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.

Sunday, July 20, 2014

What is 'development' -- more thoughts on GDP

[More thoughts inspired by Diane Coyle's GDP: A Brief but Affectionate History]

One of the major problems with the discipline of 'law and development' has been its failure to identify what the 'development'  part of law and development actually refers to.  Because of this, we invariably end up equating development with growth in GDP.  But this is highly problematic, and I suspect severely compromises 'law and development' as a programmatic discipline.

The problem with using GDP growth as a proxy for development is that GDP does not measure development, its measures aggregate quantity of 'production' -- primarily material production.  It was designed as a tool for regulating a Fordist industrial system -- an industrial system that focused on exploiting economies of scale in the production of material goods.  Originally, GDP was only concerned with material production.  It has since been adapted to try take into account production of services and other non-material goods.  But how effective it is in doing so is a matter of some debate.  It is particularly bad at accounting for financial services, as revealed in the North Atlantic Financial Crisis of 2008.  

It is not completely irrational to equate GDP with development.  In consumerist economies, higher GDP equate with more material possessions for the average citizen.  Most developed economies are consumerist.  Therefore, there is a significant correlation between level of GDP and level of 'development' however commonly defined. 

But developing economies tend to be more export oriented (since their consumers have less wealth) and therefore producerist.  Here, the consumerist orientation of GDP becomes problematic, because a much higher proportion of the beneficiaries of production are outside the national economy.  

Put perhaps an even bigger problem is that the global industrial system may be moving away from a system that exploits amount of production more towards a system that exploits diversity and flexibility in production (what is sometimes called 'post-Fordism').  Indeed, a study in the 1990s by Giovanni Arrighi, Beverly Silver and Benjamin D. Brewer (see "Industrial Convergence, Globalization, and the Persistence of the North-South Divide") found that beginning not later than 1960s, industrialization stopped correlating with development.  In fact, just the opposite -- since the 1960s, industrialization in developing countries tended to correspond with developmental stagnation -- functioning as a developmental trap by trapping the developing country into what is now a low-road form of industrial organization.  (The one exception that I can think of to this trend is South Korea, but that's a topic for another day.)

We see a good example of this in China.  China's GDP growth has been legendary, and has been propelled by growth in industrialization.  But since the end of last century, China's industrial growth has decoupled from any growth in human development -- since 2000, China's HDI index has been largely stagnate, despite its high GDP growth.   Since 2000, China has been growing but not developing.  Nor is China unique in this regard: a similar observation can be made about Botswana, whose level of GDP growth over the last 40 years or so has been largely equal to that of China, was fueled by growth in industrial production (primarily diamond mining), has been held up, along with China, as another developmental success story, and whose HDI has been stagnant since the late 1990s.

Ultimately, even if we associate development with simple material benefit, GDP may be increasing measuring the wrong thing.  It is measuring what we might think of as dead-end development -- a kind of development to be sure, but one whose trajectory is ultimately on the wrong side of (economic) history. 

Thursday, July 3, 2014

How much do we really know about what drives GDP growth?

Been reading Diane Coyle's GDP: A Brief but Affectionate History (Princeton University Press, 2014), when -- in my capacity as Mariana's designated 'law and development skeptic' -- I came across this little gem:
[T]he developed economies' national accounts for the most part now use a "chain-weighted" price index in the calculation of real GDP. . . . [But] historic GDP statistics such as those developed by Angus Maddison for the [OECD] have not been recalculated using chain weights.  To do so would change the accepted picture of international growth patterns.  Maddison notes, "Acceptance of the new measure for this period [pre-1950] would involve a major reinterpretation of Amerian history."  It would show U.S. productivity lower than the United Kingdom's in 1914, for example, and much lower U.S. growth and level of GDP than the United Kingdom's by 1929.  This is certainly not the received wisdom among economic historians, which matters because their explanations of what drives growth -- with great relevance for policies now -- could turn out to be based on an inaccurate understanding of what the economy was "really" doing in the ninetheenth and twentieth centuries.  (p. 33-24)
But this is not all gloom and doom for 'development'.  Coyle also notes how many sub-Saharan African countries use the older weighting system, and that:
In each case where old weights have been used for years, there will be a large upward revision in estimated real GDP when the weights are updated.. . . .[O]ne estimate suggests that for twenty years sub-Saharan African economies have been growing three times faster than suggested by the "official" data.
(The 'estimate' she cites to is Alwyn Young, "The African Growth Miracle," NBER Working Paper No. 18490 (October 2012), which is available at 

Of course, these "inaccurate understandings" of "what drives growth" are also of relevance to the law and development community, and to its understandings as to 'what drives growth' as well.

Monday, June 23, 2014

"Law and Anti-Development"

In case anyone missed it, the American judicial system has just made it clear that the interests of American global capital trump the interests of lessor developed countries in securing some degree of reasonable financial stability and security, and that the United States may use the global reach of extraterritoriality to enforce the interests of its investor class when the two come into conflict.  See NML Capital, Ltd. v. Republic of Arg., 699 F.3d 246, 260 (2d Cir. 2012), which was just upheld by the US Supreme Court.  For a nice write up, see this report from the New York Times.

Those that know me know that I am skeptical about our capacity to use legal institutions to promote economic development (at least as it is classically defined in terms of unlimited growth of GDP).  I am not skeptical at all, however, about the capacity of legal institutions to impede economic development.  This is an example of the latter, what might be called 'law and anti-development'.

Interesting to wonder how this fits into La Porta et alia's 'legal origins' hypothesis.

Friday, May 30, 2014

Understanding Economic Development: A Reading List

From the most recent blog post at the Center for Global Development by Senior fellow Arvind Subramanian:

"I have just finished teaching a course at the School for Advanced International Studies (SAIS) at Johns Hopkins University on long-run economic development. Not the recent trend toward micro-development that focuses on questions such as “will giving away free bed-nets help malaria prevention?” but macro-development that focuses on questions of why some nations that got left behind after the industrial revolution remain poor while some others have caught up (or on their way to doing so).

At the urging of some of my CGD colleagues, I have put together a reading list that should be of interest to a broader development audience because it includes, in addition to the normal academic readings, a large number of fictional and nonfictional books and articles that have enhanced my understanding of economic development.

All such lists are subjective, selective, and idiosyncratic. But echoing the great Marxist historian and sportswriter's (C.L.R James) point, “what do they know of cricket who only cricket know,” I would hazard, even insist, that development cannot be understood without wider reading beyond the academic. For example, if I were forced to select one book that captures the richness of economic development, I would unhesitatingly pick Joseph Conrad's Nostromo.

Some of the picks might seem odd (Keynes’ Economic Consequences of the Peace or David Mitchell’s The Thousand Autumns of Jacob de Zoet or a novel on Sri Lankan cricket, Chinaman) and may have been picked for the writing with only tenuous connections to development, and that too with connections to my narrow take on development. This list is also a work in progress because there is a lot more that I want to add, and really to find excuses to add: for example, The Patrick Melrose novels by Edward St. Aubyn or Moby Dick or Middlemarch.

The list is offered in the spirit of sharing (what I have learned from and enjoyed) and in the hope of provoking others to do the same. Violent objections and further suggestions would be greatly appreciated in the comments below, not just from economists and development-wallahs but others as well. This list can evolve by crowd-sourcing.

The full list is organized in two ways: first by topic, with non-academic selections marked by asterisks under each and second by type of reading, (non-academic non-fiction, non-academic fiction, and academic) and under each selection the broad topic covered is indicated as well.

Despite my wanting to add more to it, the list is already long. For an abbreviated version, here’s a selection of ten of my favorite non-academic readings. Enjoy, react if possible, and ignore if you wish.

1. Joseph Conrad, Nostromo, A Tale of the Seaboard. 1904. (336 pages)
Understanding Development

2. Giusepe de Lampedusa, The Leopard, transl. by Archibald Colquhoun, 1958
Understanding economic development

3. Jared Diamond, Guns, Germs and Steel, 1997.
Geography and Development

4. Philip Gourevitch, “Alms Dealers: Can you provide humanitarian aid without facilitating conflicts?The New Yorker, 2010.
Manna and Economic Development: Foreign Aid

5. Richard Hofstadter, The American Political Tradition: And the Men Who Made It, 1948
Formative histories and development

6. Ryszard Kapuściński, The Emperor: Downfall of an Autocrat, 1983
[Formative histories and development Ethiopia]

7. Ian Morris. Why the West Rules-for Now: The Patterns of History and what They Reveal about the Future. Picador, 2010.
Broad Facts on Economic Development

8. V.S. Naipaul, The Writer and The World: Essays, 2003
Formative Histories and Development [Argentina, Mauritius, Guyana, Congo, Cote d’Ivoire]

9. Thomas Piketty, Capital in the twenty-first century, Harvard University Press, 2014.
Inequality and Development

10. Michela Wrong, I Didn't Do It for You: How the World Betrayed a Small African Nation, 2006
Manna and Economic Development [Eritrea]

Thursday, May 15, 2014

Property Rights, Labor Rights and Democratization: Lessons From China and Experimental Authoritarians

In the last two days, the NYU Journal of International Law and Politics and Opinio Juris promoted an online symposium to discuss Professor Jedidiah J. Kroncke’s article Property Rights, Labor Rights and Democratization: Lessons From China and Experimental Authoritarians (NYU Journal of International Law and Politics, Volume 46, issue No. 1).

To start the discussion, Professor Kroncke's summarizes the main claim of the paper in the introduction to the online symposium:

"In the article I attempt to present several angles from which to think about how Chinese legal experience relates both to US law, both domestically and in the literature on legal development and democratization. As such, I try to show how US interpretations of Chinese property and labor rights reveal more about internal US legal developments than are driven by on-the-ground reality in China. More specifically, the gradual evisceration of the link between democratic norms and workplace regulation in the US has blinded many to understanding the Chinese experience on its own terms, especially to the extent that it subverts assumptions about what legal institutions are presumed constitutive of democratic governance. All of which has to be situated within global developments beyond this individual comparative dyad."

Then, the organizers of the symposium invited three law professors to comment on the paper. Here is a glimpse of two of the commentaries:

Professor John Ohnesorge: "I completely agree with Professor Kroncke that the world of law and development, both scholarship and practice, has not paid enough attention to labor, and applaud him for addressing this deficit. (...) My response to Professor Kroncke’s fascinating paper is to offer some ideas about why labor issues seem so hard for the law and development regime to take on, and to suggest a framework for further research on that topic. The first part of my response focuses on the general issue of how legal fields get on the law and development agenda, and the second part suggests why labor issues may be especially likely to be excluded when countries are pursuing development strategies associated with the “developmental state” concept, which many are now doing." (see the full response here)

Professor Eva Pils: "The overall argument is persuasive and important. It reminds us that democratic countries can deteriorate and become more authoritarian if they suppress basic rights, and it has implications for certain rule of law promotion initiatives in authoritarian systems. But I have some criticisms. First, I don’t think that the Chinese government is uniquely suppressive of labour rights activism – in fact, there is some reason to believe that labour activism fares better than evictee activism for property rights. Second, Kroncke seems to limit himself largely to observing that there is an inconsistency in the promotion of certain rights abroad without saying clearly that or by whom property, labour rights or democracy should be promoted. The paper could take a clearer position on this point. Third, Kroncke could strengthen his argument by acknowledging that Chinese civil society has long recognised the connection between political and economic liberty."(see the full response here)

Want to read more? See Professor Cynthia Estlund's commentary here and
Professor Jedidiah Kroncke's response to all commentaries here.
Want to participate in the debate? Post a comment below or send your post to Professor Kroncke has recently joined the list of permanent contributors to this blog. So, he will certainly be reading and he may even respond!