Saturday, August 23, 2014

Dialogus de Beijing Consensus -- On Ramo's idea of a 'Beijing Consensus': Pessimo's clarification

Pessimo's clarification:

Optimo’s response to my pessimism regarding Ramo’ particular articulation of the Beijing Consensus deserves some clarifications of my position, and perhaps of the terms of our dialogue.  This include (1) the nature of ‘development’; (2) the nature of what I am calling ‘agglomeration’; and (3) the nature of my developmental ‘determinism’.

With regards to the first clarification.  My relatively deterministic stance toward the possibilities of institutionally-fed development only applies only to one particular conceptualization of development – this is the one that equates ‘development’ with increased relative geographical (national) capacity to produce and capture material wealth (e.g., with moving from what the World Bank calls a “low income’ to a ‘medium income’ country, or from a low- or medium -income country to a ‘high-income’ country).  This is the particular conceptualization that I (and many others) see as principally driving the law-and-development project (and the global ‘development’ agenda writ large).

But, of course, there are other ways of conceptualizing ‘development’ -- such as Sen’s development as freedom, or improvements in general quality of life, or simply development as alleviation of the brutality of material poverty (my preference).  When conceptualized in this terms, I am much less a determinist – probably no more so than most people.

Along these lines, I would hypothesize that the two particular examples of technology-driven development that Optimo cites to – mobile banking in Africa and Brazil’s rapid bus transit system – certainly contribute to ‘development’ in the sense of improved ‘freedom’ or improved quality of life or the reduction in the more brutal aspects of material impoverishment, but they do not necessarily lead to a country’s increased capacity to generate and retain greater material wealth relative to the rest of the world.  To put it another way, I would suspect that mobile banking and rapid bus transit are important innovations with regards to progressive wealth redistribution, but not so much with regards to what we call economic growth.

Similarly (my second clarification), when I talk about agglomeration, I am talking only about a particular form of agglomeration – agglomeration that leads to product competitiveness (i.e., superior competitiveness in design rather than in price) and superior capture of material wealth -- what is often referred to collectively as 'moving up the value chain'.  China does indeed enjoy agglomeration in a number of productive technologies – including food adulteration and suppression of industrial wages.  But viewed from a purely developmental perspective, the problem with these particular technologies is that they do not contribute to industrial upgrading: again, their principal effect lies in wealth distribution (clear regressive in the case of labor exploitation; but perhaps somewhat progressive in the case of food adulteration (but which doesn't make it right, obviously)).

Finally, I would like to note that in discussing Taiwan, Optimo provokes a very interesting observation: Ramo’s Beijing Consensus would have been much more persuasive and compelling if he would have called it instead the Taipei Consensus (although this would not have contributed to with what I believe to be one of Ramo’s principal objectives in advancing this model: that of helping Kissinger & Associates curry favor and influence with mainland Chinese leadership).

This leads me to my third clarification, the nature of my developmental determinism.  I am not determinist with regards to a country’s level of development per se.  Certainly, countries can and do ‘develop’ in the sense of increasing their capacity to generate and retain material wealth relative to the rest of the world.  And Taiwan and South Korea are clear examples of this.  My determinism lies more limitedly in our capacities to promote development through strategic (re)design of institutions of governance (including the legal institutions that are the subject of law and development).  Without belaboring the basis for and parameters of this particular determinism, I would argue that the economic development of both Taiwan and South Korea is due simply by their close geographical and  cultural proximity to Japan, together with a perhaps even closer cultural proximity to the United States that emerged during and owing to the Cold War.  It was and is these various dimensions of proximity that catalyze the unique ability of their industrial parks to promote cutting-edge agglomeration.  But another way, I argue that is development that enables institutions (including Asian industrial parks), not the other way around.

Finally, I would like to point out that contrary to Optimo's presumption, I have yet to determine my gender.  This would suggest that I am a hermaphrodite.  And since I am also also a literary fiction, this makes me not simply a ordinary, every-day kind of hermaphrodite, but a speculative hermaphrodite, which I think would make a terrific character-class in World of Warcraft.

Friday, August 22, 2014

Dialogus de Beijing Consensus -- Optimo on Ramo's idea of a 'Beijing Consensus' (First theorem)

Question:  Does the so-called ‘Beijing Consensus’ present a meaningful ‘model’ or blueprint for development?

Optimo: It does, despite the alleged lack of success of the model in China.

In his last post, Pessimo presented, in a very clear fashion, the three theorems that characterize the so-called Beijing Consensus, as defined by Ramo. He then criticized these three theorems by raising two kinds of objections. One is that some of these theorems are wrong or have unrealistic assumptions. The other objection is that China, which was supposed to be an illustrative case for such theorems, has failed to successfully achieve any of the goals set up by the model.

The first type of criticism is far stronger than the second type. The Chinese failure in successfully following or implementing the model may illustrate problems in the model, but it says little about the overall potential of the model to provide meaningful guidance to other countries. Thus, most of my response will be focused on the first type of objection, the one that questions the basic assumptions of the model.

Let’s start with innovation (and given the length of my response I will leave the other two theorems for future posts).

Pessimo is skeptical of the possibility of creating “and sustaining capacity for leading edge innovation is virtually impossible in the developing world”. To support this idea he mentions that many attempts to create industrial parks modeled after “those that have promoted leading-edge innovation in Taiwan and South Korea have been unsuccessful”. If I understand this correctly, there seems to be an inherent contradiction in the argument here: if “innovation is virtually impossible in the developing world”, how can we explain that countries like Taiwan and South Korea managed to successfully create innovative industrial parks? Should they not be classified as developing countries? Assuming they were developing countries at the time these innovations took place, maybe we can start by toning down the criticism and assume that innovation is not “virtually impossible” but perhaps “less likely to happen” in the developing world?

The fact that some developing countries have failed at producing innovation alone is not a reason to disprove the model. The question that need to be answered is why these countries have failed. This is exactly the point in which my disagreement with Pessimo becomes very clear. To explain the failed attempts to set up “ledging-edge” or “bleeding-edge” innovation, Pessimo argues that a series of pre-determined economic factors that are directly associated with the geographical conditions of the country (the so called agglomeration effects) tend to favor developed nations as the locus for such innovation. This would require a country to “be lucky” enough to be in the right place at the right time in order to develop. I do not subscribe to this explanation, let alone to its deterministic tone.

Innovation requires a variety of factors to take place, but one of the most cited studies to explain the capacity of Taiwan and South Korea to produce innovation is the idea of “Embedded Autonomy”, developed by Peter Evans. The argument has two parts. One is that the state has an important role to play in promoting innovation. Thus, while innovation is not determined by geographic factors alone, it is also not determined by the individual assumptions of the rational actor model either. In other words, institutions matter. The second element is the assumption that a particular type of state is required to promote such innovation. According to Evans, the state’s capacity to produce innovation requires a combination of the “autonomy” prescribed by the Weberian bureaucratic model, while at the same time requiring the cooperation of private actors that can only be obtained if the state in “embedded” in society. This “embedded autonomy” is a “contradictory balance” that is hard to find. Moreover, Evans acknowledges that there is more than one way for a state to be embedded in society, as the contrasting examples of Taiwan and South Korea show. Nevertheless, some form of embedded autonomy is a requirement for innovation to take place.

The best example to support Evan’s thesis and challenge the idea of agglomeration effects is Brazil. As Evans shows, Brazil has not developed a fully functional developmental state like Korea and Taiwan. Instead, the country has mostly a dysfunctional bureaucracy, except for a few departments that are often described as “pockets of efficiency”. When a pocket of efficiency manages to have the required “embedded autonomy”, innovation becomes feasible. The automotive sector in the 1960s and 1970s is one example. In contrast, Brazil’s massive failure in producing innovation in information technology illustrates that a country may be able to innovate in some sectors by not in others, depending on the institutions governing each of these sectors.

Evans’ argument was recently by revised by him and by others. While the revisions do not reject the two basic premises of the argument (the importance of the state, and the need for embedded autonomy), Evans’own revisions indicate that the relevant social relations supporting embeddedness are now broader (i.e. it involves a larger set of actors). Others, in turn, have emphasized the importance of focusing on processes, rather than outcomes as exemplified by the most recent literature on industrial policy (e.g. see this piece by Rodrik). Brazil again offers an example of this type of arrangement with the innovations in the agricultural sector promoted by the Brazilian Corporation for Agricultural Research, EMBRAPA.

In addition to disagreeing with Pessimo’s argument that innovation is “almost impossible” in developing countries due to agglomeration effects, I also want to challenge his interpretation of the first theorem of Ramo’s articulation of the Beijing Consensus. Pessimo seems to assume that the innovation needs to take place in the developing world in order to promote development. I am not sure this is what Ramo meant. The question that Ramo asks is what kind of technology should these countries use to “start development”. His answer to this question is that “bleeding-edge innovation” (rather than trailing-edge technology) that can “create change that moves faster than the problems change creates” is more likely to promote development. Where the technology is coming from, however, is not clear -- not in the excerpt in Pessimo’s post, at least.

There is at least one example that may suggest that the technology can come from the developed world and still benefit developing countries. Mobile banking in African nations revolutionized financial transactions in the continent, allowing money transfers from one cellphone to another without the intermediation of a financial institution. This innovation builds upon a bleeding-edge technology (mobile telephony) created in developed countries to bring change to another industry: banking in developing nations.

My point here is that Pessimo’s argument that innovation can only happen in developed countries seems to assume that there is a linear process of innovation, and developing countries are playing catch-up. If we abandon this premise, we can see that there is not a leader and a follower, but there are instead multiple paths. Indeed, mobile banking in Africa is the case in point. This is a particularly important innovation in a region in which levels of literacy are low and the presence of financial institutions outside large urban centers is scarce. So, the innovation is not relevant to developed nations or even to middle-income countries, such as Brazil and Mexico. But it has been quite relevant in the African context.

Another important question is what kind of technological innovations can be classified as bleeding-edge. One response is to say that it needs to be bleeding-edge from a scientific standpoint. But I wonder if we should also include here the fact that adopting bleeding-edge innovation and making not so bleeding-edge modifications on it could generate relevant social changes. So, we do not need to talk about ultra revolutionary scientific ideas, akin to inventing the laser technology. Sometimes, some marginal modification in existing products can generate quite significant results. One example is the slightly modified system for public buses that has shown significant results. The so-called bus-rapid-transit (BRT) requires less investment than subways, and is able to transport a higher number of passengers than a regular bus system. The changes are the payment system outside the buses, dedicated lanes and a faster entry-exit system in the buses (which are at the same level of the boarding platform). As a result, it is a great option for developing countries. Indeed, the system has been widely adopted in Latin America and has already made inroads in China and India. This may not be a “bleeding-edge” or “ledging-edge” innovation from a scientific standpoint, but it has generated “bleeding-edge” innovations in public transportation systems. If we consider the impact it has had in the lives of millions of people, this could be considered the type of technological innovation that may promote development.

The last point I want to make is regarding the idea that technological innovation will promote development as long as it “moves faster than the problems change creates”. Pessimo questions what does that mean. I think it means that dynamic innovation is better than slow moving one (coming from outside or inside). As a particular technology becomes widespread and settled, it creates a series of self-reinforcing mechanisms that make it hard to move away from it, even if there is superior technology available. The cautionary tale of the QWERTY keyboard is probably the most cited example of this problem.
I think this is enough to start the conversation. My comments on the other two theorems will be coming next week.

Friday, August 15, 2014

Dialogus de Beijing Consensus -- Pessimo on Ramo's idea of a 'Beijing Consensus'

Question:  Does Ramo's particular vision of a so-called ‘Beijing Consensus’ present a meaningful ‘model’ or blueprint for development?


No, it does not.

As noted in the introduction, the “Beijing Consensus’ was a term initially coined by Joshua Ramo to describe a development model that in many ways contradicted the principal tenants of the Washington Consensus (hence 'Beijing' Consensus -- get it?).  According to Ramo, the Beijing Consensus consists of “three theorems about how to organize the place of a developing country in the world” (see pages 11-12):

Ramo writes: 
“The first theorem repositions the value of innovation. Rather than the “old-physics” argument that developing countries must start development with trailing-edge technology (copper wires), it insists that on the necessity of bleeding-edge innovation (fiber optic) to create change that moves faster than the problems change creates. In physics terms, it is about using innovation to reduce the friction losses of reform.”

This is just silly -- a buzzword salad.  What does it mean to "create change that moves faster than the  problems change creates?" What kind of problems do copper wires cause that immediate transition to fiber optics outruns?  Maybe Ramo means what the rest of the world calls 'leap-frog' technologies.  But leap frog technologies clearly create their own problem.  The fact that one moves directly from walking to automobile might mean that you don't have to deal with the problem of horse manure, but you still have to deal with pollution.  This is, of course, I really, really big problem in China right now, and they are clearly not outrunning it, nor are the going to be able to outrun it, by leapfrogging to fiber optics.

Beyond this, studies show it is almost impossible to sustain consistency in 'bleeding edge' -- I prefer the more conventional term, 'leading edge' -- innovation anywhere but in the most advanced of industrial and post industrial economies. And, contrary to Ramo's assertion, one certainly does not find it in China.  Even today, some 10 years after Ramo's claim, China does not produce anything that is leading-edge, design-competitive (or product competitive) on international markets.  Efforts to introduce centers for leading-edge industrial innovation, most notably those establishing industrial parks modeled after those that have promoted leading-edge innovation in Taiwan and South Korea -- have been unsuccessful:  The industrial parks established in China have invariably devolved simply into sites where foreign firms could source component suppliers.  A similar devolution has accompanied efforts to establish industrial parks in Thailand, Malaysia and the Philippines, so one can't really blame it on China's political system (the way that some are wont to do).

As noted above, studies show that developing and sustaining capacity for leading-edge innovation is virtually impossible in the developing world.  Such innovation requires what Michael Storper has termed agglomeration effects, a synergistic spill-over of knowledge that results when a critical density of highly skilled and educated workers live and work in close proximity with each other.  This requires huge amount of local wealth and very high standards of living to attract and maintain this kind of labor force.  Moreover, agglomeration give the possessing region an absolute rather than simply a comparative advantage in the relevant areas of production.  This means that some other region cannot succeed by simply 'competing' with rival existing centers of agglomeration (absolute advantage means that competition is impossible), and given the huge first mover advantage that the advanced industrial economies have in product competitive industries, one would suspects that it would be highly improbably that there are any areas left for new entrants from developing countries even if some level of agglomeration could be achieved.  Which is why you simple do not see agglomeration emerging in anywhere but the developed world.
Ramo writes:
The second Beijing Consensus theorem is that since chaos is impossible to control from the top you need a whole set of new tools. It looks beyond measures like per-capita GDP and focuses instead of quality-of-life, the only way to manage the massive contradictions of Chinese development. This second theorem demands a development model where sustainability and equality become first considerations, not luxuries. Because Chinese society is an unstable stew of hope, ambition, fear, misinformation and politics only this kind of chaos-theory can provide meaningful organization. China’s new approach to development stresses chaos management. This is one reason why academic disciplines like sociology and crisis management are the vogue of party think tanks at the moment.

Again, the problem here is that sustainability and equality both required highly sophisticated regulatory systems whose costs are such that they generally cannot be supported by anything less than an advanced industrial economy.  These include not simply advanced technologies for regulating and responding to environmental degradation without interrupting the productive activity of the polluting industry, which China does not have, but highly evolved banking systems, auditing systems, and socially pervasive accounting practices to that can effectively collect and redistribute wealth through an efficient the taxation system, which China also does not have.  Again, China provides ample evidence of this.  Contrary to Ramo’s claim, China’s development has in fact resulted in a infamously massive increase in social inequality (as measured by GINI), and infamously staggering levels of environmental degradation.  Nor is China unique in this regard:  the technologies and quality of labor needed to support effective wealth redistribution and sustainable development are simply too expensive for lesser developed countries to develop, attract and maintain.  .

Nor is there no evidence of any meaningful 'crisis management' coming out of the central level in China.  In fact, many attribute the recent political crackdown on civil society (including educational institutions, and including the study of sociology) precisely to political insecurity resulting from a lack of crisis management regulatory technologies.  (Ironically, one of these people is Yu Jianrong, one of China’s most highly respected and internationally visible sociologists).  Like redistribution and environmental sustainability, crisis management is an expensive technology to maintain, both due to monitoring costs and due to the fact that personnel trained in this area are expensive and finicky about where they want to live. 

Finally, Ramo writes:
Finally, the Beijing Consensus contains a theory of self-determination, one that stresses using leverage to move big, hegemonic powers that may be tempted to tread on your toes. This new security doctrine is important enough that I treat it later in a separate chapter.

While there is some truth to this, this is a condition that clearly lies outside the reach of any domestic development ‘model’.  China’s autonomy was and is pure and simply a function of its size.  It is a capacity that simply lies beyond the reach of the vast majority of developing states.  One of the problems that informs this ‘theorum’ is that Ramo seems to think that economic autonomy is simply a problem of domination by international organizations (‘hegemonic powers’).  In fact, the much bigger problem is domination by markets.  The only effective response to this problem that we have found to date is for developing nations to enter into transnational regional financial arrangements like the Chiang Mai Initiative in Asia or the Prado-inspired BRICS Development Bank.  But at best, this only results in a regional autonomy, not in the kind of domestic financial autonomy that Ramo is imagining.  Moreover, they only insulate from large shocks, they do not insulate from the kind of persistent market-driven domination by private actors – as articulated, for example, in threats to relocate production, harassing litigation and lobbying, and intellectual domination of the WTO and other international financial institutions and organizations – that is a much greater threat to economic autonomy than ‘hegemonic powers’. 

In sum, China’s actual developmental trajectory has been almost the polar opposite of that which Ramo’s labels the ‘Beijing Consensus’.  It has not featured any significant ‘bleeding-edge innovation’; and it has been massively anti-egalitarian and massively unsustainable from an environmental perspective.  It has indeed featured a marked degree of economic autonomy, but this is due purely to China’s immense size and is therefore not a meaningful ‘model’ for other developing countries.  The failure of even China to meaningfully conform to the so-called ‘Beijing Consensus’ would appear to confirm that the Ramo’s notion of a Beijing does not represent a meaningful developmental model for “students in places like New Delhi and Brasilia,” or anywhere else in the world.

Finally, one might counter that implementing these theorems would pay for their (immense) administrative  costs by promoting economic growth.  Maybe so (not really), but China gives us no evidence of this.  Even at its very impressive levels of economic growth, China -- like India, Botswana, Indonesia, and other dramatically growing economies -- has shown to be utterly incapable of maintaining the developmental features called for by Ramo's 'Consensus'.

Saturday, August 9, 2014

Dialogus de Beijing Consensus -- Prologue

Over the next two months or so, Mariana Prado and myself will be using this blog to construct a scholastic dialogue about the so-called 'Beijing Consensus' and its possible relevance for law and development.  This exercise will lead to a book chapter for a forthcoming book on the Beijing Consensus being edited by Weitseng Chen of the National University of Singapore Faculty of Law (who is therefore my colleague, and was also Mariana’s classmate in the Yale Law School doctoral program).  In keeping with the scholastic dialogue tradition, I am proposing that Mariana be ‘Optimo', and I be ‘Pessimo’.

In this introductory post, I will introduce the intellectual history behind the Beijing Consensus, so as to give some background.  Later this week, Pessimo will be making the first entry.

The Beijing Consensus was a term initially coined by Joshua Cooper Ramo.  Ramo used term to introduce a particular developmental strategy that he was advancing as a superior alternative to the then popular Washington Consensus.  According to Ramo, in contrast to the Washington Consensus, the Beijing Consensus emphasized experimentation rather than what we might call ‘programaticism’; a developmental focus on equitable distribution and (environmental) sustainability, rather than simply on GDP growth; and a focus on promoting and protecting ‘financial sovereignty’ – aka, the country’s ability to determine for itself how to structure its national economy, without being pressured into adopting particular policies by the advanced industrial countries or the international developmental organizations.

We will examine and critique Ramo’s notion in further detail later on.  But for now, it is significant to note that Ramo’s notion can be seen as part of a larger intellectual history.  Since the 1970s, scholars have been advancing various ‘Asian’ models of development as promising alternatives to ‘Western’ models.  Prior to Ramo, these included the ‘Developmental State’, and a ‘post-industrial’ form of industrial organization often referred to as ‘post-Fordism’.  The idea of the Asian ‘developmental state’, which was initially developed by Chalmers Johnson in the 1970s based upon the developmental experiences of Japan, advance the idea that the state could promote economic developmental by adopting industrial policies that targeted particular domestic industries for industrial development.  Post-Fordism, as perhaps most influentially articulated in the context of law and development by Charles Sabel, and which also derived in part of Japanese industrial organization, emphasized promoting industrial flexibility and adaptiveness rather than industrial exploitation of economies of scale.  A third precedential model, called neo-authoritarianism, emerged in the early 1990s, and argued that Asia’s impressive development could be credited to a policy decision to promote capitalist and neo-liberal economic reforms before promoting democratic and liberal political reforms.  (The subsequent “Asian values” thesis of the later 1990s, associated primarily with Singapore’s Kishore Mahbubani, can be seen as a variant of this.)

Ramos particular conceptualization of the Beijing Consensus met with a lot of resistance, principally because there was real question whether the particular developmental policies he saw it as prescribing accurately described China’s actual path of economic development.  But it did appear to trigger renewed Western academic interests the possibility of a superior, and distinctly Asian, developmental model.  In 2005, Randall Peerenboom, wrote a book published by Oxford University Press, entitled China Modernizes: Threat to the West or Model for the Rest?, in which he advances what he termed the an “East Asian Model”, is characterized both by prioritizing economic reforms over liberal political reforms, and by a distinctively pragmatic approach to development that Peerenboom referred to as “doing what works”.  A couple of years later, Dani Rodrik advanced a similar developmental model, which he and others are calling ‘New Development Economics’ (which was discussed a bit in Michael Trebilcock’s recent post to the blog), that like the East Asian Model emphasizes pragmatism and experimentation and that cites China’s post-Mao development as its principal exemplar.  More recently, some scholars – perhaps most prominently in the field of law and development, Curtis Milhaupt – have been advancing a distinctly Chinese notion of ‘state capitalism’: a form of capitalism similar to the developmental state but in which the focus is not so much on industrial policymaking but more on state involvement in the corporate governance of firms.

The succeeding posts in this dialogue will debate the relevance of each of these ‘models’ to ‘law and development’. Stay tuned.

Thursday, July 31, 2014

Between Trade and Development

In my recent Robert Hudec public lecture to the Society for International Economic Law at its biannual conference in Bern, Switzerland (“Between Theories of Trade and Development: The Future of the World TradingSystem”), I focus on the role of developing countries and the multilateral trading system.  First, I briefly trace the legal status of developing countries in this system, beginning with the emergence of special and differential treatment on the import side in the 1950s (with respect to the protection of infant industries), and on the export side in the 1960s (with respect to non-reciprocal preferences granted by developed countries), to the single undertaking approach adopted in the Uruguay Round culminating in 1993, where all countries were essentially required to sign on to a broad range of commitments extending well beyond border measures to a variety of internal domestic regulatory policies, to the current Doha Round where a major fault-line has emerged between developed and developing countries with respect to multilateral commitments. 
I then trace a parallel set of shifts in thinking in development economics in the post-war period, beginning with big push, state-led theories of development and import substitution industrialization from the 1950s through to the 1970s, then the converse of these policies reflected in the Washington Consensus that prevailed in development circles throughout the 1980s and much of the 1990s, which emphasized the ubiquitous virtues of private markets and a limited role for government; then the currently prevailing New Development Economics, which emphasizes the shortcomings of both earlier schools of development economics in their commitment to universal or generalizable theories of development, and instead focuses on country- and context-specific impediments to development, recognizing that some of the most economically successful developing countries in the post-war period (including the East Asian and Chinese high-growth economies) have adopted highly eclectic and unorthodox policies that seem to have been effective in their particular contexts.  These shifts in thinking in development economics map closely the evolving role of developing countries in the multilateral trading system.
This evolution in thinking amongst development economists suggests that a one-size-fits-all multilateral trading system must be abandoned, as is already reflected in the dramatic proliferation of preferential trade agreements (PTAs) between developed and developing countries, and between and among developing countries themselves.  To reinvigorate and render sustainable the multilateral trading system, I argue that this system should provide more scope for plurilateral agreements amongst sub-sets of members (“coalitions of the willing”) and making provision for signatories to PTAs to designate, at their option, the WTO dispute settlement system as the dispute settlement regime for their PTAs, hence promoting stronger integration and coherence of international trade law.  In turn, I argue that developing countries, other than the least developed countries, should abandon claims for extreme forms of special and differential treatment, especially on the export side, and be prepared to bargain reciprocally with developed countries for improved market access.

Thursday, July 24, 2014

A response to Michael Dowdle or "How the BRICS Bank proves that Santa Claus exists"

In his most recent post, Michael Dowdle, the most prolific contributor to this blog, argued that the BRICS Bank can be conceived as an example of my concept of institutional bypass. Moreover, he adds that the Bank has a strong potential to actually undermine the field of law and development by refusing to engage with the "good governance" discourse and specially by refusing to use the main instrument that current promotes the "good governance" agenda, conditionalities.

Michael is not alone in conceiving the BRICS Bank as a bypass. Indeed, a person had suggests that to me on facebook last week and the media has also used the word "bypass" to describe the new Bank (see here). But Michael considers this an irony, as he believes that in this case an institutional bypass is actually being used to destroy the field that I care so much about. Indeed, he conveys this idea clearly in the title of his post: "The BRICS Bank as Inverse Institutional Bypass, or "Christmas comes early for Mariana Prado, but did she get what she really wanted?""

Actually, I am not overly concerned with that. While the concept of institutional bypass may be productively used to promote fruitful and desirable changes, I also acknowledge that there are undesirable institutional bypasses. So, the concept itself basically describes mechanisms of institutional change without necessarily attaching a normative judgment to them. Bypasses are not intrinsically good or bad. They are just bypasses. 

But most importantly, Michael suggests that the BRICS Bank likely rejection of the modus operandi of the World Bank will necessarily be detrimental to the field of law and development. I am not so sure. First, it is not clear whether a full rejection of the modus operandi of the World Bank by the BRICS will necessarily happen. And if it does, it is not certain that it will produce negative results. As a matter of fact, I have recently published a paper with Fernanda Cimini Salles mapping out possible strategies that could be adopted by the BRICS Bank. For each of these strategies, the paper discusses its interaction with the World Bank and the potential outcomes. Those interested in the full argument can read the full paper here. I am pasting below a summary of the argument, published in another blog:

Fernanda Cimini and I ask whether the new bank has the potential to bypass the World Bank, destabilizing the current development finance framework. Our answer is: it depends on how it will operate. If we look at the existing practices in development finance, the BRICS Bank has at least three options:

1) Adopting the current paradigm, which is guided by institutional concerns. An example is the World Bank (IBRD), which tries to improvea country’s institutional framework by engaging in a process of creation of rules, norms, organizations and procedures that can directly or indirectly promote development.

2) Adopting a compliant passiveness type of operation, which, in contrast to the first one, has not actively engaged with an institutional agenda for development. An example is BNDES, the Brazilian Development Bank, which operates within the existing framework, forcing borrowers to follow existing rules and norms.

3) Adopting a consistent pragmatism type of operation. This is illustrated by theChinese Development Banks (CDB and Exim Bank), which have actively engaged with institutions, but they have done so in rather creative ways, always driven by the goal of achieving the concrete objectives of the operation.

There are still uncertainties regarding how the BRICS Bank will operate. So, we do not know which of these three, if any, will be adopted. But these uncertainties should not stop us from speculating about the new bank and how it could change the development scene. In this speculative spirit, we could consider that the most significant change may come from the interaction of the BRICS Bank with the World Bank. In this interaction, there are the possible scenarios:

1) If the BRICS Bank adopts the agenda and modus operandi under the current paradigm, it will become a direct competitor of the World Bank, but it will not offer the risk of rupture with the field. This is not to say that the competition process between the two banks may not generate innovations in the field. On the contrary, the BRICS Bank, by becoming a competitor under the current paradigm, could be create incentives for the creation of innovative mechanisms of development finance that promote institutional reforms while addressing the problems that have reduced the effectiveness of World Bank mechanisms.

2) If the BRICS Bank adopts the compliant passiveness model, it would offer an alternative to the World Bank without directly challenging the current paradigm.  However, by choosing this model, the BRICS Bank would not try to compete directly with the World Bank or to imitate its modus operandis. As a consequence, the incentives for innovation in finance mechanisms would be lower, as there would be less chances of the BRICS Bank’s operation clashing with those proposed by the BRICS Bank. A possible outcome is a peaceful co-existence of the two institutions, or even a partnership.

3) If the BRICS Bank adopts the consistently pragmatic model, its operations will clash directly with the normative and operative structures of the World Bank. In this case, not only the World Bank will be “threatened”, but also will the organizations that have been pushing for the institutional turn in the field and a particular model of development. This consistent pragmatism may bring a refreshing blow of flexibility and effectiveness, generating a much-needed renovation of the entire field.

The table below summarizes the scenarios identified in the paper

World Bank BRICS Bank Dynamic Possible Outcomes
Current Paradigm Current Paradigm(Unlikely) Direct Competition (with or without collaboration) No rupture with the field - Operational Innovation
Current Paradigm Compliant Passiveness Peaceful Coexistence without direct competition No rupture with the field - Possible partnership
Current Paradigm Consistently Pragmatic Tense Coexistence with no collaboration Rupture with the field - Potential structural innovation

In sum, independently of what kind of approach the BRICS Bank adopt, if it is indeed created, we are likely to see changes in the field of development cooperation in the near future. The impact of a new world multilateral development bank controlled by emerging countries goes beyond financial and political considerations. The BRICS Bank has the potential to call into question the basic normative and operational structures of the field of development and even to provoke a rupture with the existing architecture. The intensity of such changes remains to be seen.

In sum, as the Guardian nicely put, the bank "has the potential to change how development is done, but the devil is in the details". So, my response to Michael is that I still believe in Santa Claus!

Tuesday, July 22, 2014

The BRICS Bank as Inverse Institutional Bypass, or "Christmas comes early for Mariana Prado, but did she get what she really wanted?"

So, as you may be aware, the BRICS nations – Brazil, Russia, India, China and South Africa – will be establishing their own developmental Bank, which is being called the BRICS Bank.  The motivation behind the BRICS Bank is a dissatisfaction with the way the World Bank is organized and run.  There are three principal sources of dissatisfaction.  The first is the degree to which World Bank governance is dominated by that Bank’s largest shareholder (and contributor of capital), the United States.  Relatedly, they are also dissatisfied by the WB’s lending policy, which focuses on neo-liberal private market development rather than on infrastructural development.  And finally, there is also dissatisfied with the WB’s use of conditionalities – i.e., with its frequent demands that recipient countries undertake neo-liberal governance reforms as a condition for getting a developmental loan.

As many may be aware, our own Mariana Prado has spent the last couple of years developing an innovative developmental strategy that she calls “institutional bypass”.  The basic gist of this strategy is that instead of focusing on reforming existing but problematic governance institutions, law and development could focus on developing functionally parallel institutions and having them compete with the existing institution.  She believes that the superior economic and social efficiencies that law and development strategies will bring to these parallel institutions will give them a competitive advantage over their older, corrupt counterparts, and that competition will thereby cause the new and better designed institution to ultimately end up replacing the older corrupt institutions.

I think it easy to see that the BRICS Bank is exactly of this kind of thing:  a new institution brought about to compete with an older and, at least to some, dissatisfactory institution. 

But there’s a twist:  because the BRICS Bank, in rejecting the use of conditionalities, it is effectively rejecting rather than promoting the general law and development agenda.  It is what we might call an 'inverse' institutional bypass -- a bypass that is challenging rather than promoting 'law-and-development', at least in its neo-institutionalism guise, as a developmental strategy.  

 Somewhat ironically, as a law and development skeptic, the reason why I really like Mariana's idea of institution bypass is precisely because it does not presume the superiority of law and development legal reforms:  by allowing for competition, it implicitly allows for the possibility that the seeming problematic institution could in fact be more efficient and effective than those advocated by law and development.  I don’t know if in developing her model, Mariana ever really considered this ‘ironic’ possibility.  But if she hasn't, now she may have to.