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INSTITUTIONAL INSTITUTIONAL
COMPLEMENTARITY, COMPLEMENTARITY,
GROWTH STRATEGIES GROWTH STRATEGIES
AND POVERTY AND POVERTY
REDUCTIONREDUCTION
Robert Boyer
Workshop on “Poverty Reduction and policy Workshop on “Poverty Reduction and policy Regimes”, UNRISD, Geneva, 21Regimes”, UNRISD, Geneva, 21--23rd February 200723rd February 2007
INTRODUCTIONINTRODUCTION•• Two important issues in institutional economics Two important issues in institutional economics
��Why and how capitalism differ?Why and how capitalism differ?
��How to reform institutions to promote growth and How to reform institutions to promote growth and social justice?social justice?
•• One answer and research program: the One answer and research program: the
institutional institutional complementaritycomplementarity hypothesis (ICH)hypothesis (ICH)
��Aoki (2001)Aoki (2001)
��Hall and Soskice (2003)Hall and Soskice (2003)
��AmableAmable (2003)(2003)
•• An hypothesis shared by various researchersAn hypothesis shared by various researchers
Comparative Institutional analysisComparative Institutional analysis
Variety of capitalismVariety of capitalism
Regulation theoryRegulation theory
•• Some interesting results and interpretations Some interesting results and interpretations
aboutabout
Coherence, diversity, evolution of capitalismsCoherence, diversity, evolution of capitalisms
•• Does ICH help in the design of anti poverty Does ICH help in the design of anti poverty
and pro growth policies ?and pro growth policies ?
THE SYNOPSIS OF THE THE SYNOPSIS OF THE PRESENTATIONPRESENTATION
��I I -- The failure of monoThe failure of mono--causal explanationscausal explanations
��II II -- The major findings of institutional The major findings of institutional economics for developed countrieseconomics for developed countries
��III III -- Growth regimes and poverty reduction: Growth regimes and poverty reduction: Some preliminary stepsSome preliminary steps
�� IV IV -- A research agendaA research agenda
I I –– UNDERDEVELOPMENT AND UNDERDEVELOPMENT AND
POVERTY: THE FAILURE OF POVERTY: THE FAILURE OF
MONOMONO--CAUSAL EXPLANATIONSCAUSAL EXPLANATIONS1. Conventional approaches failed
� Pure market mechanisms do not imply development nor poverty reduction
� Welfare policy or institutionalization of workers rights are not necessary obstacles to growth and employment creation
� Benchmarking has proven to be quite difficult and problematic
� The ideal of a single one best way configuration has been challenged by systematic international comparisons
2. The achievements of recent institutional
analyses
� The market is only one of the available coordinating mechanisms along with
� State …
� Hierarchy…
� Community…
� Network, alliance
Figure 1 – A synopsis of different modes of coordination and
institutional arrangements
MODE of COORDINATION and DISTRIBUTION of
POWER
HORIZONTAL
VERTICAL
1 MARKET
2 HIERARCHY
6
ALLIANCE
Interest
5 NETWORK
3
COMMUNITY 4
STATE
Motive for Action
Obligation
� Some welfare policies may have a positive productive impact and reduce poverty� Income security
� Voice representation
� Work and life security
� Skill security
� Labor Market security
Figure 2 – How various securities may enhance dynamic efficiency
� The best practices cannot be simply added since� They have to be combined with existing
domestic institutions…
� They might be incompatible one with
another…
� They may even deteriorate overall
performance and exacerbate poverty
� There generally exist several successful institutional configurations� They are built upon different complementarities among diverse institutions…
� None is Pareto optimal what ever the context and the time period…
� The example of the knowledge based economy: three configurations
�The knowledge economy relies on the
complementarity between high general
education, intensive job training, and
cooperation between research and industry.
Sweden, Denmark,…
�The deregulated economy displays the conjunction of private appropriation of knowledge, flexible labor markets, and science pushed innovations.
US, English speaking countries
�The accelerated catch-up model benefits from the shift in the technological paradigm for previously lagging countries.
Ireland,
II II –– DEVELOPED ECONOMIES: DEVELOPED ECONOMIES:
THE MAJOR FINDINGS THE MAJOR FINDINGS
R1 - No single coordinating mechanisms can warrant the viability and the efficiency of national economy
� Each institutional arrangement requires precise organization, rules and norms, individual and collective compliance
� These requirements have to be manufactured by other institutional arrangements
� Market is among the most demandinginstitutional arrangements
Table 1 – Coordinating mechanisms: their governance and prerequisite
Social rules or normsVoice (vote, lobbying)Indirect and global political
and economic exchange
De jure and imposed
membership
CoercionExit (tax evasion,
migration)
Unilateral actionPublic hierarchyState
Members socialized into
corporate culture, use of
sanctions
Asymmetric power, threat
of sanctions
Highly institutionalized
rules
Rewards to individualsRestricted to members,
exchange based on
asymmetric power,
bureaucratic rules
Complex organizations
which tend to become
bureaucratic
Private hierarchies
Partially private
administration
Reputation effectOpposition insider/
outsider
Multilateral exchange
Some degree of compulsionSelf-interestRestricted to membersFormal membershipAssociations
Trust built outside the
economic arena
Resource dependenceBilateral or multilateral
exchange
Personal relationsContractual bondsVoluntary exchange over a
time period
Semiformal membershipNetworks
Knowledge of others and
reciprocity over time
Highly institutionalized
norms and rules require
members to accept
"corporate" obligations
Social norms and moral
principles impose
obligations
Voluntary exchange based
on social solidarity and
high degree of trust
Informal membership
evolves over long period of
time
Communities
Legitimacy of free marketRegulations to maintain a
public market
Bilateral exchange or
market place (Wall Street)
Norm of private propertyLegal enforcement of
control
Voluntary spot exchangeFree entry and exitMarkets
Collective means of
compliance
Individual means of
compliance
Rules of exchangeOrganizational structureGovernance mechanisms
� Each institutional arrangement has a limited domain of applicability…
� Thus it cannot be extended to the entire economy
� Some allocate efficiently goods, others manufacture trust, public goods…
� Still others internalize externalities
Table 2 – Each coordinating mechanism has is own specific strengths
and failures
Might fail in
inducing
technical change
Slow to react to
changes in the
environment
Useful for
providing many
goods collectively
that individual
members cannot
provide for
themselves
Weak in the
provision of collective
goods
Members tightly
integrated into
community, have
limited capacity
for innovations
Inadequate
monitoring of
technical
change and
innovation
Can provide
public goods but
has difficulties in
providing them in
precise amounts
Governance costs
might exceed the
benefits of internal
division of labor
Useful for
establishing
standards and
quality, for
setting rules of
competition in
the industry
Useful for enhancing
quality and training but
not very good in
providing for societal
general welfare
Can internalize
some collective
goods (quality,
training) but not
others (welfare,
general public
goods)
Cannot provide
collective
goods or deal
with
externalities
Public good
and
externality
Lobbies can
capture public
interest goals
The ideal of
internal markets
might hurt
incumbent
workers
Resembles
enforcement
mechanism of
carrels
May facilitate
cartelization and
monopoly
Compatible
with various
types of
competition
Facilitates
collusion and
imperfect
competition
Needs controls
external to state
bureaucracy
(judges,
parliament,
market) to correct
state abuses
Might enhance
opportunistic
behavior
Usually relies on
the state as an
enforcer
Need an external
enforcement authority
Needs trust and
loyalty, often
coming from
outside (family,
religion,
ethnicity)
Needs an
internal
enforcement
authority
Enforcement
StatePrivate hierarchiesAssociationsNetworksCommunitiesMarket
Coordinating mechanismType of
failure
Table 2 – Each coordinating mechanism has is own specific strengths and failures
Equity Might enhance
inequality (power
and privilege)
Excessive
multiplication of
controllers
(frustration and
inequality)
Narrow
encompassing
associational
structures lead to
income inequality
When widely developed
into industrial districts,
networks may facilitate
greater equality and
income distribution.
When weakly
developed, networks
tend to increase societal
inequality
Might lead to
retarded
development
Facilitates
inequality in
income and
wealth
Can be highly
bureaucratic and
cannot easily
deliver goods at
low cost
Deficient in
cooperation and
X-efficiency
Facilitates
cooperation and
X-efficiency but
not allocative
efficiency
Slow to enhance
efficiency and speed of
adaptiveness, except in
industries where
technology is complex
and rapidly changing
Some goods
cannot be
delivered at
sufficiently low
costs
Some basic
social relations
cannot be
provided by
pure market
mechanisms
Efficiency
StatePrivate hierarchiesAssociationsNetworksCommunitiesMarket
Coordinating mechanismsType of
failure
R2 – The coordinating mechanisms are more complementary than substitute
� First reason: the need to correct the imperfections of one IR by another and so on
� A second reason: some IR are devoted to economic efficiency, other IR aim at social justice
� Thus growth and poverty reduction can be made compatible, if not complementary
� An example
� An example: Financial markets
Citizens
Governed by an
association
State intervention
Market Lobbies
R3 R3 -- The need for a conceptual The need for a conceptual clarificationclarification
The need for distinguishing among related
concepts1. Supermodularity
Two elements E and E’ are said to be
complementary if the performance R of the
conjunction of E and E’ is superior to any
other mix of elements i.e.
R(E,E’) > R(E,A) ∀ A ≠ E’ and
R(E,E’) > R(B,E’) ∀ B ≠ E
Strong requirements for supermodularity
�Choose an explicit performance criteria
�This is frequent in economics but not in sociology and political science
�The need for sophisticated modeling in order to generate unobserved worlds
2. Compatibility
This second notion is frequently confused with the first one…but it should not ! Actually E and E’ are compatible if they can be jointly
observed in existing economies and societies i.e.E ∩∩∩∩ E’ ≠≠≠≠ ∅∅∅∅
2. Complementarity
This second notion is an attenuation of supermodularity. Actually E and E’ are complementary if they deliver jointly better results than separately, i.e.
R(E,E’) > R(E,.) and
R(E,E’) > R(.,E’)
This removes the hypothesis of optimality
3. Compatibility
This third notion is frequently confused with the second one…but it should not ! Actually E and E’ are compatible if they can be jointly
observed in existing economies and societies i.e.E ∩∩∩∩ E’ ≠≠≠≠ ∅∅∅∅
R4 R4 –– AN OTHER AN OTHER INTERPRETATION OF INTERPRETATION OF COMPLEMENTARITYCOMPLEMENTARITY
The synergy between two or more beneficial constraints
� An idea borrowed from political economy and economic sociology (Wolfgang Streeck, 1997)
�Institutions are not only constraints but also enablers for individual strategies…
� and an incentive for innovation
R5 R5 –– FROM DYADIC TO TRIADIC FROM DYADIC TO TRIADIC COMPLEMENTARITYCOMPLEMENTARITY
A requirement in order to understand
complex institutional architectures
� Especially important when economic and
social objectives are simultaneously pursued
�Three examples
Figure 5 - The complementarity at the micro/meso
levels: some examples
5a – The flexicurity configuration
Welfare
DenmarkEmployment
policy
Labour laws
5b – The small open social democratic economy
Large openness
to the world
economy
SwedenModern State
/ Social System
of Innovation
Universal
welfare
5C – An atypical complementarity
Share holder value
GermanyEarly
retirement
Codetermination
R6 R6 –– INSTITUTIONAL INSTITUTIONAL COMPLEMENTARITY AND COMPLEMENTARITY AND
GROWTH REGIMESGROWTH REGIMESA quite useful to understand
� Cross countries differences at a given
period of time
� The succession of growth regimes
�Two examples
Figure 6 – The complementarity at the macro level of
growth regimes
6A – The golden age fordist growth regimes
Increasing returns to
scale
Domestic demand
led regime
Fordist wage
compromise
6B –– The Scandinavian social pacts
Conciliatory fiscal
policy
Export led growthResponsible wage
formation
III III –– DEVELOPING ECONOMIES: DEVELOPING ECONOMIES:
HOW TO USE INSTITUTIONAL HOW TO USE INSTITUTIONAL
COMPLEMENTARITY COMPLEMENTARITY
M1 – A first method for detecting successful configurations� Assemble data about successful cases of poverty
reduction (contemporary or historical)
� Use Qualitative Comparative Analysis (QCA) to detect inductively the mix of institutions and policy regime that lead to poverty reduction
� Build panel data in order to estimate the quantitative impact of each mix of variables
M2 – A second method: the
extension of growth diagnostics� Concentrate upon a given country and
period
� Extend the growth diagnostics proposed by Haussman and Rodrik(2005) to poverty reduction
� Select the policies that simultaneouslyimprove growth and reduce poverty
Figure 7 – A diagnostics approach to poverty
reduction
WHAT ARE THE FACTORS GENERATING POVERTY?
Macroeconomic management
Labour Market Institutions
Lack of access to public goods
Over-
evaluation
of the
currency
Bad policy
mix
Inadequate
income
distribution
Poverty
trap
Dualism
Education
Health
Food
security
Change in
monetary
policy
Adjustment
of public
policy
Redistributive
taxation
Anti
discrimination
measures
Rural /
Urban
Policy
Redesign
of
welfare
Minimal
rights
for
informal workers
More
spending
Decentralization Target
diseases
affecting
the poorer
Public
program
in
favour of
farmers
Figure 8 – A diagnostics approach to growth stimulation
M3 – How to go from here to there?� A cost/benefit economic analysis is not
sufficient
� A win /win strategy is rather rare especially for poverty reduction
� Some gain, others loose : the need for compensating mechanisms
� Short medium term losses : legitimacy becomes crucial
� The key role of political regimes
Figure 9 – The duality between political legitimacy and
economic efficiency
Consolidation of the coalition for pro
poor policy
Economic
benefits in
the long run
Better
economic
outcome
First
political
decision
Helps to
overcome
possible
economic costs
Legitimate
M4 – The timing of institutional reforms is quite important � Very few reforms deliver permanent and
positive returns
� Many reforms deliver positive returns only in the long run
� A frequent configuration: initial large costs and benefits appear only in the long run
Figure 10 – The time profile of costs and benefits of an
institutional reform
Time
1
2
3
Net
Economic
benefit
M5 – The discriminating role of political regimes and strategies � Many economic institutions are built via the
political process
� Economic outcomes are only partially determining political adhesion to a reform
� The inner process of economic policy formation matters
� The time horizons of polity and economy differ, hence a specific dynamic of institution building
Figure 11 – The interplay of political and economic determinants of
institutional reforms
IV IV -- CONCLUSIONCONCLUSIONC1 – The Institutional Complementarityhypothesis might help in the detection of successful configuration:
� A limited organizational and institutional diversity.o The three configurations of the knowledge economy
o Four brands of capitalism: market led, State driven, mesocoporatist, social democratic
� the pattern of institutional changeo Piece mal benchmarking is not a solution for capitalism
o The blocking of sequential institutional reforms
C2 – This hypothesis has still to be tested for developing countries
�Is not informality a major obstacle ?
�Can weak governments launch ambitious programs ?
�A need for new methods?
C3 – Some possible research programs:
�A systematic comparative analysis of successful episodes of poverty reduction in contemporary world
�Revisit the constitution of welfare states for developed economies
�A mix of growth and poverty diagnostics for each case study
An agenda for further research
ManyMany thanksthanks for for youryour attentionattention
Robert BOYERParis Jourdan Sciences Economiques.
48, Boulevard Jourdan 75014 PARIS, FranceTél. : (33-1) 43 13 62 56 –
Fax : (33-1) 43 13 62 59
e-mail : robert.boyer@cepremap.cnrs.fr
web site : http://www.jourdan.ens.fr/~boyer/
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