliance while party insiders willing to stay in central organs and obtain high offices in the government reciprocally look for men with money to achieve their ends. The winner of the internal political contest becomes the president of the Frelimo, who automatically becomes the president of the Republic. Precisely because of the logic of competitive clientelism prevailing inside the Frelimo, its de facto character of a single party state offers no guarantee of intertemporal policy continuity.¹⁶

What bears most emphasis is that things could have evolved differently. At the beginning of the reform process initiated at the behest of external forces (international organisations), the Frelimo was in a strong bargaining position reminding us of KMT’s position in Taiwan. It held the most important cards in its hands and was apparently able to manipulate election results in its favour. It could therefore have chosen to use party discipline and its leverage on the nascent business community to launch the country on a consistent development path. In contrast to the KMT, however, it chose not to follow that line and instead promoted a system of crony capitalism based on a competitive clientelistic system from which transient leaders would emerge. In the end, it is perhaps the lack of a strong and enlightened leadership at the head of the party that best explains why the option of a developmental state was ignored.

The discovery of oil and gas reserves in Cabo Delgado (during the years 2006–10) did not help. The existence of these valuable resources created new rent opportunities, real or anticipated, that considerably raised the stakes involved in the struggle for political power and influence. In this context, it is not surprising that the trend towards improvement of governance indicators was reversed, and that huge scandals came to the surface, such as the hidden debt scandal in 2016, which deeply affected the country’s economic and political climate and its relations with the international community.¹⁷ Given the weakness of anti-corruption institutions and their lack of independence from political influence, it is hard to think of significant improvements of this situation in the near future.

E Bangladesh

In Bangladesh, two political parties, the AL and the BNP, have dominated national politics since the end of the military dictatorship of General Ershad in 1990: they correspond to two groups with unclear ideological differences but neatly differentiated identities defined by strong leaders known as the two begums. The stands of these two parties have always reflected the deep personal antagonisms between Sheikh Hasina (the daughter of Sheikh Mujib, the founder of the nation) and Khaleda Zia (the widow of General Zia), and their winner-takes-all approach to politics. The year 2008 witnessed the end of regular rotation of these two parties in power as the AL was able to take full political control of the country. What our study of Bangladesh reveals about state–business governance is the important political leverage of the textile business sector. This sector is no doubt one of the main drivers of economic growth and exports in the country. It is nevertheless striking that the textile business elite, thanks to their intimate connections with influential politicians, has been able to extract enormous advantages in a variety of forms: tax exemptions (textile exporters are exempted from import duties on intermediate products), export performance benefits, subsidies of various kinds, export guarantee schemes, and lax labour laws condoning low wages, long working hours, absence of regular contracts, and poor working conditions (as epitomised by the Rana Plaza disaster, in which more than 1,000 workers died when their factory building collapsed). With trade unions suppressed and union organisers intimidated, workers’ rights have no chance of being properly protected.

It can be argued that, since they are part and parcel of an industrial policy and this policy has proven to be remarkably successful, the above measures evoke those adopted by the governments of Taiwan and South Korea to encourage economic development and manufacturing growth in particular. Two remarks are nevertheless worth making here. First, and in contrast to Taiwan and South Korea, the government support for the textile sector has been rather exclusive in the sense that it has not been justified as a component of a comprehensive economic development strategy aimed at the diversification of manufacturing and export activities. There is therefore a legitimate suspicion that the favourable treatment of the textile sector and the relative neglect of other sectors have been the outcome of the disproportionate political influence of the textile lobby. Second, it is even harder to understand why the well-being of the labour force operating in the favoured sector has been so much ignored by the authorities, hence reinforcing the suspicion that politicians serve the interests of the textile firm owners rather than the whole sector. The compliance of the former is explained by the regular donations they receive from the latter for their political campaigns and other purposes.

V Conclusion

In the foregoing analysis, primary attention has been given to the oft-observed predicament of state capture by business interests and the conditions under which it is likely to occur. An important and thought-provoking proposition is that, other things being equal, the extent of state capture is larger when political competition is fiercer in the sense that the number of contenders is higher. By implication, a change of political regime that opens up the political space and sparks political competition may have the paradoxical effect of increasing the capture of the state by powerful business people. And to the extent that their private interests are at odds with the collective good, their capture of the state is susceptible to throwing the country on a development trajectory that gives precedence to rents over social efficiency.

On the other hand, the experiences of Taiwan and South Korea, as well as those of the People’s Republic of China and Vietnam, testify that a state immune to capture by business interests and able to devise and implement enlightened development policies can acquire legitimacy over time and thereby contribute to reinforce national integration. Conversely, a charismatic leader enjoying a good measure of initial legitimacy may waste it if he adopts misguided policies, which ignore long-term objectives, the necessary role of individual incentives, and the need to strengthen national cohesion through income redistribution, poverty reduction, and the building of strong physical and social infrastructures.

As illustrated by the lives of Nyerere and Nkrumah – yet not Kérékou and so many other autocratic rulers – strong leaders can retain some popularity thanks to the aura they gained as ‘father of the nation’, if they achieved positive results on the social and political fronts. Progress in health and education, and immunity to corruption, are examples of the former and the latter, respectively. The fact remains that the dire economic situation of the country resulting from their disastrous economic policies creates a difficult challenge for their successors who do not have their charisma and pedigree as founder of the new nation.

Leaving aside extreme cases of economic disaster following policy experiments of centralised planning, we must admit the existence of potential trade-offs between economic and political objectives. In particular, the nation-building project may arguably impose constraints on the extent to which efficient economic policies can be pursued. This is especially true at the critical time when varied population groups with particularistic interests need to be morphed into a national entity with sufficient cohesion. This being reckoned, there is solid ground to believe that, over the long run, national integration and the legitimacy of a regime depend foremost on the implementation of viable and effective development strategies.

Consisting of heterogeneous elements in spite of a common language and ethnic origin, the Taiwanese nation was not ‘a given’. As in Pakistan, it was the result of the mixing of immigrants and indigenous population groups: Han Chinese from mainland China and (mostly) Han Chinese from Taiwan in the case of Taiwan, and Muslims from India and Muslims from the Pakistani provinces in Pakistan. In contrast to Pakistan, however, the KMT regime of Taiwan succeeded in gradually building up a strong nation thanks to an effective pattern of egalitarian and rapid development led by an autonomous state. By contrast, Pakistani politics has been continuously dominated by self-centred political dynasties and reactionary forces, foremost among which are puritan religious movements. The latter have been instrumentalised by the military (and the intelligence services) to counter overdone external threats. Beset by political clientelism, the pressure of Islamists and greedy, power-hungry army officers, the nation-building process went astray, and the country was never set on an effective development path.

Bangladesh was also plagued by reactionary religious movements and entrenched political dynasties, although the latter are not rooted in rural areas as they are in Pakistan, and although the influence of the former has been much more superficial. Its government did not miss profitable external trade opportunities when they emerged, and this eventually allowed it to kickstart the country’s industrialisation process. The challenge, here, is double: how to rein in the influence of powerful textile business lobbies so that economic diversification can take place and the working population can obtain a higher share of the growth proceeds; and how to reduce the country’s dependence on foreign funds, remittances in particular?

Politics does not only influence a country’s development trajectory through leadership quality and the degree of autonomy of the state vis-à-vis business interests in particular. It also produces effects through the type of operating bureaucracy and the way property rights are established or enforced. Yet these two aspects of state capacity cannot be exclusively reduced to a political problem, hence the wider perspective that their analysis requires. This will become clearer as we proceed with our investigation in the next chapter.

Before embarking on this chapter, a question that comes to mind is what happens to countries that have proven unable to build a sufficiently strong state and a sufficiently integrated nation? It is here that the analysis of Charles Tilly (1985) provides valuable insights. His central point is that the end of World War II marked an important turning point in the sense that the independence of all sovereign nations became guaranteed by the newly formed United Nations. An immediate consequence is that failed or weak states are no more allowed to disappear, get absorbed by a stronger neighbour, or split into several parts, under the action of external forces, military or political. Neither are they compelled to transform themselves with a view to improving their performances and their capacity to withstand such forces, preserve their integrity, and simply survive. Countries which would have dissolved in the times preceding World War II may now persist, however woefully, thanks to internationally protected borders and to foreign assistance. In other words, evolutionary changes of the Darwinian kind, or adaptive transformations imposed by necessity (in the manner suggested by Arnold Toynbee), cannot be set off to spark institutional reforms as they could do in modern European history, for example.

9 State Capacity and Property Rights

After having examined the role of politics in spurring or slowing down structural transformation and development, we are now ready to probe into issues of state capacity, a theme which has received growing attention among economists during the last decades (see, e.g., Levy, 2007; Besley and Persson, 2009, 2010; Bourguignon and Verdier, 2012; Dincecco, 2017; Dincecco and Katz, 2016; Khemani, 2019; Wilson, 2019). This will complete our discussion of the role of governance-related institutions. In a second step, we then look at the second generic type of institutions deemed crucial for development, namely property rights.

I Weak State Capacity

The following presentation is articulated around three major issues: bureaucratic failures; inadequate incentives and professional norms (as illustrated by the education sector); and ineffectiveness of the judiciary. They are discussed in this order.

A Bureaucratic Failures

As we have done in the preceding chapter, we start by considering the successful experiences of Taiwan and South Korea before attempting to understand the sources of bureaucratic failures in three in-depth case study countries. We follow a general approach to the problem of state capacity wherein it is seen as a problem of incentives and norms rooted in politics. In the words of Stuti Khemani (2019: 2–3):

Politics fundamentally shapes the culture of bureaucracy all the way to the frontlines of service delivery. Processes or platforms of political contestation, and the leaders it produces, from those at humble local levels, such as in a village, to those occupying the national seats of power, have implications well beyond elections and politicians, through how they influence the incentives, beliefs and norms (or expectations of how others are behaving) of state personnel and thus, the day-to-day functioning of myriad agencies within the bureaucracy.

1 Positive Lessons from Taiwan and South Korea

Taiwan and South Korea have not only been endowed with determined and enlightened top leadership but also with an effective bureaucracy. In this respect, they were fortunate to inherit from the Japanese colonial power a modern, meritocratic, and authoritative bureaucratic structure that fitted well with the nature of the new regime. Recruitment and promotion criteria in the civil service thus continued to be based on merit, state employees received lifelong tenure, professional norms were strong, and corruption was limited. In Taiwan, moreover, the jobs of state bureaucrats down to quite low levels were now occupied by newcomers from mainland China, which automatically ensured political loyalty. Being an alien force, the new bureaucrats developed a corporate identity which was all the stronger as they had to identify their own interests with those of the state, their protector. These were obviously ideal conditions for a clean, cohesive, and competent bureaucracy. Another favourable factor consisted of the overarching responsibility of the NRC, the agency in charge of the country’s industrial policy. Made of the best experts available, it acted as a unique centre of command under the direct supervision of the supreme leader. Here, too, historical circumstances played a key role since the Taiwanese leadership learned bitter lessons from their defeat at the hands of Mao’s communists in China. Foremost among the causes identified was the existence of fragmented and politicised bureaucracy which, moreover, was too compliant with the requests of the private interests of powerful business lobbies.

There is yet another, less well-known aspect of state capacity in Taiwan, namely the administration’s approach to SMEs. Since the operation of these firms was deeply anchored in traditional, horizontal networks relying on informal contract enforcement mechanisms where interpersonal trust played a major role, the willingness of the Taiwanese authorities to allow varied forms of production organisations to prosper and to actually support SMEs without unduly interfering with their specific mode of operation, is a good example of a successful interaction between formal and informal institutions. The pivotal contribution of SMEs to the country’s growth and manufacturing exports is solid proof that this flexible approach of the government was fully justified.

In South Korea, as we have seen earlier, the commanding responsibility for economic development rested in the EPB, and the external threat posed by the close presence of the communist regime of North Korea, which benefited from an early industrial base which South Korea did not possess, was a powerful incentive to proceed fast and with maximum coherence and efficiency. Characteristically, both the NRC in Taiwan and the EPB in South Korea were modelled on the famous MITI (Ministry of International Trade and Industry) of post-war Japan. Filled with high quality and highly motivated bureaucrats – a legacy of high morals inherited from the classic bureaucrats of the pre-war period – this agency applied administrative guidance in order to push growth in a desired direction and ‘managed’ competition accordingly.¹

Bureaucratic effectiveness in both Taiwan and South Korea stemmed from an additional source that deserves special mention: the top layers of their bureaucracies struck clever, incentive-based deals with private business firms, as though they had understood the basics of modern contract theory. Their general approach thus provided that special advantages granted to these firms (licences and permits, export loans, tax exemptions, subsidies) were conditional on their demonstrated ability to reach the objectives assigned to them (export targets, for example), and to become profitable within a reasonable span of time. Targets could be modified to allow for changes in the economic environment. Moreover, instead of awarding monopolistic positions, they tended to impose competition on the private sector so as to bring the discipline of the market to bear on its firms. In short, the stimulus of internal competition was systematically added to the stimulus of external competition. In South Korea, incentives to comply with production and export targets in heavy industry were reinforced by tournaments organised among chaebols. The government was thus able to overcome the information asymmetry which, in fully new export ventures, prevents the effective monitoring of firm performances by the executive and other state entities. For two chaebols committed to some new industrial export target, the tournament formula made it suboptimal for both not to do their best to reach their target. This is because they were keen to avoid the prospect of failure, and of practically going bankrupt, while the rival company would succeed.

Outside the industrial sector, and in line with the approach of inclusive development, careful attention was devoted to the creation of wisely conceived institutional vehicles for the active support of agricultural and rural development (training institutes, cooperatives, promotion of innovation, etc.). Worth noting here is the fact that bureaucrats carefully avoided substituting themselves for private middlemen, letting competition percolate down to local levels. At the same time, producer cooperatives were encouraged to benefit from scale economies in modern input procurement, output transport and marketing, veterinary services, training and adoption of new technologies.

It is also remarkable that the move toward economic liberalisation (and even political liberalisation in the case of Taiwan) was authoritatively imposed by the state itself. This radical policy reform was initially opposed by important sections of the population, the business community in particular. It is only at a later stage, when the benefits became more and more manifest, that trade liberalisation was gradually accepted by important group coalitions, and that the prescient decision of the state authorities was largely praised. Incidentally, this example has been used by Fernandez and Rodrik (1991) to illustrate their argument that, when there is uncertainty about the distribution of the costs and benefits of a reform, a radical move from above may well be justified.

2 Key Aspects of Bureaucratic Failures in Bangladesh, Benin and Tanzania

That the experiences of Taiwan and South Korea were rather exceptional is borne out by our case study material. A major institutional deficiency appears to be a serious lack of coordination between different ministries, resulting in confused, overlapping, and poorly enforced regulations. This problem is often ascribed to poor information-sharing, itself caused by the absence of good communication equipment. Here, we want to stress another aspect more in line with a political economy approach. In the very logic of political patronage, members of the government are inclined to view their ministry as their own fief, that is, they see it as a source of rents which should naturally accrue to them for personal appropriation and for redistribution to the network of their supporters and brokers. Combined with funds obtained from state budgets and from business oligarchs (see Chapter 8), rents extracted from the bureaucracy through appropriate channelling up help politicians to meet the costs of electoral competition and nurse a constituency between elections.² Under these conditions, the sharing of information and any form of cooperation between different parts of the executive tend to be obstructed with the effect of seriously undermining the coherence and the effectiveness of development policies. These problems of coordination come on top of the costs potentially arising from the fact that the generation of illicit income may conflict with economic efficiency.³

Land laws and their implementation in Benin are an example that comes to mind here. Reforms of land tenure have proven unbelievably complex, volatile, and non-monotonous, and one important reason is to be found in the assignment of responsibility for land regulation to multiple agencies and the continuous shifts of missions between these agencies. The Ministry of Agriculture, the Ministry of Town Planning, and the Ministry of Finance have been the main contenders for playing a major role in dealing with land matters. At a lower level, rural municipalities have strongly resisted against attempts to reduce their own land prerogatives. For example, thanks to their efforts, missions that belonged to the National Agency for Land Administration under a law were shifted to them under a subsequent law. They also successfully opposed the officialisation of rural land transactions, which would have implied the end of sale conventions of which they were in charge. In the same way as the customs service and the tax administration, the land administration is the object of fierce political struggles because of the huge rents that its control can potentially create. Decisions in these strategic public sectors represent high stakes for powerful groups – such as traders and businessmen for the former two, and notaries, barristers, architects, and land surveyors for the latter – which are therefore ready to pay for obtaining decisions to their liking. Payments are direct when they are made in the form of bribes to officials in charge, or indirect if they consist of donations to the political party that is in control of the administration or the service concerned.

When elections are won by different parties, or by different factions belonging to the same (dominant) party, time-varying allocations of key ministries or public agencies will not bring an end to corruption as long as the political game continues to be played according to the rules of clientelistic politics. What may change, however, are the laws and regulations enacted by the ruling government. And this is a serious problem to the extent that changing laws and regulations are susceptible of causing uncertainty, itself a source of disincentives to invest. This possibility is again illustrated by land legislation in Benin where new laws involved backtracking on previous ones, or introduced additional confusion.

Another reason why land laws are unenforced in Benin lies in a misalignment between the law and state capacity: this happens when a complex law is enacted for which the state does not have the administrative resources required for effective implementation. Politics may also play a role here if complicated laws are enacted in the full knowledge that their implementation will be difficult, or if they serve to satisfy contradictory interest groups without much concern for the actual enforceability of the legal compromise. The latter possibility is especially likely when formal rules aimed at uniformising and simplifying the diverse customary practices and norms found on the ground run counter to informal and local power structures. The difficulty to reconcile the two points of view illustrates one key issue of nation-building as mentioned in Chapter 8. It not only concerns land matters but also family and other spheres of everyday life. Conflicts thus easily erupt when formal laws are guided by international norms borrowed from advanced Western countries, which exert direct and indirect pressures on poor countries for their adoption.

As examples, we can think of all the laws that confront deep-rooted informal or customary practices, such as laws that prohibit early age marriage or polygamy (as in many West African countries), and laws that prohibit rural land sales above a certain (low) threshold, impose official authorisation for the purpose of buying rural lands, or mandate the owner of an uncultivated landholding to rent it out (as in Benin). In these instances, institutional dysfunction at the state level arises not from sleaze and rent-seeking but from ideological motives or external pressures to adopt laws which, being ill-conceived and out of touch with reality, are almost doomed to be unenforceable. Bureaucrats in charge of their implementation face an impossible task, or they are compelled to resort to brutal force which people will try their best to circumvent through various stratagems. In these instances, prescriptions emanating from international organisations and foreign donors are doomed to yield disappointing effects. The root cause lies in a lack of political economy perspective.

In Tanzania, coordination failures at the level of the administration bear strong similarities to those noted for Benin. In land matters, for example, laws are even more complex and confusing than in Benin, which is partly due to unresolved tensions and swinging moves between two objectives: protecting small and medium landholders and encouraging investment by large agro-processing export companies. Such tensions are institutionally reflected in the existence of a dual tenure system that will be explained later. Institutional overlaps are found at the levels of both the land administration and the land dispute settlement systems. To illustrate the former, while land officers in the local government authorities are paid by, and report to, superiors in the Ministry of Land, Housing, and Human Settlement Development (MLHHSD), they simultaneously execute functions for local governments, which are themselves under the responsibility of the President’s Office. As for the latter, at the lower level the village land councils and the ward tribunals are under the responsibility of the local government authority, but right above, the District Land and Housing Tribunals (DLHT) are governed by the Ministry, and at the top, the High Court (Land Division) and the Court of Appeal are under the judiciary. By contravening the principle of separation of powers, this institutional set-up creates serious problems of accountability.

Examples of multiplicity and overlap of institutions are easily found in other parts of public administration, too. Thus, the National Land Use Planning Commission is largely redundant with the Direction of Urban and Rural Affairs in the Ministry of Agriculture. There is a clear lack of cooperation between the Tanzanian Revenue Authority, responsible for tax collection, and the Minister of Finance, which lays out the tax schedules. Furthermore, the production and distribution of electricity is managed by a public monopoly, Tanesco, but is regulated in parallel by the Ministry of Mining and a regulatory agency (Ewura), the missions of which are overlapping. As a last example, the demarcation between the mandates of local government executives and those of officers appointed by the central government is often blurred, while the relationships between local government authorities, the prime minister’s office, the Minister of Finance and various other ministries are extremely intricate. If it is sometimes hard to retrace the origins of these dysfunctions, the effects are almost always negative. Thus, Ewura may have its recommendations – for instance, about the pricing of electricity – overturned by a President fiat although they had been grounded in serious work performed by excellent experts. And firm managers do not tire of complaining that they must obtain approval from an abnormally large number of government agencies before they can market a new product or service.

Turning now to Bangladesh, we find a country plagued by essentially the same problems as those discussed above. To illustrate, the education sector is riddled with confusing and sometimes conflicting divisions of responsibility between multiple actors. Thus, with respect to primary schools, overall ministerial control lacks effectiveness because three main ministries and several smaller authorities are entrusted with management roles. Added to this dysfunction are tensions and contradictions arising from the devolution of responsibility across central, regional, and local authorities. In these conditions, chains of responsibility and accountability are unclear.

It is typically because the multiplication of ill-coordinated agencies, departments or services obeys the need to create and entrench niches where rents can be earned by state agents that reforming the public administration faces stiff resistance. Thus, in spite of two Public Service Reform Programmes, no clear sign of consistent progress has been detected. The culture of recruitment of personnel on other grounds than ability and skills, or of promotion based on seniority or partisan links rather than merit, has largely persisted. In addition, shirking behaviour, embezzlement of state resources, and bribe-taking remain widespread. Poor peer monitoring and absent or perfunctory supervision are the most immediate causes of this predicament.

Besides a lack of coordination between different ministries and administrative units (which is again particularly evident in land matters), pervasive corruption at all levels of the civil service, and low transparency of decision processes, an additional problem undermining state capacity is the frequent meddling of the highest state authority in administrative decisions, such as we have seen for Ewura in Tanzania’s electricity sector. The financial sector, which is severely dysfunctional, epitomises the adverse effect of this last factor. In particular, the lack of even formal autonomy of the central bank is perhaps the most egregious example of institutional impediments to development in Bangladesh. The governor of the Bangladesh Bank is thus in a clearly subordinate position vis-à-vis the government and the president and, given the tight links between state and business, vis-à-vis private bankers as well. Subservience to private interests has become even more pronounced as the Bangladesh Association of (private sector) Banks, the BAB, has recently gained increasing political influence. As a consequence, regulation of the whole banking sector is essentially ad hoc and typically unable to control the numerous malpractices committed by the country’s commercial banks. The dual authority ruling over the banking system – state-owned banks are governed by the Banking Division of the Ministry of Finance while private banks are under the purview of the central bank, itself under the thumb of the presidency – is an additional factor causing ineffectiveness in the regulation of the whole sector.

In the light of these major institutional failures, it is not surprising that the banking sector in Bangladesh, despite its undeniable role in financing the expansion of the textile industry, has shown very poor management performance. In 2017, Bangladesh thus occupied a miserable 147th position out of 179 countries according to the international Z-score, an indicator of the probability of default of the entire banking system. Its Z-score was also the lowest among South Asian countries. The main factor responsible for this disastrous situation is the low quality of the sector’s lending operations, which is itself the result of regulatory and policy capture: bankers are subject to political pressures to grant unproductive loans, or loans which they know will never be repaid by the borrowers. In addition, cases of embezzlement through legal insider lending – that is, to the bank’s owners or their family – have been reported. In such an unhealthy environment, NPLs is a major concern: while representing 25 per cent of outstanding loans in the early 1990s, their proportion shot up to an astronomical 41 per cent in 2000.

Effective reform measures were then taken, in part under the pressure of the IMF, but also as part of an anti-corruption policy led at that time by the BNP government. As a result, the ratio was successfully brought down to a reassuringly low figure of 6 per cent by the late 2000s. However, because the root cause of the problem, which lies in the political system of patronage prevailing in the country, was left untouched, the downward trend was soon reversed as the proportion of NPLs practically doubled during the following decade. Even more worryingly, while NPLs tended to be initially concentrated in state-owned banks, they have soon started to spread to private commercial banks too. Besides negatively affecting the banks’ prudential ratios, these bad loans have forced the banks to raise their borrower rates, thus discouraging private investments outside the privileged sectors (the textile industry, in particular), which have continuously enjoyed exceptionally favourable terms. To this shortcoming, we must add the frequent need for monetary injection in state-owned banks or in the bailouts of private banks.

B The Role of Incentives and Norms: The Example of Education

Education is a key factor of development, and it is even more true today for poor countries in need of production niches in high-value-added products and services. It is undeniable that enrolment rates at various levels of the education sector have significantly increased in many of these countries during the last decades. However, the achievement of high rates of enrolment and completion of different cycles is a smokescreen if the level of skills acquired in the education process remains low. In blatant contrast to South Korea and Taiwan, where education has been remarkably performing at low, medium, and high levels and in technical and scientific fields in particular, our sample of four poor countries exhibit dismal education records if we judge by learning outcomes. Especially worrying are the indicators measuring literacy, numeracy, and writing skills for children who have completed primary school. This situation, sometimes termed as one of ‘learning crisis’, is not exceptional since similar results have been found for other countries, particularly in India and Pakistan, which are close neighbours of Bangladesh. The latter country will receive special attention in a later subsection.

In what follows, we discuss the causes of poor performances in education under three different headings: weak state capacity, absenteeism, and low teacher quality. Before addressing this task, it is worth stressing that in all these respects, Taiwan and South Korea have done very well. In particular, from the beginning of the development process, education has been considered a top priority by the political rulers. Moreover, an effective and coherent administration was put in place to manage it and monitor its progress. Equally noteworthy is the strong demand for education among Taiwanese and Korean citizens, whose preferences are highly skewed toward their children’s training. This implies that, as in many East Asian countries, parents, and even poor parents, are ready to incur substantial sacrifices in order that their children can get proper education and raise their income prospects in life. Given the foregoing characteristics, it is not surprising that both the quality and the social status of teachers in this region of the world are remarkably high, and that teachers and school directors exert great efforts toward fulfilling their duties.

1 Weak State Capacity and Institutional Dysfunction

The education sector is typically an area where it is uneasy to disentangle institutional dysfunction from limited state capacity (stricto sensu). Still, a useful distinction is between input amounts and the efficiency in their use. In many developing countries, including our sample countries, because of insufficient state budgets allocated to this sector, input indicators reflect a situation plainly unfavourable to education quality: very high pupil-teacher ratios, a very high number of pupils per classroom, shortage of teaching material, a low number of schools forcing many children to travel long distances, and so on. Except when the country is too poor to finance a vibrant education sector, and therefore needs external assistance, deficient funding of the school system is attributable to low public spending, as a result of low general taxation and/or the low ranking of education in the list of government priorities. While Mozambique, where international donors provide key financial support for education, offers a good illustration of the former situation, Bangladesh comes to mind as a striking example of the latter. In Bangladesh, indeed, not only is general taxation exceptionally low as a percentage of GDP, so strong are the pressures of powerful business lobbies on the government to limit taxes, but the country also devotes comparatively small amounts of public money to education, primary education in particular. The consequence of these two features combined is that Bangladesh has one of the lowest ratios of public expenditure on primary education to GDP in the world (significantly less than 1 per cent). Interestingly, major actors in the country formally agree that this situation ought to be remedied and taxes significantly increased. Yet, in practice, everyone behaves as though they are satisfied with the present equilibrium characterised by low taxes and low public expenditures. This is because, as in a prisoner’s dilemma, everyone would like the other actors to bear the brunt of higher taxes while benefiting from better public goods.

The institutional dimension of the human capital problem lies in the effectiveness with which inputs, however small or large, are used in the education process. Institutional dysfunction generally arises from deficient incentives, absent or weak professional norms, and the power structure. In the following, we illustrate these three possibilities under the headings of two major problems: absenteeism of teachers and school directors, and poor teacher quality and training.

2 Absenteeism of Teachers and School Directors

A recurrent and distressing cause of low education performances is the pervasive absenteeism of teachers and school directors, as well as their lack of punctuality. While the rate of teacher absenteeism in the primary schools was relatively low in Bangladesh in 2006 (16 per cent compared to 25 per cent in India), it was estimated to be as high as 31 per cent in a survey of Tanzania’s schools in 2014. The latter figure is of the same order as the rate of 27 per cent observed in Uganda, but in 2006 (Chaudhury et al., 2006). In Mozambique, the situation is even worse, with a rate of around 45 per cent for both primary school teachers and directors in the same year. In addition to being frequently absent, teachers in these schools have a bad habit of arriving late, or leaving early, so that many pupils in the country are losing more than 50 per cent of the learning time they are entitled to, as a result of late start times, early closing, and extended recesses. These are astronomical figures, and the question immediately arises as to what are the reasons behind such widespread non-compliance with contractual obligations on the part of frontline agents of the education system. Note that the situation appears significantly grimmer in the heath sector: the rates of absenteeism estimated for primary health centres in 2006 are thus much higher than in primary schools, implying rates reaching 40 per cent in India and Indonesia, 37 per cent in Uganda, and 35 per cent in Bangladesh (Chaudhury et al., 2006).

A first possible cause is low, or irregularly paid salaries, which compel these agents to take up side jobs that distract them from their first duties. But this cannot be a complete explanation since the phenomenon can be observed in situations where the teacher salaries are well above the average local earnings. A second explanation is the absence of professional norms ensuring that the agent is internally punished when not fulfilling duties, say, by feeling guilt or shame in front of peers, parents, and others. In this respect, there are obvious differences between South Asia, Africa, and some countries of Latin America, on the one hand, and East Asia where education is highly prized, on the other hand.

A third explanation is the absence of effective monitoring, which entails the consequence that defaulting agents cannot be externally punished, thus encouraging them to act with impunity. This mechanism is likely to be interlinked with the previous one in the following sense: adequate social norms are prevented from emerging if a dutiful teacher who starts by abiding by the contract gets discouraged by seeing that others around him/her are not sanctioned upon violation of the terms of the contract. In game-theoretic terms, agents follow a behaviour of conditional reciprocity, and the bad equilibrium in which everybody feels free to act according to own selfish interests comes into existence.

A fourth way to understand school dysfunction rests on individually rational behaviour. Thus, if many people do not perceive significant returns to education for their children – typically because they live in a region where there are no job prospects in the formal sector of the economy – they will not send them regularly to school, especially so if they can employ them at home and/or teachers are badly trained and, hence, of low quality (see the next subsection). As a consequence, parents may not consider teachers as socially useful specialists, and the latter lose their own motivation to regularly attend to their duties. In these conditions, professional norms of regular attendance fail to get established. In other words, a link is likely to exist between the formation (and maintenance) of norms and the intensity of the demand for education.

Finally, contract-breakers may feel protected by locally powerful people who can even be the instigator of the fraud. The existence of so-called ‘ghost schools’ and ‘ghost teachers’ in Pakistan, from which Bangladesh actually seceded in 1971, illustrates this possibility, showing that not only may education fail to be a priority, but it may also be actively opposed by local strongmen. The latter need not be necessarily religious leaders opposed to secular education and favouring religious teaching in madrasas (Malik et al., 2021). They may also be traditional landlords eager to prevent the emancipation of their dependents lest they should develop ‘unrealistic expectations’ and cause a shortage of cheap agricultural labour (Martin, 2016: 87). In such instances, school dysfunction is not (necessarily) caused by a lack of spontaneous demand for education, but by deliberate attempts by powerful people to repress it.

When they act as political leaders or brokers, reactionary landlords may go as far as diverting school buildings from their intended function by using them as cowsheds, farm buildings, accommodation for some relatives, and the like (Martin, 2016: 133).⁴ Teachers themselves are then ‘ghost teachers’ who rarely turn up for their duty, and place false entries into the attendance registers (2016: 88). Their time and energies are diverted to other uses that serve the interests of their patrons who protect them from disciplinary action (see Zahab, 2020: 82, and Gazdar, 2000, for quantitative evidence). In some cases, primary school teacher posts are sold by politicians and officials for large amounts of money, thus inducing the beneficiaries to take side jobs to repay their loans (Hasnain, 2008: 137). Also, it may happen that teachers surrender as much as half their salaries in order to escape the duty of attending school because they are essentially happy with the reward consisting of the lumpsum pension of 2–3 lakhs which they receive at the end of their careers (Martin, 2016: 80).

In the presence of flawed monitoring by state authorities (school inspectors), a frequently proposed solution consists for schools to be monitored by stakeholders comprising parents of the pupils, in particular. Nowadays, this solution is promoted by many scholars, including economists. In Mozambique, for example, school councils (CEs) have been set up to precisely supervise school activities and denounce failures. And, yet, the results have fallen short of expectations. The underlying reasons are several, but two deserve special mention in the context of the present discussion. To begin with, members of CEs may lose their motivations to attend CE sessions because they do not derive any material gain, typically in the form of per diems, from their participation. This type of behaviour would be largely unthinkable in East Asia and in Western advanced countries, because members of school committees are either intrinsically motivated or attach a high value to improvements from which their own children will benefit. Next is typically a power-related problem: CEs frequently complain that children may suffer from reprisals by teachers and school managers if they point to unjustified absences, lack of punctuality, and abuses of power or to non-transparency in the use of school funds. As a result, the CEs risk being pseudo-participative institutions whose members are coaxed to accept what is decided by the school board, thus being reduced to a simple role of rubber stamping. In the same logic, school directors may exert their power and influence to bring a compliant person to the CE presidency.

3 Low Teacher Quality and Training

To a large extent, teacher quality depends on recruitment procedures and training (in addition to decent salaries). That these determinants are often distorted is starkly testified by the experience of Bangladesh. There, the recruitment of teachers is often biased by the leakage of the written exams on the basis of which selection is made. Moreover, the payment of bribes may decide which teachers will be transferred to Dhaka, the capital city, which is equivalent to a big promotion. In many poor countries, teacher training is strongly deficient with the consequence that the level of skills of, say, primary school teachers, is hardly higher than among the pupils. The reasons for this sorry state of affairs may vary. In countries such as Mexico, the main culprit is the teacher trade union, which staunchly opposes the skill upgrading of the profession. Being politically well connected, it is able to block or derail training reforms although they are manifestly in the general interest. The backtracking on these reforms by the present president, Lopez Obrador, who is himself close to the teacher trade union, attests to the possible influence of politics on teacher quality.

In another scenario, teacher training is undermined by severe budget cuts, which reflects the low priority that education quality receives at central state level or even among international donors. Thus, in Mozambique, the fast-track teacher training model, which abruptly reduced the number of years of training for primary teachers from three to just one, was seen as a way to increase the number of teachers in a short span of time without raising the burden of salary expenses (since salaries are calculated according to the length of the training period). If it helped contain the increase in pupil–teacher ratios, the reform had the devastating effect of supplying teachers with insufficient skills in reading, writing, and arithmetic. In Benin, within the framework of the Structural Adjustment Programme of the years 1989–92, the imposed downsizing of the public sector led to a severe reduction of the education budget. This caused, inter alia, a doubling of the pupil–teacher ratios in the poor, northern part of the country with catastrophic effects on teaching quality.

4 An Inspiring Experience

An inspiring experience to which we want to draw attention in concluding our discussion of education problems is taken from an innovative approach adopted in the city of Sobral in Brazil’s poor, north-eastern state of Ceara. Before the start of the programme, only about half of children could read by the time they finished primary school. After its completion, twelve Cearan school systems ranked among Brazil’s twenty best. The key elements of success are: (i) the ending of the practice whereby city governments appointed their friends and political allies to serve as school principals, and its replacement by selection procedures exclusively based on merit (as assessed in interviews and tests); (ii) the priority given to enhancing teacher training with, in particular, the strictly enforced obligation for every teacher to spend a day per month in training; (iii) the systematic application of city-wide tests in math and Portuguese for all grades by local professionals, and the payment of bonuses to teachers who succeeded in hitting minimum targets; (iv) the setting of the absolute requirement that children must master basic literacy before they can enter the third grade (when they are aged eight or nine); (v) the devolution to cities of greater power to run their own schools; and, finally, (vi) the linking of a (small) part of the budget allocated to each city to improvements achieved in school results.

Perhaps even more decisive was an element of the policy environment. Sobral benefited from its unusually stable politics: the same political team has run the city for twenty-five years, and education was kept a priority during this whole period (Economist, 2021: 33–4). This condition sharply contrasts with the constant changes of education policy in a country such as Mozambique, particularly in matters of teacher training. The main lesson to draw from the Ceara experience is that success in improving educational performances very much depends on a bundle of conditions rather than a single factor. This is negatively confirmed by a recent randomised control trial which found no effect on student outcomes and teacher attendance of a scheme allowing high-performing teachers to receive their preferred posting in Uganda (Cohen et al., 2021).

C Lack of Independence and Effectiveness of the Judiciary

Since the judiciary is a critical part of the law enforcement mechanism, its functioning must play an important role in any assessment of a country’s state capacity. Another issue is the degree of independence of the judiciary. Clearly, in Taiwan and South Korea the authoritarian nature of the regime meant that the judiciary was not independent of the executive, at least in matters involving freedom of expression, political organisation, and human rights. On the other hand, rights and obligations pertaining to the economic and the family spheres were effectively enforced, and this proved to be important for the smooth running of the economy and the harmonious life of the society. An independent judiciary in the full sense of the term was to wait until later, after the basis for sustainable growth and development had been built. Almost by definition, ‘developmentalism’ places higher priority on the modern transformation of the economy than on full democratisation of the society; the idea being that successful modernisation would naturally lead to the democratisation of a society, while the reverse does not necessarily follow (Okuno-Fujiwara, 1997: 403).

In two in-depth case studies that we conducted, Tanzania and Bangladesh, special attention has been devoted to the functioning of the judiciary system. The analysis reveals that not only is this system highly dysfunctional, but also its flaws go beyond problems of insufficient staffing, out-of-date equipment, archaic procedures, huge backlogs of pending cases, and poor communication of information. In evidence is the pervasive presence of corrupt practices and the meddling of powerful actors in the treatment of judiciary affairs, including day-to-day matters pertaining to the civilian and commercial domains of the law. It is therefore not surprising that there is such a strong distrust in judiciary institutions and the magistrates in many poor countries: people tend to believe that judicial decisions are biased in favour of those who are well connected to politicians or rich enough to afford paying bribes.

Expeditiousness of the judiciary system is low in Tanzania, at least if we judge from the situation of land dispute settlements. Backlog of cases and delay in settlement of land disputes are among the problems most often mentioned in relation to land administration. What needs to be stressed is that, in land and other matters, slowness of public decision making feeds corruption, as bribes are often demanded by officials on the ground that they know ways of speeding up delivery. In countries such as Tanzania and Benin, practices of bribe-taking persist in spite of the display of public notices in offices, warning that such practices are strictly forbidden (which we could verify by ourselves), and in spite of official anti-corruption campaigns.

As attested by testimonies in relation to Bangladesh, the situation may even be worse in the sense that lengthy procedures and various other tricks may be part of a delaying tactics intended for extracting illegal payments from both plaintiffs and defendants. Clerks, advocates, and judges are those whose strategic positions allow them to demand additional payments allegedly meant to ‘accelerate’ the resolution of the case. There is thus widespread suspicion that actors along the enforcement chain often indulge in practices evoking piracy: they artificially create the problem which they then pretend to be able to solve against illegal dues. The difference with the aforementioned situations where slowness of delivery of public goods or services feeds corruption is that in the present case corruption is born of calculated prevarication or fabricated administrative problems; that is, it is the result of malevolent manipulation.

Another salient dysfunction of the judiciary is caused by the meddling of powerful people in judiciary decisions. Bribes are not necessarily involved since political interventions may be part of an implicit contract of political patronage. This is attested by evidence collected in Pakistan. Thus, Lyon (2019) argues that one important reason why a Pakistani landlord may decide to engage in politics is to get a serious land conflict settled in his favour with the help of powerful politicians at district level. As for Martin (2016) and Mohmand (2019), they cite meaningful anecdotal evidence attesting that a political patronage system anchored at the village level enables landowners connected to a political machine to secure the recognition of their perceived rights, at the cost of bribing or intimidating judges if needed. This is especially true of the entrenched dynastic elite, which lord over hierarchically organised patron-client networks that they use as trustworthy voting blocs to endorse their favoured politicians (Malik et al., 2021).

What bears special emphasis is the deleterious effect of political interventions on professional norms inside the judiciary system. If Big Men can influence judicial decisions and derive direct or indirect advantages from their action, why should even low-ranking officials refrain from drawing small perks from their position? The situation is even worse when the appointment and/or the promotion of judges are the outcome of political and politicised decisions. In Bangladesh, this is true at the highest level of the judicial system since judges of the Supreme Court are nominated by the Ministry of Law, Justice and Parliamentary Affairs, itself vulnerable to high-level political pressures aimed at keeping political rivals at bay and buttressing the ruling political regime.

Delving deeper into the case of Bangladesh, it is possible to figure out how, based on perceptions and opinions of a sample of respondents, this country performs in comparative terms. Assessment of judiciary fairness relies on three indicators extracted from the Rule of Law Index of the World Justice Project (2019): while the first two measure the extent of inequality in access to the courts and in the treatment of the cases, respectively, the third one tries to capture the degree of corruption and bribery of the judges. Essentially, they converge to show that Bangladesh does not fare very well along the three dimensions considered. Where it performs especially poorly (with a rank of 115 among 126 countries) is in regard of the second indicator (measuring the degree of discrimination in case treatment) for which it nevertheless does slightly better than its two big South Asian neighbours, India (ranked 117) and Pakistan (ranked 118).

When the expeditiousness of the judicial procedures is measured by the backlog of pending cases, the picture which emerges is rather dismal. Civil court cases resolved during a recent year (2018) represent a significantly smaller number than the total number of cases received and filed, implying an increase in the backlog. This is clearly not a new or transient phenomenon since at the end of the year 2018, more than one-fourth of the total backlog of civil cases consisted of cases that had been pending for more than five years. A similar deterioration is observed when considering the total number of civil and criminal cases, and, interestingly, case backlogging is especially important in the three most prosperous administrative divisions of the country. Among the chief reasons behind this worrying situation are the shortage of judges and the ineffectiveness of the judicial procedures which continue to be based on manual paperwork and even require the judges to write by hand the statements of witnesses.

The lack of independence of the judiciary vis-à-vis the executive is harder to estimate, and evidence is unavoidably piecemeal. A rare exception is nevertheless the detailed and rather unique study of Mehmood and Seror (2019) for Pakistan.⁵ They argue that meddling of the executive in judicial matters does not mean that all types of judgments are biased. Decisions most liable to be influenced by such interference concern cases where resources valuable to politicians are directly or indirectly at stake (think of expropriation of private property by government agencies, for example). They thus show that the rise of religious landowning elites, taken as a proxy of democratic regression, has increased the incidence of court rulings in favour of the government for cases involving land disputes with the government, and for cases involving violation of human rights. In contrast, no effect is detected for ordinary criminal cases such as thefts. Moreover, democratic regression has reduced the quality of judicial decisions as measured by case delay (the difference between the year of the case decision and the filing year) and by merit, as proxied by a dummy indicating whether the decision was based on evidence rather than technical or procedural grounds.

Unfortunately, there are no systematic data available to explore the influence of politicians on judicial decisions for civil cases. As argued above, we expect civil judgments to be biased toward the clients of powerful local politicians in contexts dominated by political patronage. Are reforms showing promising results? In Bangladesh, the mode of appointment of the judges, which is critical for their independence, has apparently improved since this prerogative has been taken away from the Public Service Commission, and actual implementation seems to have occurred in 2007. Yet there is lingering doubt about the extent to which in actual practice the judges are appointed for their competence and experience rather than their political loyalty. If we go by the reform experience of Pakistan, however, it is possible to entertain hope for progress: an important reform consisting in the appointment of judges by peers rather than the executive appears to have produced significant effects in the form of more expeditious and less skewed decisions (Mehmood and Seror, 2019).

II Uncertain and Ambiguous Property Rights

A useful distinction here is between property rights over business assets and rights over land. Land tenure is especially important in countries where a significant portion of the population still depends on agriculture and related activities to eke out a livelihood.

A Rights over Business Assets

Together with governance failures, the weakness of property rights is the main generic institutional obstacle against development, which economists repeatedly point out in their writings on the subject. The central argument is that absent or fuzzy property rights impede investment and growth both because they cause uncertainty about who will benefit from the investment effort and because, by preventing asset collateralisation, they make access to credit difficult or impossible. Perhaps the most egregious example of such an adverse effect is the high risk of politically motivated expropriation following a change of ruler, or a change of mood of the present ruler, in autocratic regimes. There is ample historical and contemporary evidence of this possibility as attested by the many instances in which, on the spurious ground of tax evasion, oligarchs have been suddenly dispossessed of their wealth and even thrown into jail.⁶ Examples run from the Ottoman empire – where reaching positions close to the sultan (the post of the sultan’s treasurer, in particular) was a dangerous step that could be quickly followed by demotion, arrest, and execution – to today’s countries of the ex-communist world (Russia, Georgia, and the Central Asian Republics, for example) or the developing world (India, China, Malaysia, South Africa, etc.).

The examples of Taiwan and South Korea nonetheless show that this is not a necessary attribute of autocratic regimes. Enlightened autocrats are indeed able to internalise the negative long-term effects of violations of private property rights on their country’s development, and they therefore stand as their strong guarantor. It is true that expropriation or nationalisation of business assets was an impending threat in Taiwan and, even more so, in South Korea. However, the threat would be executed only if a breach of contract was clearly committed by the business owner in his dealings with the state authorities. In other words, the risk of expropriation was predictable. As far as land property rights are concerned, the creation of a cadastral survey was one the priorities set by the Japanese authorities, which early on during the colonial period wanted to boost tax revenue and facilitate land transactions (Cheng, 2001: 20; Chu, 1999: 15). On the occasion of the radical land reforms carried out by the independent governments of Taiwan and South Korea, these rights were duly revamped.

In our small sample of country case studies, Benin and Bangladesh are clear cases where property rights of Big Men are uncertain. The logic is plain: their rights are secure as long as the right political ruler, the one whom they have supported, is in power. In Benin, Ajavon bitterly experienced this logic after his defeat against Talon, who himself had to go into exile after his defeat against President Boni. Diversifying political support is the obvious way of avoiding or mitigating the expropriation risk, yet this may be an impossible tactic in strongly polarised political universes. Just think of Bangladesh where, until recently, a person of importance was compelled to choose either of the two available political sides, the AL and the BNP. Accusations of treachery or duplicity were easily proffered against anyone who appeared to play a double game. The risk is equally high for businesspeople belonging to ethnic minorities, as testified by the aforementioned fate of the Gupta family in South Africa or the expulsion of all Indian entrepreneurs and merchants from Uganda under Idi Amin Dada.

It is therefore not surprising that wealthy Indian, Chinese, or Lebanese entrepreneurs tend to adopt cautious behaviour when they enter into the political game, which is almost inevitable in most countries. One frequently observed tactic consists of sharing ownership with powerful local politicians-cum-businessmen. In Malaysia, for example, many of the bigger Chinese business interests have chosen to co-opt influential politicians from the dominant party (UMNO), as well as former civil servants from the dominant ethnic group, as directors and shareholders of their companies (Jomo and Gomez, 1997: 364). In the specific case of Malaysia, this tactic was especially appropriate as the Industrial Coordination Act (ICA) of 1974–5 provided that the development of the manufacturing sector should be aligned with the ethnic redistributive policies that the Malay political elite demanded with a view to achieving interethnic economic parity. (Until then, Malay businessmen had been essentially concentrated in agriculture and the public sector.) As a result, ‘both Chinese and foreign companies began to actively solicit business ties with politically influential Malays willing to lend their names for a price without taking on executive roles after becoming owners and directors of the companies’ (Bowie, 1991: 103–4, as cited by Jomo and Gomez, 1997: 363).⁷

In South Africa, to take another example, Indian-born entrepreneurs, the Gupta brothers, befriended the highly corrupt President Zuma and went into business with his son, Duduzane.

B Land Rights

Before delving into the intricacies of land laws, it is useful to describe the major types of land conflicts observed in our four in-depth case study countries, and to decipher their root causes.

1 Types of Land Conflicts and Their Root Causes

Another sector of property rights for which frequent complaints were made in the course of our discussions with national experts is land rights. This explains why this issue has received special attention in the cases of Tanzania, Benin, and Bangladesh. We have already mentioned the extremely complex and even confusing character of many land laws, hinting that such a feature is a result of the big stakes involved in the way land is allocated. What we had then in mind are the lands located in urban and peri-urban areas, which carry relatively high values. A key problem here is the uncertainty of property rights caused by fuzzy original rights, double sales, production of fake documents, and other malpractices. Disagreements around the 2013 land law in Benin have thus resulted from conflicts of interest between those who wanted maximum security through the provision of a five-year period during which rights could be verified, on the one hand, and those professionals, intermediaries, and public agents who rejected the idea of an authorisation period, on the other hand. The 2017 amendment actually cancelled the five-year authorisation period provided in the 2013 law, creating confusion and furore among certain circles.

Another type of insecurity may also happen in relation to rural lands, particularly when village lands are coveted by international plantation companies. Here, the issue arises when villagers grant a concession over their customary land in the absence of a full understanding of the contract signed, or when the deal with the plantation company is made secretly by the village chief or the elder council for own profit. The latter possibility exists because of the temptation to use local power positions to unduly appropriate the rents obtained from the awarding of uncultivated common lands. In this instance, as in the case of urban and peri-urban lands, it is because the value of the land has suddenly increased that unscrupulous people may try to lay dubious claims on it, exploiting informational advantages, abusing their power position, or both.

Rising land values or scarcity are caused not only by the growing commercialisation of land-based activities but also by sheer population pressure. These powerful forces tend to disrupt traditional practices and customary rules, particularly in high-population density countries. Two types of land conflicts deserve special mention here, and they are both in evidence in our case study material of Bangladesh. First, intra-family conflicts around land inheritance tend to multiply when land becomes scarcer. For example, as some children have internally migrated to take an urban job, those who have stayed behind and live on agriculture may lay claim on the customary bequest shares of their migrant siblings. As has been shown in the case of pre-genocide Rwanda (André and Platteau, 1998), such conflicts can be so pervasive and severe that they end up tearing asunder the village social fabric and the core institution of the family, setting not only members against cousins, in-laws, and more distant relatives, but also brothers against sisters, brothers against other brothers, and siblings against parents.

Relatedly, when some children have settled in a foreign country (say, India), and the duration of their foreign stay is indeterminate, there may be undue attempts to appropriate their land in the village, whether by close or distant relatives or by neighbours. Such attempts are typically made without informing the rightful landholder. When these conflicts, as well as others (for example, boundary conflicts about the precise delimitation of land plots), cannot be resolved by informal institutions, the plaintiffs tend to go to litigation. The question then arises as to which laws ought to govern or guide the decisions of the judges.

A second important source of land disputes arises when the village population is heterogeneous, say because migrant farmer families coexist with descendants of founding lineages, pressure on land generally prompts the latter to remind the former that they possess only use rights and these rights can be rescinded if native families need their landholdings. The same customary principle, according to which freeholder rights exclusively belong to long-term native residents considered as the ‘sons of the soil’, is also asserted in situations where sedentary agriculturalists and nomadic land users, typically pastoralists, have claims over the same land territory. Coexistence between farmers and pastoralists is a ubiquitous phenomenon in Africa, not a surprising feature given that until recently and in most parts of the continent, land was abundant and therefore used in extensive ways. Under land pressure, the customary rights of the herders are denied by the farmers who want to enclose their agricultural plots to avoid encroachments by wandering animals.

Obviously, the tense inter-group relationships which result from these troubled circumstances can easily degenerate into violent conflicts, as numerous examples testify. For the first situation of heterogeneity, the bloody confrontations between Ivorian and Burkinabe farmers in the Côte d’Ivoire, or those between Senegalese Toucouleurs and Moorish farmers in the Senegal river valley, come to mind. In these two cases, the occupation rights of the ethnic minority stretched over several generations so that its members perceived those rights as having been progressively upgraded into full freehold tenure, especially so because they had made significant land improvements. In other situations, it is migrants of a rather recent origin who settle in areas where future land scarcity is anticipated by the local population. This is illustrated by the situation of the Chittagong Hill Tracts (Bangladesh), where Bengali farmers, encouraged by the central government, have obtained access to land situated in the traditional territory of native communities of forest dwellers, gradually transformed into farmers. As for the second situation of heterogeneity, we can think of the genuine war which opposed non-Arab agriculturalists to Arab herders in the Darfur province of Sudan, or of the ongoing insurgencies of Tuareg and other groups of herders (Fulani, for example) in some Sahelian countries (most notably, in the northern parts of Burkina Faso and Mali), or elsewhere in sub-Saharan Africa (in northern Nigeria, in the rift valley in Kenya, etc.).

2 The Need to Sort Out the Maze of Land Laws

The above-described issues are obviously intricate, and they all require government intervention, yet not of the same kind and intensity. Let us start with the situation of land-scarce rural areas where the population is heterogeneous, particularly when excruciating conflicts need to be defused and traditional informal mechanisms of conflict settlement are unable to come up with a satisfactory solution. In these instances where land conflicts risk degenerating into a vicious circle of bloodsheds and retributive reactions, the full force of the law and the supreme authority of the state must obviously be brought to bear. In order to save the face of customary authorities, the state is well advised to seek some form of ‘accommodation’ terms with them (see our Chapter 1 typology of formal-informal interactions). A key problem here is that the state itself may fail to act as a benevolent ruler and side with one group against another for reasons of political opportunism or on the basis of identity considerations. This is clearly what was observed in the nasty Darfur conflict where the authorities in Khartoum backed the Arab herder groups (both antagonists are actually Muslim); in the Sahel and other areas of Africa where the rights of the herders have always been ignored or under-estimated; or in the Côte d’Ivoire where the native farmers enjoyed the support of Ivorian nationalists.

In the latter instance, however, and following a protracted period of troubles threatening the integrity of the nation, the Ivorian state eventually decided to confirm the rights of longstanding foreign farmers to stay on their land, based on certified long-term land leases. Since the latter concept is compatible with informal rules, the solution is of the ‘accommodation’ type. The point remains that, when there is an inter-ethnic dimension to land conflicts, politics – and partisan politics for that matter – necessarily intrudes into debates around land legislation. Because political compromises may then be hard to find, we discover a vivid illustration of why land laws may be complex and even contradictory when opposite interests are confronted with each other.

We can now grapple with the issue of relationships between customary landholders and large-scale investors. Evidence shows that problems on the ground have generally not been remedied satisfactorily by state legislation and intervention. In a nutshell, this is because large-scale allocation of land by the state is frequently undertaken with no genuine prior consultation of the rural communities concerned. As a consequence of the absence of their informed consent, frustrations are likely to surge up when they come to realise that they are enduring losses or that their expectations (e.g., in the form of new jobs) are not met. The top-down state approach to large-scale agricultural investments seems to be the main culprit: public authorities act as though they consider that rural communities do not possess useful knowledge or are unable to understand all the stakes involved. Not surprisingly, therefore, the formulae that work best are contract farming or out-grower schemes. Local people, then, are not dispossessed of their land and they receive valuable inputs, including seedlings and training in new techniques, as well as assured markets for their produce from the investing company with which they are directly in contact.

The dual tenure system prevailing in Tanzania is worth considering in some detail because its approach (yet not necessarily the details) is so characteristic of many other African countries. Under this system, most rural lands belong to the category of so-called village lands, which are placed under the jurisdiction of village councils. Land rights based on customary tenure, which are not mandatorily registrable but can be backed by certificates issued by the village council, are either individual or collective. This implies that the land can be used by individual occupiers or by the community and, in the former instance, individuals may apply to have their private parcels surveyed and registered. Because the president of the republic is the eminent owner (the custodian) of all Tanzanian lands, a remnant of the colonial period confirmed by the socialist regime of Nyerere, the holders of village certificates are not entitled to transmit them, through sales, donation, or bequest, to somebody outside the village community without the approval of the village council. The intent is clearly to prevent land of a village from ending up being controlled by people alien to the village community. Inside the village community, however, rights acquired through bequests and purchases are valid, so that not all land is allocated by village councils. But land reserved for future use can be allocated by these councils to needy applicants, whether villagers or non-villagers. In all their operations, village councils are required to sanction customary practices only as long as they do not go against the fundamental principles stated in the written law, such as equal treatment of men and women.

The Land Acts resulting from the National Land Policy (1995–9) provide that the status of some village lands can be changed by shifting them to the category of so-called general land. Formal titles of long-term occupancy (for a maximum of ninety-nine years) are then granted by the state to both citizens and non-citizens, whether in rural or urban and peri-urban areas. If the land had occupiers, a process of compensation is initiated. The important point is that external investors cannot get village land unless it has been first converted into general land. Persuaded that many village communities have plenty of unoccupied or unused lands, the government of Tanzania intended to transfer a significant portion of the village land area to the general land category. In actual practice, the dual tenure system, in which centralised control coexists with devolution to customary law at village level, has given rise to deep discontent on the sides of both rural communities and external investors. Major reasons are the long and cumbersome procedures of approval (for areas exceeding 20 ha), which themselves create rent-seeking opportunities, inadequate compensations paid to the villagers, and considerable delays in their disbursement. An additional difficulty arises when, as often happens, there is no proof of ownership for parts of the village lands which, although deemed unoccupied, are actually used by the community as common lands or kept in reserve for the needs of future generations (in conditions of population growth).

Finally, it must be remarked that, despite the intentions of the lawmaker, the intricate land legislation of Tanzania does not actually prevent illegal land speculation. A habit has thus developed whereby separate villagers allow ‘investors’ to come in and buy land parcels that do not individually exceed the legal threshold of 20 ha. Once these purchases are aggregated, though, they exceed the statutory limit. Worse, they violate the spirit of the law insofar as, instead of developing the land, the buyer uses it as a collateral to borrow money from banks, and afterward sell it by surveying and creating plots.

What about the regulation of land problems that occur in situations of extreme land scarcity and hit the core of community and family life? These are the hardest to solve and, here, there is no escape from economic solutions consisting of enhancing labour absorption in agriculture and agriculture-related activities, and of expanding non-farm employment, whether in rural or urban areas. Therefore, institutions that enable these economic transformations, such as those put in place by Taiwan and South Korea, matter even more than land institutions. As attested by the experiences of many poor countries in Asia and Africa, legal inheritance norms, imposition of minimum viable farm size (below which any sale of land is prohibited), and similar measures produce weak or no effects. This being reckoned, it is in conditions of great scarcity that land titles, based on sound surveying and adjudication procedures, are most needed. Two major problems must nevertheless be overcome. First, titles cannot achieve their objective if land dispute settlement institutions are not effective and if judges are corruptible. (As one Kenyan farmer put it to one of us, ‘a title is worth less than a bribe to the judge’.) Second, for titles to become widespread enough, an effective land administration must exist capable of not only surveying, registering and formalising land rights, but also of updating land registries systematically.

Evidence is not reassuring if one judges by the situation observed in many countries of Asia (Bangladesh and India, for example) and Africa. In Tanzania, where land is rather abundant, very few rural residents hold occupancy certificates (the Certificates of Customary Rights of Occupancy, or CCROs) aimed at securing their individual land parcels. One key problem is that the village land must be properly surveyed, and its land boundaries duly demarcated, before the ministry for land affairs can approve its regularisation and issuance of individual land certificates by the village council can proceed. The whole procedure takes several years to complete. In addition, only a small proportion of Tanzanian villages have land use plans, a precondition for transferring land to the general category. And, finally, only a minority of land records are found in the land registers with the consequence that cases of multiple titles for the same piece of land are not uncommon.

In Benin, another country where land is rather abundant, the initial approach to the formalisation of land rights was more decentralised and progressive than in Tanzania. It opted for a scheme, known as the Plan Foncier Rural, in which land demarcation is based on the community and undertaken on demand: only those villages which feel the need for a survey of village lands and their certification are eligible, and in each of them a committee is tasked with identifying and demarcating all parcels situated on the village territory.⁸ Thereafter, customary land ownership is formally and legally documented in the form of transferable and collateralisable land certificates which, as in Tanzania, may be individual or collective. A clear advantage of this scheme is that it supplied convenient and fast services for obtaining legal proof of landholding rights and for carrying out land transactions. Yet it was soon to be called into question and telescoped under the pressure of external forces combined by the preference for centralisation of some politicians. A reform was thus initiated (in 2004–5) under the impulse and with the support of the Millennium Challenge Corporation (MCC), with the explicit purpose of ending legal dualism and streamlining and centralising the administration of land rights. Responsibility for implementation of a new Land Code (the Code Domanial et Foncier) was vested in a newly created agency (the ANDF), the central idea being to transform rural land certificates and urban residence permits into full-fledged titles. Aware that the issuance of titles is a time-consuming process, the lawmaker authorised the issuance of a new, temporary attestation de détention coutumière to replace the previous certificat de propriété foncière. Land sales continued to be permitted through conventions or through officially sanctioned contracts.

What is worthy of note is that only a minority of villages demanded the demarcation of their lands under the initial scheme and, even in those in which demarcation took place, the proportion of land certificates to the total number of parcels surveyed was typically low. The only exception comes from villages where migrants form a significant portion of the local population, thus confirming the idea that local demand for land documents varies greatly depending upon the specific context of rural communities, and that their heterogeneity is an important variable (together with population density). It barely needs to be added that the subsequent reform was unsuccessful.

Further confirmation comes from a recent study (Broka et al., 2021) conducted in the pineapple development scheme in one of the richest parts of the country, not far from the two main commercial cities in the south (Cotonou and Porto Novo), which shows that rural land markets are quite active despite the fact that most producers have no land certificate. Thus, a significant proportion of the plots owned have been acquired through outright purchase rather than through inheritance or gifts.⁹ Looking at all the pineapple plots under cultivation, more than a third of them have been rented in by the possessor, and if traditional land loans are included, the proportions are much higher.¹⁰ Even more strikingly, most land transactions have been made through strictly informal channels. Regarding the land rental market specifically, barely 60 per cent of the deals made by men rest on a written piece of paper while the proportion goes down to barely 45 per cent for women in couple. In these cases, moreover, the great majority of the land deals (about 85 per cent) are attested by a simple paper carrying the signatures of the two transactors and their witnesses (in the remaining cases, there is no witness). Hardly anyone has therefore followed the prescribed legalisation procedure before the competent court. And yet land disputes seem to be rather rare.

Compared to Tanzania and Benin, Bangladesh, as in neighbouring India, is in a radically different situation: population pressure on land resources is so high that land titling is necessary. However, as stressed earlier, land titling is not of much use if land records are not regularly updated, and the judiciary cannot rely on proper registry evidence. This is, unfortunately, the grim situation observed in South Asia, and, in these conditions, it is no coincidence that citizens distrust the land dispute settlement procedures even though there are other reasons behind their poor performances. Together with the noxious presence of corrupt and opaque practices, with which land acquisition and compensation procedures are riddled, particularly in relation to the creation of SEZs, the failure to keep valid records of land transactions is probably the most severe institutional dysfunction of land administration in Bangladesh and the whole region.

The lesson seems to be the following. In land matters and for rural areas particularly, a great deal of flexibility, decentralisation, and respect for informal arrangements is desirable. In the context of multi-ethnic societies governed by a plurality of norms, the ambition of the state to regulate land tenure rights in a top-down and uniform manner, without due consideration for the role of local agencies and semi-formalised mechanisms, is doomed to end in disappointment and failure. The main reason for involving communities in any process of land rights formalisation is that land issues are intimately related to other aspects of the village social life, so that mishandling them can have major consequences beyond the strict domain of land-related management and activities. Evidence suggests that, as long as communities can function on the basis of informal rules, which they themselves devise and enforce, the state should not intrude into their land institutions or, if it does, it should do it with caution and restraint. It is to the special situations which require its intervention, and which have been identified above, that it should devote much of its attention and its formalisation efforts. In terms of the terminology used in Chapter 1, formal institutions or rules should substitute for informal ones in extreme situations while they should complement them in more ordinary circumstances.

III Conclusion

Politics has an enormous influence on state capacity. When the regime is rooted in political clientelism and cronyism, the money needed to mobilise and maintain support is obtained not only from donations made by big business leaders and from embezzled state budgets, but also from kickbacks extracted by low-level officers and channelled up the bureaucratic hierarchy. As substantiated by evidence from India, Pakistan, and Bangladesh, sales of desirable posts and locations in the administration, through appointments, promotions and transfers, are a pivotal mechanism of rent appropriation ultimately intended to grease the oil of the political machinery. Insofar as frontline officers are induced to take decisions that maximise rent extraction and these decisions run counter to the citizen’s interests, the socially harmful effects of this mechanism can be substantial. Ghost teachers and ghost schools are an extreme example of the immense social cost that may result from rent-generating policies.

Political capture of the bureaucracy can yield another, less well-known undesirable effect: because in the logic of this capture, administrative departments operate as feudal fiefs under the control of political bigwigs, coordination between them is made intrinsically difficult, thereby hampering the effectiveness of development policies. In fact, the problem may be worse than just poor coordination if it consists of fierce struggles about gaining control of lucrative rent opportunities embedded in some key ministries or departments (police, customs, tax administration, land planning, to cite the most important).

Lacking state capacity may also stem from factors that have nothing to do with politics, however. Thus, if bad educational performances may arise from policy neglect reflected in small budgets and poor monitoring, from reactionary rural landlords working to undermine schooling efforts at local level, from bureaucratic dysfunction and/or the lobbying corporatist pressures exerted by trade unions, they may also be caused by a lack of professional norms leading to teacher and school director absenteeism. In turn, absent norms may ultimately appear to be the consequence of a low demand for education in areas deprived of job opportunities where returns to schooling can show up.

Turning to property rights, and land rights in particular, their uncertainty and ambiguity may be traced not only to undue meddling of politicians on behalf of influential people or to malpractices at the level of the state bureaucracy (land surveyors, architects, and the like), but also to unenforceable laws that prescribe unrealistic procedures or unattainable standards. The root of the problem may then lie in an incorrect appraisal of the genuine demands of the people, a lack of consultation with them (such as is typically the case with investments by large foreign plantation companies), unnecessarily slow and cumbersome procedures, or inappropriate attempts at systematisation and uniformisation of enduring informal rules and practices. Ill-advised external pressures by donor organisations informed by their own Western standards may actually be responsible for the latter type of dysfunction.

Finally, malfunctioning of the judiciary may originate in a variety of causes, which go beyond illicit political interference and corruptibility of judges and magistrates: poor equipment and staffing resulting in slow treatment of the cases, low quality of the personnel, imprecise or non-enforceable laws (see above), outdated working procedures, and unreliable documentary sources (e.g., land registries).

10 Conclusion

In this chapter, we begin by summarising the central contributions and the main lessons of our whole exercise. We then address the question of their possible implications for development assistance.

I Major Lessons

Three important contributions have resulted from the present endeavour. First, we have proposed a methodology aimed at enabling us to navigate one’s way through the data and information that need to be collected to form a sound institutional diagnosis. Clearly, the approach proposed consists of two major phases: an exploratory phase during which international databases are mobilised and local expert opinions collected, and an in-depth analysis phase intended to probe into strategic sectors or domains where institutional obstacles appear to be especially salient. This meso-level institutional analysis is itself preceded by an economic diagnostic based on the twin concepts of growth engine and structural transformation, the latter being itself rooted in the dual economy framework initially proposed by Arthur Lewis. As we have found, poor countries tend to be characterised by the absence of a clearly identifiable growth engine (Tanzania), an artificial or unsustainable engine (Benin), a misleading engine based on resource rents (Mozambique), or a working engine at risk of misfiring (Bangladesh).

Our second contribution consists of the lessons learned from the institutional analysis: if institutional hurdles and the sectors of the economy where they manifest themselves are not necessarily identical between countries, behind them stand generic issues or problem areas. The identification of these issues provides us with a privileged instrument to penetrate into the institutional territory of a country, more particularly into its parts that matter for long-term development. Our attention has thus been drawn to institutional aspects that have been largely bypassed or generally under-estimated by economists and international experts to this date: the role of initial conditions with special attention to geographic and demographic conditions; the quality of political leadership and state autonomy; state capacity (including property rights, and land rights in particular); the nature of state-business relationships; the functioning of the judiciary; bureaucratic failures with special attention to coordination problems between its various parts; and the role of informal exchanges, including those mobilised for illegal transactions.

Moreover, crucial interlinkages between some of these core problems have been brought to light. For example, state capacity failures are often better understood when they are explicitly related to the political regime. This is typically the case when teacher absenteeism is caused by a political system of clientelism dominated by quasi-feudal local elites. Or, poor coordination between key administrative departments is more likely to be serious and difficult to remedy in contexts where these departments are viewed as political fiefs by the incumbent ministers and their close circles. To take a final example, formal property rights cannot be effectively enforced if the judiciary system is dysfunctional and, in particular, if magistrates and judges are prone to corruption. In the latter instance, indeed, cash notes carry more value than a land title.

As our third contribution, we have proposed the early development experiences of two East Asian tiger countries, South Korea and Taiwan, as useful benchmarks for putting the findings emerging from our four case studies in a broader perspective. The idea was not to use South Korea and Taiwan as models to be replicated but, more realistically, as guides susceptible of attracting our attention to important institutional dimensions of development. The generic issues of the role of initial conditions, the quality of political leadership and state autonomy, and state capacity have thus come out as key entry points into the Taiwanese and South Korean experiences of successful development. Furthermore, the critical importance of state-business relationships, which came out of our four intensive country case studies, has been fully confirmed by our review of South Korea and Taiwan at the time they were more or less at the same development level as these four countries.

There are several important and more specific lessons to draw from the comparison of the development experiences of our 4+2 countries.

Countries may have their own path to development. The fact that countries as apparently similar as Taiwan and South Korea, two showcases of developmental states, exhibited some significant differences in their mode of structural transformation, further reinforces this point. In particular, while South Korea’s growth has largely rested on the dynamism of large firms, small and medium-scale enterprises have played a significant role in the economic development of Taiwan. On the other hand, if the comparison is made between these two countries and Western Europe, we can confirm the idea of Gerschenkron (1962), according to which the role of the state increases with the distance between the take-off time of a country and the take-off time of pioneer countries. Relatedly, authoritarian regimes have been, and continue to be, a frequent occurrence in presently developing countries, whether in Africa, Asia, or Latin America. It is therefore not surprising that we have found them repeatedly in our small sample of countries (Kérékou and Talon in Benin, Nyerere and Magufuli in Tanzania, the Frelimo in Mozambique, Ershad, Ziaur Rahman, and the two begums in Bangladesh).

In most cases, however, strong leaders have not been to the task, essentially because they failed to see the critical role of private incentives in development and, in some cases, to check corruption in the ruling clique. Those criticisms cannot be levelled against South Korea and Taiwan. In spite of their having many trappings of a socialist state, including economic planning and the centralisation of politics in the form of a single party rule, their political leaders understood that sustained growth cannot be achieved if sufficient space is not created for market forces to exert their competitive pressures. On the contrary, they have exhibited great skills in mobilising private initiative and devising performance-based contracts in their relations to the private sector. It is probably not coincidental, therefore, that East Asian past leaders have inspired the present regimes of Presidents Kagame in Rwanda and Talon in Benin, although in the latter instance the profile of the autocrat somewhat differs from those of his counterparts in Taiwan and South Korea at the time of independence. The short-lived regime of President Magufuli in Tanzania comes as another possible illustration of the authoritarian way to development.

The quality of political leadership is clearly a major factor of successful long-term development. A developing country needs effective leaders able to conduct its destiny with the help of a team of technocrats in charge of setting economic priorities. This implies the existence of an autonomous state immune to pressures from private lobbies and to large-scale corruption, as well as its backing by an efficient bureaucracy. Moreover, it is essential that such leaders prevail over the whole critical period during which the basis of the economy’s structural transformation is laid, which implies that the ‘good’ leader remains a sufficiently long time in power or is followed by successors endowed with similar qualities. This condition has been fulfilled in Taiwan and in South Korea, although in the latter case the country had to wait for the demise of the corrupt leader who seized power at the time of independence. In some other instances, the inverse, less favourable scenario unfolded with ‘bad’ leaders succeeding ‘good’ ones. Thus, in Pakistan, the early rule of Ayub Khan held the promise of an effective state-directed development, yet was succeeded by regimes which, starting with Bhutto and continuing with Zia ul-Haq and Pervez Musharaff, reformed the country’s institutions in a way that deeply changed the rules of the political game. In short, they destroyed the autonomy of the state and the independence of the bureaucracy by encouraging the politicisation of the administration and the subordination of civil servants to elected politicians. Less calamitous is the experience of Indonesia where President Suharto, a strongman who abolished politics and co-opted the army, gave a powerful and consistent impulse to the modernisation of the country during the long period of his rule (no less than three decades). It is on the basis of clear priorities decided at the top that business cronies were allowed to carry out the national plan. By contrast, President Joko Widodo (popularly known as Jokowi), who did not hail from the army or the country’s elites, ended up frustrating the many hopes that his election raised among ordinary citizens. Mostly adept at entrenching his power through vast co-option of potential rivals, he let his cronies set the priorities. Damage has been more limited than in Pakistan because the engine of sustainable growth had been set into motion before his advent to power.

As we also learn from the East Asian experience, including post-1978 mainland China, an effective state-directed development is grounded not only in a successful industrial policy but also in sizeable investments intended for rapidly expanding the country’s infrastructure and its human capital. In doing so, major attention needs to be paid to quality factors. This is especially evident in the case of education where performance must be measured not so much by admission or graduation rates as by learning outcomes.

II Implications for Development Assistance

Our review of the four countries selected for intensive study has revealed that lack of insulation of the state from private business interests, faulty economics, and poor state capacity have largely contributed to disappointing development performances. Foreign assistance can help enhance the quality of the bureaucracy and to better manage the economy, but only in so far as bureaucratic effectiveness and quality of economic management do not depend on political factors. In reality, however, many institutional failures are traceable to the way political forces in a country play out.

Because almost all country diagnoses have so far ignored this basic truth, it is no surprise that hopes placed by Western donors in the development prospects of particular countries have been frequently dashed. Upon careful look, disappointment has been caused not so much by the sheer ignorance of politics as by the influence of rather naïve views underestimating the complexity of political economy mechanisms. This has been recently testified by the disastrous experiences of Western aid in countries such as Haiti, Somalia, Libya, Iraq, and Afghanistan. Moreover, because political patterns are influenced by the historical path of a country, its geopolitical situation, and particular aspects of its social fabric and culture (think of the role of clans and other traditional entities, of immigrant entrepreneurs, religious movements, regional and ethnic divisions, and so forth), any political economy analysis needs to be country specific. This does not mean that there are no common features between certain countries, but they should not be assumed a priori on the basis of superficial examination, and specific features should be investigated.

A first lesson is therefore that donors need to have a good knowledge of the countries it deals with, particularly with respect to the dimensions that our study has shed light on. Examples abound where interventions were made without sufficient information about potential backlash effects, without proper cognisance of impinging informal institutions (e.g., land tenure rules, contract enforcement mechanisms, exchange and credit relations) and their resilience, or without due awareness of the complex interests at stake. Second, since politics strongly affects development results, a donor cannot ignore the role of governance, and this implies that aid allocation decisions must necessarily be made on the basis of a needs-governance trade-off. In addition, the donor must decide whether the aid awarded is going to be effectively monitored with inevitable sanctions when fraud is detected. We have seen that in some cases, donors have shown a lot of laxity in the presence of a series of well-published scandals, presumably because stopping aid also involves costs for the donor country (due to fixed costs of establishing the aid link, to the harm caused to geopolitical interests, or to the ensuing losses for its own business firms). Also, their readiness to use ad hoc measures to bypass the implications of governance indicators is to be questioned.

As shown in Bourguignon and Platteau (2021a, 2021b), the advantage of using donor monitoring is that it increases the chance of poor and badly governed countries to be eligible for aid, provided, however, that the initial gap between their governance quality and the quality observed in other poor but better-governed countries is not too large. Budget aid, grounded in the idea of partnership between donor and recipient, is evidently not recommended when conditionality needs to be imposed by the former on the latter. When a donor deals with poor and badly governed countries whose populations cry for external assistance, project aid, and to a lesser extent programme aid, seem advisable. The reason is that such aid modalities are more easily monitored, in part because they may be implemented by NGOs or private companies contracted by the donors. An extreme case is the mode of intervention favoured by China when financing and building infrastructural facilities in Africa. Since monitoring intensity may be tailored to the specific governance situation of each recipient country, recourse to project aid need not be systematic: appropriate for so-called fragile countries, it may be largely dispensed with in poor and better-governed countries.

Devarajan and Khemani (2016: 21) make the point that, when government failures are the result of politics, priority ought to be given to aid modalities for which citizens’ ability to hold the state to account is maximised. In short, aid should primarily aim at promoting citizen engagement and transparency (2016: 21). In the same line, Wade (1985: 488) stresses the need to strengthen the rules of public disclosure or accountability to curtail corruption. This prescription raises the moot question as to whether aid should aim to improve governance directly or, rather, to lay out the infrastructural basis of long-term growth, promote better education, health and technical training, and reduce poverty. We submit that the latter option should be followed but strict conditions and rigorous monitoring should be attached to the disbursement of aid so as to make it as effective as possible: in this way, aid-related governance rather than general governance can be improved. Moreover, whenever people’s participation and self-assertion are an important prerequisite of success, as in many rural development programmes, the donors must encourage the underlying processes. In many cases, this may require that on-the-ground interventions are entrusted to non-government organisations, or similar types of associations, both local and international.

We thus believe that general governance in recipient countries is not susceptible to being exogenously modified, whether by demanding public transparency or otherwise. Placing great hope in the ability of foreign actors to initiate changes in governance is bound to lead to disillusionment, and it may even happen that such attempts will spark nasty backlash effects. As already suggested, the more realistic solution consists of applying aid allocation rules based on comparative country performances weighed down by considerations of intensity of needs and coupled with a serious monitoring of the aid use. On the other hand, as the Taiwanese historical experience testifies, improvements in state accountability and the promotion of a civil society evolve gradually and are the outcome of development rather than its prerequisite. Furthermore, if economic liberalisation was largely undertaken under foreign pressures, political liberalisation was to a great extent an endogenous process, in which even the authorities eventually participated. The problem is of course more complicated when political leadership is lacking, say because the clique in power is corrupt or the ruler has unrealistic views regarding the country’s growth potential. It is in this sort of especially hard circumstances, however, that effectiveness in aid use should arguably be a major preoccupation of the donor community.

There is a snag, however. Endogenous or co-evolving progress toward political liberalisation is more difficult today than it was at the time Taiwan and South Korea developed. The reason is that globalisation and the accompanying exposure of elites and middle-class people to modes of living and values in developed countries, including democratic aspirations, cause their preferences to change more quickly than ever before. As a result, restrictions to freedoms have become less acceptable to people, the educated classes in particular, thereby requiring a greater measure of people’s indoctrination, internal repression and isolation from international influences. The examples of Russia and China come to mind here. This reality thus points to a tragic dilemma for which no satisfactory resolution seems to exist. And ominous consequences for the international order also follow.