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/