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MIT INTERNATIONAL DEVELOPMENT GROUP: FACULTY PERSPECTIVES
16 PROJECTIONS 7 INSTITUTIONAL INNOVATIONS FOR DEVELOPMENT
The editors of this volume organized a discussion on the main theme of this issue with the faculty of the International Development Group (IDG) within the Department of Urban Studies and Planning (DUSP) at MIT. The objective of the discussion was to elicit the views of the faculty from their own theoretical and practical perspectives on how institutional innovations could promote development in developing countries and how such innovations could be encouraged. The discussion concentrated on the following three broad questions concerning institutional innovations for development:
1 How can institutional change promote development? What policy interventions are required to encourage institutional changes that promote development?
2 How does the process of institutional change occur? When do we know that the old institutions have become obsolete and new ones are required to spur development?
3 While the common premise may be that institutional innovations promote development, there are cases where “innovations” in one region or country fail to achieve their desired outcomes in other regions or countries. Why? What are the socio-economic and political pre-requisites, if any, for ensuring replicability of institutional innovations in promoting development in other institutional settings?
The discussion focused on several themes relevant to the broader issues regarding institutional innovations for development. Faculty members contributed insights from their own research and work experiences. Important among these were: defi ning the concept of development and institutions; understanding the historical context of institutional innovations; distinguishing between the types of institutions that promote change; the issue of scale at which institutions aff ect development, such as local, regional, national, or global, and small versus large organizations; diff erent realms of intervention, such as political, bureaucratic, technocratic, and socio-economic; the constant overlap between public and private realms in bringing about institutional innovations; and understanding the process of change, such as incremental or sudden, that could promote development.
Given the diversity of opinions and expertise within the IDG, we summarize below the key points that each of the faculty members emphasized during the discussion. The various perspectives brought forward by the IDG faculty are very important for this volume, as they expand the discussion of institutional innovations for development beyond the three tracks covered (land markets, infrastructure, technology). This synthesis
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18 PROJECTIONS 7 INSTITUTIONAL INNOVATIONS FOR DEVELOPMENT also highlights the importance of understanding how institutional change is perceived by diff erent disciplines and how it varies within diff erent contexts - social, political, organizational, and economic.
DEFINING DEVELOPMENT AND INSTITUTIONS
At the outset, Prof. Diane Davis, Professor of Political Sociology, pointed out that before addressing the issue of how institutional innovations promote socioeconomic development, it is important to fi rst specify what we mean by development. For example, do we mean economic growth, equity, social justice, redistribution, or other concepts. In addition, we need to clearly defi ne the types of institutions we are referring to when we talk about the role of institutions in development.
Prof. Davis stated that her research focuses on the relationship between changing state institutions and development at the macro level and in an urban context. She stated that to understand this relationship, it is important to study the embeddedness of state institutions within the private sector, political system, and the civil society. The set of interrelationships within which state institutions operate explains the developmental outcomes. We also need to distinguish between states and regimes. The same state could have diff erent regimes with varying political ideologies that may aff ect developmental outcomes. In the case of Mexico, it is interesting to ask how the democratization of the state has changed both the macro-development as well as micro-development and how the interrelationships between institutions have been important in determining outcomes.
Prof. Davis also mentioned that although it is important to know when institutions become obsolete, the real challenge lies in making the transition from old to new institutions. Sometimes, new regimes are established that alter institutions in order to deal with the old problems. Therefore, this may not result in new institutions but in hybrid institutions that may be worse than the old ones. This would be a case when institutional change is not desirable because the hybrid institutions could be incoherent and diffi cult to operate.
On innovations and their adaptability to other countries, she pointed out that it is important not only to understand the history and politics surrounding specifi c innovations, but also to understand how innovations grow organically within particular institutional environments and contexts. This process makes their replication diffi cult in other institutional environments that have a limited resemblance with the original
context.
HISTORICAL PERSPECTIVES ON INSTITUTIONAL CHANGE
Prof. Bish Sanyal, Ford International Professor of Urban Development and Planning, argued that an interesting question to ask on the issue of institutional innovations is: where do ideas for change come from? How have people thought about this question before and what is the history of these ideas? Historically, right after World War II, two major schools of thought emerged on the issue of how institutional change comes about. One was Schumpeter’s idea of change being initiated by creative destruction through markets that can be called the market approach to change. The second was the neo-Marxist school of thought that focused on institutional changes arising from class struggles, e.g., the social dynamic that unfolds between labor and capital. In between these two polarities, is a group of scholars who thought of organizations as being responsible for change, particularly with regard to the state or the government playing a key role in aff ecting change.
However, this idea that the government and the state can instigate change came under attack by two major schools of thought in the 1970s. On the Right, neoclassical theorists argued that the state was the biggest hindrance to change, rather than being a facilitator of change. On the Left, the neo-Marxists argued that the state was completely captured by the elites, restricting its capacity to bring about progressive social change. The whole idea of capitalist development and political democracy going hand in hand—a central idea of change from the 1940s—was under attack. The argument was that there was no relationship between the two.
Prof. Sanyal’s work draws on another approach that developed in the 1970s. This approach was critical of the government and emphasized the role of small non-governmental organizations, small fi rms, and the informal economy. These models of development from below proposed that it was the people who generated change, bypassing the government. However, it was realized that there were limits to this argument as non-governmental and other small-scale grassroots social groups were not able to bring about change on a large scale. Large and small organizations were both important within diff erent domains of action.
In some cases, small organizations or groups at the grassroots level borrowed ideas from those at the top level or from large scale organizations. Prof. Sanyal pointed out that this is what innovation is—when a particular domain or group borrows ideas from
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20 PROJECTIONS 7 INSTITUTIONAL INNOVATIONS FOR DEVELOPMENT other groups, and uses it to strengthen its own thinking. He emphasized the role of cross-fertilization of ideas among organizations in bringing about change and innovation.
SOCIAL CONSTRUCTION OF INSTITUTIONS
Prof. Annette Kim, Ford International Career Development Assistant Professor of Urban Studies and Planning, examined institutions from the point of view of market development in transition economies. Prof. Kim’s work addresses the question of how markets form, particularly in transition countries that did not have markets earlier. She pointed out that institutions are critical to account for the diff erent policy outcomes in various countries in these regions.
Nevertheless, institutions can mean many things and it has become a very popular term, especially in academia. Prof. Kim highlighted that diff erent disciplines look at institutions diff erently. Her research addresses this variation by examining three different ways of defi ning institutions. For example, while institutional economics looks at institutions in the context of transactions, laws and regulations, economic sociology perceives institutions in the context of norms, networks, and embeddedness. Political economy, on the other hand, views institutions in the context of diff erent political interest groups. All these play a role in the evolution of markets.
Prof. Kim also pointed out that legal institutional developments were important, such as property rights, privatization, and the devolution of state authority. However, legal norms such as property rights laws may not be such a strong explanatory variable when we talk of market agents such as entrepreneurs and capitalists themselves, as many empirical studies have pointed out, unless there is basic economic and political stability. Nevertheless, the question of why policy “sticks” in some places and not in others (or why policies become successful in some places while failing in others), still needs further examination. You can have the same policy in diff erent places but it may not be disseminated in the same way or have the same impact. Hence, Prof. Kim’s work revolves mostly around the issue of social construction of markets.
Along these lines, Prof. Kim argued that the role of a cognitive shift is important in determining how market agents view the economic world and what the opportunities are, and what the new ways of behavior are. She emphasized that a mental or cognitive change needs to occur, as well as behavioral changes associated with it. The interesting questions are where does this cognitive change come from and what instigates people
to change the ways they have been doing things? This process is related to laws, structured environments, regulations, and social norms that limit what people can do, but institutional change also requires an internal change in the way we view the external world, which subsequently aff ects human behavior.
INSTITUTIONS VERSUS ORGANIZATIONS
Prof. Karen Polenske, Professor of Regional Political Economy and Planning, explained the importance of distinguishing between institutions and organizations. Institutions consist of formal laws, property rights, and informal norms or codes of behavior, which need to be distinguished from organizations. Organizations are entities that carry out those institutions and operate within their framework. You might have the same property rights law, but each country or region might have a very diff erent way of implementing and enforcing that particular right. Prof. Polenske also argued that any perspective on institutions depends on the geographical boundaries or regions that we are talking about. The need for certain institutions is diff erent in diff erent parts of the world. She gave the example of energy security, which is a major current concern. A complex set of institutions and a strong set of rules and regulations are required to establish norms regarding the use of energy or water or other basic needs. The way we deal with environmental regulations varies from country to country, and the diff erences aff ect outcomes in these countries not only at the national level but also at the local level.
THE ROLE OF LARGE VERSUS SMALL FIRMS IN DEVELOPMENT
Prof. Alice Amsden, Barton L. Weller Professor of Political Economy, examined the role of fi rms as an institution, as a source of private sector enterprise and entrepreneurial activities in developing countries. She argued that a fi rm is an institution because institutions comprise organizations and they also comprise norms of behavior, both formal and informal. It is important for economic development planners to think of the diff erential developmental impacts of foreign-owned versus private nationally-owned fi rms. In order to improve the developmental outcomes in developing countries, she mentioned that the real challenge is to change some of the international organizations, such as the World Bank. To illustrate her point, Prof. Amsden argued that while the World Bank is very much in favor of the private sector, it never lends to private fi rms, for example, manufacturing fi rms in developing countries. Hence, one area where change can positively aff ect developmental outcomes is in providing loans for private national industrial activities in developing countries, in particular to those that cannot obtain fi nances from other sources.
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22 PROJECTIONS 7 INSTITUTIONAL INNOVATIONS FOR DEVELOPMENT Prof. Amsden also pointed out that people in developing countries are trained to believe that multinational fi rms are better than nationally owned fi rms. Nevertheless, there is a lot of evidence more recently, particularly anecdotal evidence and case studies, that this is not the case. Private national companies in Korea, Taiwan, and India, tend to be as good, if not better than multinational fi rms in the same industry. Hence, there is a lot of potential in looking at the institutional issue of foreign versus national enterprise. This is interesting because it also addresses the issue of how to measure success. Most researchers that study this issue use an inductive method – they start from the institution, the organization, say through a case study, and then they generalize. Others follow a more deductive methodology. However, the methodology adopted for examining these comparisons can yield diff erent results. In studying fi rms, aspects such as fi rm size are also a cause of variation. It is important to realize that both—large fi rms and smaller fi rms - have signifi cantly diff erent developmental outcomes in developing countries. Prof. Amsden also argued that evidence pointed to large fi rms being more eff ective in facilitating innovations as compared to small and medium enterprises.
THE ROLE OF THE PUBLIC SECTOR
Prof. Christopher Zegras, Ford Career Development Assistant Professor of Transportation and Urban Planning, works mostly on metropolitan level development in Latin America. Prof. Zegras pointed out the key role of the public sector in determining the eff ectiveness of investments in this area. The public sector infl uences the eff ectiveness of investment through its role in three realms: political, technocratic, which is related to the political realm, and the market. These realms run through the diff erent sectors of operations, regulations, delivery of infrastructure, and enforcement. For example, infrastructure is delivered through either public sector or private institutions, often aff ecting each other to some degree. Hence there is an overlap between these realms and their range of infl uence is incredibly diff erent in diff erent countries and regions of the world. The question is how change can be promoted through these realms.
Prof. Zegras gave the example of the innovation of the Bus Rapid Transit (BRT) system in Bogota, run by Transmilenio –a public sector company that designed and regulated the system. It originated from a few public sector entrepreneurs, has been quite successful to date, and has had signifi cant implications for the private sector. Another example of institutional innovation is the organization called SECTRA in Chile—a transportation planning agency at the national level, which was empowered by the Pinochet regime in the early 1980s in a very apolitical way with a mandate to develop capabilities, data, and models for the transportation sector. The agency has been a worldwide model
for the technical expertise it has developed. Nevertheless, its degree of eff ectiveness in aff ecting change when it has to move through the various institutional realms is still debatable. Hence, an important question that arises is how eff ectiveness can be measured.
In addition, in Latin America more broadly, another institutional innovation is the private sector delivery of public transportation. Private actors are serving markets that nobody was able to serve in a cost-eff ective way. The question that arises is what the public sector can do to innovatively stimulate the private sector to respond better to these markets, such as by providing better regulation. Prof. Zegras also highlighted the role of culture in institutional change, along with socio-economic and political aspects and the diffi culty of distinguishing between these categories.
INSTITUTIONAL VARIATIONS IN THE PERFORMANCE OF PUBLIC SECTOR ENTERPRISES
Prof. Judith Tendler, Professor of Political Economy, explained the institutional reasons for the diff erential performance of public enterprises in various countries. She pointed out that the concept of pre-requisites for institutional innovation is fl awed. Often what we consider pre-requisites are actually outcomes of a particular development process or policy. The diff erences in the performance of enterprises need to be analyzed much more deeply and not simply in terms of public versus private enterprises. For example, the World Bank established many of the public state-owned enterprises in developing countries to overcome infrastructural bottlenecks. In several cases, these state-owned enterprises did not function properly and were subsequently privatized. However, in several cases, privatization also did not work and was subjected to similar criticisms as in the case of public enterprises. Prof. Tendler emphasized that we need to understand in depth the institutional reasons for the variations in the performance of enterprises through inductive case studies.
Prof. Tendler also argued that in the debate on small versus large fi rms, it is important to understand that size is not as important as the system of fi rms that exist in a particular region and the linkages and spillovers among them. We must understand what types of connections exist between the fi rms, and the public policy support that can maximize the linkages and spillover eff ects among fi rms in a country or region. The growth of small fi rms is often linked with the growth of large fi rms through the markets of inputs and outputs established between them. Just focusing on large or small fi rms may be limiting and may miss out on several aspects. It is the process of clustering that matters
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24 PROJECTIONS 7 INSTITUTIONAL INNOVATIONS FOR DEVELOPMENT and the public sector can sometimes play a role in intermediating the linkages between fi rms. It is diffi cult to change from one system of clusters with top-down regulation and provisions of standards and training, to a more bottom-up approach where each cluster identifi es its own priorities and bottlenecks—an approach that is considered important in the literature on clusters. Planners, researchers, and activists are faced directly with the challenge of bringing about these institutional changes.
INSTITUTIONAL INNOVATIONS IN URBAN TRANSPORTATION
Prof. Ralph Gakenheimer, Professor of Urban Planning, examined the issue of institutional innovations in the fi eld of urban transportation. Studying institutional innovations in the transportation sector is very interesting because it is one of the most conservative areas of policy. Nevertheless, when innovation does occur it tends to have a very high profi le. This is because its products of transportation services are extremely visible and experienced by everybody in a city or region. Also, it is possible for those providing the services to exert extraordinary leverage, almost without constraint when they want to. While providers have power, there is a tendency for this sector to be poorly funded and poorly regulated. To the extent that there are two basic institutional options available for the provision of services—privatization or public control—there is a tendency for events to swing like a pendulum from one to the other. This is because both institutional forms produce critical reactions that drive the situation back in the other direction. Thus, signifi cant resources are lost in the process of transition without bringing about adjustments to either form.
Prof. Gakenheimer has researched this trend in four cities in Latin America over the last thirty years where the institutional developments in transportation moved in diff erent directions. There is a tendency for bureaucrats in this fi eld to be extremely conservative because they are resistant to any type of change. The question then is how we can alter this status quo and what type of commitments it would take. Prof. Gakenheimer mentioned that global commitments on air quality and global warming are important in this regard as they are becoming prevalent and strengthenedover the past decade in areas where they never existed before. This institutional change is occurring in several countries during the present time, which are moving towards stronger actions in a slow but detectable way.
Institutional innovations also come about through new technologies and new funding made available by various sources. For example, the Bus Rapid Transit (BRT) movement has been a remarkable innovation across developing countries. One factor for its suc-
cess has been that it can be institutionalized separately. This is critical to innovations in developing countries because existing institutions are so hindered by corruption and old practices that new foundations must be created for moving forward. This has been done in several cases of implementation of BRT.
There is also the issue of concatenation—once you enable one innovation, it may trigger others, including some that had not been possible earlier. Leadership and charisma are also important factors that can facilitate institutional innovations in this fi eld. Examples of charismatic leaders are Enrique Penalosa in Bogota and Jaime Lerner in Curitiba who have been infl uential in bringing about innovations in their cities. Prof. Gakenheimer also mentioned the “copycat tendency” which may not be as common in other fi elds as it is in transportation, but has been important in facilitating the spread of innovations such as BRT across cities. Finally, national policy related to the urban transportation sector is severely lacking across countries and there is a strong need for change, especially as secondary cities across developing countries face rapid growth while remaining underserviced by national governments.
CONCLUSION
The richness in approaches and ideas expressed by the IDG faculty during the discussion suggests that the topic of institutional change represents a very fertile ground for research in the context of developing countries. More contributions on this topic are needed, both for consolidating the theoretical base with respect to the role of institutions and institutional innovations in development, and for understanding the use of diverse methodologies in accounting for institutional change. In addition, more research is needed to unearth specifi c country or regional experiences that focus on diff erent policy alternatives and developmental outcomes. The articles in this issue of Projections are examples of such research endeavors to enlarge our knowledge base on the topic of institutional innovations for development.
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