Industrial policy when institutions are weak:Can collaborative governance approaches add value?

Brian LevyJuly 3, 2012

Varieties of Industrial Policy

• Targeted, sectoral state intervention– East Asian industrial policy (e.g. Korea; shipbuilding)– Ethiopia leather

• Public support for ‘search and discovery’– Export promotion– Matching grant programs

• Facilitation of collaborative governance– Cluster initiatives– Other collective action support

Varieties of Governance • Each cell can usefully be considered on its own terms as having a distinctive type of elite

bargain, with distinctive rules of the game and thus distinctive:– Incentives– Constraints– Opportunities– Risks

#1 Conflict

Political Settlement

High Elite Cohesion

(Dominant Party Leader #2 #4

#6Open Access

Order(Competitive Politics and

Markets)

Low Elite Cohesion

(Truce + Electoral Competition) #3 #5

Organizational and Institutional Complexity

Low: Personalized Elite Bargain

High: Impersonality

4

Governance Trajectories

Institutions for ‘top-down’ industrial policyA nested set of principal-agent relationships which link accountable political organizations, politicians, the central public bureaucracy, and front-line public officials

“Top down” public management: The 2004 World Development Report’s “Long Route”

What does it take for the “top down” route to succeed? • A unified government principal, with clear developmental goal

o Clarity at each levelo Interests of external stakeholders vis-à-vis the relevant intervention are

fully internalized by the ‘vertical’ political system

• Well-functioning principal-agent at each levelo Political accountability o Politicians => policymakerso Policymakers => frontline service providers

• Oversight institutions of state function well

• Hypothesis: which regime types support “top-down” route?oCitizens => politicians, via accountable political parties [#5; #6]oA developmental dominant political leadership [Subset of

#2& #4]o ‘Top-down’ approaches will fail in competitive clientelist

settings [#3]

“Top-down” supportive governance

#1 Conflict

Political Settlement

#2 #4

#6

#3 #5

Example: What kind of regime is South Africa?

High Elite Cohesion

(Dominant Party Leader #2 #4

#6(Sustainably competitive markets and

polities)Low Elite Cohesion (Truce + Electoral

Competition) #3 #5

Organizational and Institutional Complexity

Low: Personalized Elite Bargain

High: Impersonality

9

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What options for accelerating development might be both feasible and effective in difficult institutional environments?

Þ “Working with the grain”Þ Possible that conclusion could be ‘none’;

development may require a prior political and institutional zig-zag…..

…but I’m giving it a try….. [Thanks, Justin……]

Haber’s politics of property rights in Mexico

• Private investment =f(credible commitment to stable rules of game)

• Property rights can be a targeted/private good

• Integrated with structure of “vertical political integration” – Coalitions; clientelist networks

• Underpinned by 3rd party enforcement

• Private investment in Mexico:– 1880s-1910 (protection + give ownership shares to rival warlords)

• Quarter century of sustained manufacturing growth)– 1930s- 1970s (PRI + protection + organized labour)

• 5% growth for forty years

How to lock-in ‘islands of effectiveness” in contemporary competitive clientelist African settings?

• Protected by non-expropriable specialist technical skills– Ethiopian airlines

• Very high returns– Zambian mining

• Have the ‘right’ political partners– Mozambique

• Minority state equity

• Collaborative governance?

Can collaborative governance work in weaker settings?

• Hypothesis: Collective action to provide sector-specific public/club goods can also be used to insulate the sector against destructive political pressures – (policy reversal; rent extraction; other transactions costs

increasing actions)

• For insulation to be effective, trumping influence networks must be stronger than threat influence networks

• Five cases:– Bangladesh garments– Ghana cocoa– Zambia cotton– South Africa hake fishery– South African garments: provincial & national

Bangladesh garments

Why are quasi-rents from Bangladesh garments not predated away?

Activity-specific specialized skills Relatively low capital investment Organized sector associations Political ‘diversification’:

o Over 3,000 garment exporting companieso Distributed across the two dominant political partieso Export market & credibility => shared incentive to

defend sector from predation, by either party

Ghana Cocoa

• Early 20th century smallholder platform….

• Rents expropriated, production collapses 1950s – 1970s

• Turnaround during Rawlings period; continuing rapid expansion. How locked in?– COCOBOD? No………… (vs Kenya Tea Authority)– Multistakeholder cocoa price setting committee, with

strong farmer representation– Cocoa farmers are in swing voter constituencies

Zambia’s cotton outgrowing• A seeming success

– Ginneries privatized in mid-1990s– Outgrowing arrangements with small farmers (entirely private sector driven)– Very rapid ‘headline’ growth: 60,000 tons (1990s) => 200,000 (2005)

• But huge cyclical swings– 1998: 100,000 => 50,000 (1999)– 2005: 200,000=> 100,000 (2007)

• Institutional weaknesses underlie swings– Side-selling/pirate-buying– No organized countervailing small farmer associations

• 2002: Government “Cotton Outgrower Credit Fund” exacerbates institutional failures– Finances only 3% of harvested area– Non-transparent credit allocation– “serious questions about activities of some fund beneficiaries”

Using Global Standards -- A Fisheries Example

The sustainability risk: Additional quota above sustainable limits given to deep-pocket or otherwise influential fishing companies

Senegal and fishing concessions for EU and Russian vessels

South African fishery’s mitigation measures• Internal transformation (BEE)

– Sea Harvest now majority owned by BEE Brimstone Group +employees– I&J transfers 20% equity to BEE consortium, 5% to employees– As of 2008, the two firms account for 62% of 15-year quota (vs 75% in

1990)

• Align with global standard – Marine Stewardship Council– MSC certifies that sustainable arrangements are in place– MSC monitors compliance– MSC recertifies after five years

South Africa Garments

Provincial: 2004- ongoing: • Two business-led provincial clusters: • financed by members plus fees, plus province• Ongoing support services to firms

National: 2005 ambitious plan negotiated• Across national value chain (retail; garments; textiles); • preliminary business-govt agreements reached• But trumped by SA’s difficult political economy:

o Labor initially stays outside processo No meeting of minds between labour and business groupso Government unable to be effective honest brokero Tripartite agreement eventually signed, but empty shell

2011: another round of crisis; stabilized by govt

Ostrom’s Good Practice Principles IThe Rules Principles for ‘Good Practice’ Design

I: Rules governing eligibility

Boundary rules – define who is eligible to enter a position

Clearly defined participant boundaries: Clear and locally understood boundaries between legitimate participants and non-participants are present.Position rules – create positions for

participants to enter

II: Rules governing benefits, costs and decision-making

Payoff rules – assign rewards or sanctions Proportional equivalence between benefits and costs. Rules specifying the amounts that a participant benefits are proportional to the distribution of labor, materials and other costs.

Aggregation rules – determine how collective decisions are to be arrived at

Collective-Choice Arrangements: Most individuals affected by the collaborative initiative are authorized to participate in making and modifying its rules.

Choice rules – specify what a participant occupying a position must/must not/may do at a particular point in a decision process

Conflict-Resolution Mechanisms: Rapid, low-cost, local arenas exist for resolving conflicts among participants, or with officials.Graduated Sanctions: Sanctions for rule violations start very low but become stronger if a user repeatedly violates a rule.

Ostrom’s Good Practice Principles IIIII: Rules governing monitoring

Information rules – assign the obligation/permission or prohibition to communicate to participants in positions… and the language/form in which the communication will take place

Monitoring: Monitors who actively audit participant behavior are at least partially accountable to the participants and/or are the participants themselves.

IV: Rules governing delegation of decision authority

Operational rules Collective choice rules Constitutional rules

Minimal Recognition of Rights: The rights of participants to set rules (or participate in rulemaking) are recognized by the government.Nested Initiatives: Governance activities are organized in multiple nested layers, with a clearly defined, autonomous domain of decision-making for local-level collective action

National-level: Failures of Collaboration

The types of rules

The Cape Garments Cluster

The National Initiative Zambia Cotton

Rules governing eligibility

Good practice Unclear rules -- role of labour in process

Partial – failure to exclude side sellers

Operating rules

Good practice Unclear rules—no neutral mechanism for addressing conflict

Unclear rules -- no mechanism to address price shocks

Rules governing monitoring

Good practice Not applicable. No collective mechanism

Rules governing delegation

Good practice No autonomous domains of decision-making

Partial -- outgrowing supported by policy, but ambiguous intervention

(How) can collaborative governance potential be enhanced?

• Support good practice collective action (a la Ostrom’s principles)– No stakeholders with veto potential can be left out!!

• Discuss political risks, and mitigation options, as part of industrial policy dialogue

• Strengthen horizontal associations– Large => small numbers; trumping capability

• Leverage global supply chain & standards networks

• But who will facilitate……….?=> Politics is trumps!!!!