Why do institutions matter? Global competitiveness and the politics of policies in Latin America

Capital & Class, Summer 2009 by Charnock, Greig

Abstract

This paper subjects to critique the 'new institutionalism' in development policy literature. It highlights the way 'second generation' institutional reform processes in the Latin American region are to be engineered through a politics of global competitiveness while their success is to be gauged, first and foremost, in capital-functional terms. The paper culminates in the focused critique of an Inter-American Bank flagship report, The Politics of Policies, which demonstrates the new institutionalism's prejudice against any form of political leadership that does not seek to guarantee a competitive investment climate as well as an uncompromising commitment to a politics of global competitiveness.

Over the past decade, a broad consensus has emerged that 'institutions matter'. (Fukuyama, 2007: xv)

There is an emergent consensus in development studies and policy analysis - a 'new institurionalism'.' Its adherents and proponents reject the market fundamentalism of the 1980s and early 1990s, represented by structural adjustment and shock therapy, and with these many of the assumptions about what the untrammelled free market can achieve. For in 'the real world', the utility maximising individual - the keystone of neoclassical economics - is too often subjected to imperfect or asymmetrical information, which has the effect of delimiting or 'bounding' the benefits that ought to accrue to the rational market actor. In this new consensus, the key to understanding both the developmental limits to and potentialities of the market lies, therefore, in the institutions that facilitate and/or hinder rational market action. Institutions are seen as the purposive, problem-solving and collective outcomes of rational actors' individual decisions, and their importance lies in the manner in which they internalise and therefore minimise the transaction costs between economic agents.' While this approach may be considered commensurate with rational-choice approaches to economics and political science in general, the new institutionalism focuses in on a paradox: namely, that such bargaining on the part of individual interests can yield 'irrational' results. Sometimes institutions can be dysfunctional, and they may also exhibit 'path dependencies' which make them difficult to reform along more functional lines, since some actors (potential 'losers') must be persuaded to act irrationally (for example, in correcting dysfunctional outcomes despite the status quo's being materially favourable to them) (Grindle, 2001, 2002). In short, and from this essentially rational-choice and gametheoretical perspective, the new institutionalism seeks to develop a comprehensive and functionalist understanding of contemporary governance institutions and processes across the developing world as a means of changing them.

The popularity of this new institutionalism is especially evident in the current concern with 'pro-poor' reforms and the installation of 'good governance' regimes in the global South. In order to gauge the degree to which a 'paradigm shift' has been in process amongst development scholars and practitioners, one has only to read recent editions of the World Bank's annual World Development Report, or take its former chief economist and Nobel laureate Joseph Stiglitz seriously when he writes,

The Bank has made enormous strides in its reform. Its rhetoric has changed enormously. It now voices the need to go beyond projects - beyond even policies - to change institutions. It talks not just about limiting the role of the state, but about creating a more effective state. It discusses the impact of corruption on development, when only a few years ago this would have been viewed as crossing the dividing line between economics and politics. It articulates the need to take a comprehensive approach to development that sees development as a transformation of society. And it talks about putting the country in the driver's seat, about participation and ownership, about the salience of poverty. (Stiglitz, 2003: 125)

While much has been written about the World Bank's reorientation,' this paper diverts attention to a neighbouring Washington DC-based development agency - the Inter-American Development Bank, or IDB. In 2003, the IDB initiated a project entitled 'Political Institutions, Policymaking Processes and Policy Outcomes'. The purpose of the project, conducted by the IDB's Latin America Research Network, was to take a detailed look at 'the institutional arrangements and political systems at work in Latin America and how they shape the roles and incentives of a variety of actors . . . that participate in the policymaking process', with one of the goals being to 'explore the way in which this process contributes to shaping policy outcomes and the political economy of specific countries and sectors' (IDB, 2ooja: 1). The project resulted in the publication of a report entitled The Politics of Policies, released as the 2006 edition of the IDB's flagship 'Economic and Social Progress in Latin America' series, which is published annually in cooperation with Harvard University's David Rockefeller Center for Latin American Studies.4 In this paper, I will argue that The Politics of Policies is a profoundly ideological text on two grounds. First, the report is rooted in a particular methodology that can be attributed to its new-institutionalist orientation, and which I critique in more detail in the first section of the paper. Second, and more insidiously, while its authors state that the text is not interested in 'policy content', a closer reading reveals a subterranean agenda: a politics of global competitiveness. Paul Cammack describes this as: