(five-ten years) for the poorer countries – various agreements in the WTO being the best example of this. Backing up this claim is a rapidly growing body of literature, especially from the World Bank and its associates, which tries to establish statistical correlation between institutional variables and economic development, with the supposed causality running from the former to the latter.[3]
Exactly which institutions should go into the ‘good governance’ package differs from one recommendation to another, not least because we still do not fully understand the relationship between particular institutions and economic development. However, this package of ‘good institutions’ frequently includes democracy; a clean and efficient bureaucracy and judiciary; strong protection of (private) property rights, including intellectual property rights; good corporate governance institutions, especially information disclosure requirements and bankruptcy law; and well-developed financial institutions. Less frequently included but still important are a good public finance system and good social welfare and labour institutions providing ‘safety nets’ and protecting workers’ rights.[4]
Critics argue that, apart from the fact that the international financial institutions (IFIs) do not have an official mandate to intervene in most of these ‘governance’ issues,[5] the institutions of developed countries can be too demanding for developing countries in terms of their financial and human resource requirements. Some critics also argue that some of these institutions may go against the social norms and cultural values of some of the countries concerned. Many emphasize the difficulty of institutional transplantation and warn against the attempt to impose a common institutional standard on countries with different conditions.
These critics have an important point to make, but in the absence of some idea of which institutions are necessary and/or viable under what conditions, they are in danger of simply justifying whatever institutional status quo exists in developing countries. So what is the alternative?
One obvious approach is to find out directly which of the ‘best practice’ institutions are suitable for particular developing countries by transplanting them and seeing how they fare. However, as we see from the failures of structural adjustment in many developing countries and of transition in many former Communist economies, this does not usually work and can be very costly.
Another alternative is for the developing countries to wait for spontaneous institutional evolution. It could be argued that the best way to obtain institutions that suit the local conditions is to let them evolve naturally, as indeed happened in the now-developed countries (NDCs) when they themselves were developing. However, such spontaneous evolution may take a long time. Moreover, given the nature of the evolutionary process, there is no guarantee that such an approach will in fact yield the best possible institutions, even when viewed from the perspective of specific national requirements.
These, then, point us to the third – and my preferred – alternative route, which is to learn from history. Just as we looked at the issue of ‘good policies’ from a historical perspective in the last chapter, we can, and should, draw lessons from the historical, as opposed to the current, state of developed countries in the area of institutional development. In this way, developing countries can learn from the experiences of developed countries without having to pay all the costs involved in developing new institutions (one of the few advantages of being a ‘latecomer’). This is significant because, once established, institutions may be more difficult to change than policies. This will also help donors wanting to encourage the adoption of particular institutions by the recipients of their financial support to decide whether or not the particular ‘we’re-not-ready-yet’ arguments put to them by some recipient country governments are reasonable.
As I pointed out in Chapter 1, despite the obvious relevance of the historical approach in understanding the problems of development in our time, surprisingly little work has adopted it. This aberration is even more serious in the area of institutional development.[6] This chapter tries to fill this important gap.
In section 3.2, I examine how various institutions that are currently regarded as essential components of the ‘good governance’ structure evolved in the NDCs when they were developing countries themselves, mainly between the early nineteenth and early twentieth centuries. I look at six broad areas – democracy (section 3.2.1), bureaucracy and judiciary (section 3.2.2), property rights (section 3.2.3), corporate governance (section 3.2.4), private and public financial institutions (section 3.2.5) and welfare and labour institutions (section 3.2.6).
In section 3.3, I discuss how institutional developments achieved in NDCs in the past compare with those of today’s developing-countries at similar levels of development. The first subsection (3.3.1) shows NDCs in the process of institutional evolution in earlier times by offering three ‘snapshots’ (1820, 1875 and 1913). Section 3.3.2 discusses how the process of institutional development in the NDCs was ‘long and winding’. Section 3.3.3 compares the level of institutional development in the NDCs in the past with that of today’s developing countries, and shows that, at comparable stages of development, the former actually have much higher levels of institutional development than those achieved by today’s NDCs.
3.2. The history of institutional development in the developed countries
3.2.1. Democracy
There has been a particularly heated debate on the relationship between democracy and economic development.[7] In the early post-war period, there was a popular argument that developing countries cannot afford ‘expensive’ democratic institutions. Today, the dominant view in the IDPE is that democracy helps economic development and therefore has to be promoted as a precondition for development.[8] However, still others point out that democracy is more of an outcome of, rather than a precondition for, development, and is therefore not really a variable we can manipulate, whether or not we think it is good for development.
No attempt is made here to settle this difficult and long-standing debate. However, the historical experience of developed countries in this regard tells us an interesting story that should make the reader pause before readily buying into the current orthodoxy that democracy is a precondition for development.
When voting was first introduced in the NDCs, it was confined to a very small minority of property- owning males (usually aged over 30), often with an unequal number of votes apportioned according to a scale based on property, educational achievement or age.
In France between 1815 and 1830, for example, the franchise was granted only to males above 30 who paid at least 300 francs in direct taxes, which meant that only 80,000-100,000 people out of a population of 32 million (that is, 0.25-0.3 per cent of the population) could vote. Between 1830 and 1848, there was some relaxation of franchise requirements, but still only 0.6 per cent of all French people could vote.[9] In England before the 1832 Reform Act, which was the watershed event in the extension of suffrage in the country, it was widely agreed among contemporary observers that landlords could decide 39 out of 40 county elections through their influence on the tenants, bribery and patronage.[10] Even after this act, voting rights were only extended from 14 per cent to 18 per cent of men, partly because many craftsmen and labourers with no or little property were disenfranchised as a result of the act, which established a closer link between property and enfranchisement. In Italy, even after the lowering of the voting age to 21 and the reduction of tax-paying requirements in 1882, only around two million men (equivalent to seven per cent of the population) could vote, due to lower but still extant tax payment and literacy requirements.[11]
It was not until 1848, the year that France introduced universal male suffrage, that even limited forms of democracy began to appear in NDCs. As we see in table 3.1, most NDCs introduced universal male suffrage between the mid-nineteenth century and the first couple of decades of the twentieth century. However, even this process was not without reversals.
| Table 3.1 |
|---|
