How informative are the institutional diagnostics conducted on the IDP case study countries? South Korea seemed to offer an interesting basis of comparison. Would an institutional diagnostic made there at the time its level of development was close to that of the IDP countries today, that is in the 1960s and early 1970s, have anticipated the stellar development that would follow? This chapter describes an attempt at establishing an institutional diagnostic of South Korea in the early days of its take-off. Of course, this diagnostic had to rely on second-hand material in the literature rather than direct observation. Going through the early days of South Korean development under General Park, it turns out that the nature of the diagnostic would have much depended on the time it would have been made. Such instability would have essentially been the result of the uncertainty about the quality of the political leadership. In several instances, particularly after seizing power, Park’s strategy and institutional reforms indeed seemed extremely risky, not to say suboptimal. They worked because of his talent as a leader, especially his capacity tom onitor the business sector.

Chapter 1 is a short survey of the institution and institutional change literature in connection with development. Four themes of interest for the rest of the volume are considered in turn. First comes an important clarification about what is meant by ‘institution’ in the development literature and how it is to be interpreted in the rest of the volume. Second, the chapter deals with the question of the relationship between formal and informal or transitional institutions, a question of first importance in developing countries, especially when the two types of institutions enter in conflict. Third, the dynamics of institutions is discussed, the distinction being made between institutions that evolve endogenously or alternatively persist in spite of a changing environment or being clearly suboptimal. Finally the chapter briefly examines the main arguments in the debate about radical versus gradual institutional reforms.

This chapter presents the methodology used in forming a comprehensive institutional diagnostic of the four case study countries included in the IDP project. An institutional diagnostic of development is defined as an exploration of how the institutions of a country affect the functioning of its economy, its dynamics, and the policymaking process, the ultimate goal being to detect the most serious flaws that hinder development. The methodology includes three steps. A first step reviews the economic, social, and political development of the country, examining institutional quality indicators, and soliciting from various types of decision makers their views on potential institutional obstacles to development. The second step consists of an in-depth analysis of selected critical economic areas, where the relationship between the institutional context of a country and its development is the most apparent. The third step synthesises what has been learned into a list of basic institutional problems, their economic consequences, and, most importantly, their causes, proximate or more distant, as well as the potential for reforms in view of the political economy context.

This chapter deals with two other sets of generic institutional issues: state capacity and property rights. Both have received a growing attention by economists. They are probed here in the light of our six case studies and, occasionally, other countries’ experiences. The discussion of state capacity is articulated around three major issues: bureaucratic failures, inadequate incentives and professional norms (e.g., in the education sector), and ineffectiveness of the judiciary. Beyond technical and organisational aspects, politics also plays a major role in the three areas. The money needed to maintain support to clientelist or crony regimes is often obtained in exchange of favours to big business, through embezzled state budgets and kickbacks implicitly allowed at all levels of the bureaucracy. They strongly diminish state capacity. The discussion of property rights distinguishes between rights over business assets and rights over land, the latter being especially important in countries where a large proportion of the population depends on agriculture. Special attention is brought to what we call the ‘maze’ of land laws, as observed in many developing countries.

This final chapter summarises the central contributions and the main lessons of the whole Institutional Diagnostic Project as synthetised in the present volume. It also addresses the question of their possible implications for development assistance.

The Introduction provides a brief summary of the various approaches to the relationship between institutions and development in the literature, the originality of the institutional diagnostic approach, a presentation of the Institutional Diagnostic Project, and an outline of the volume

The same kind of backward institutional diagnostic as for South Korea was applied to Taiwan in its take-off days. An early diagnostic conducted just after the KMT settled on the island would have been rather negative in view of the very unfavourable initial conditions of Taiwan’s development, but it would have been strongly positive a few years later. This chapter explains why, while presenting an account of the development strategy deployeda nd the institutional setting developed by the newcomers. This second diagnostic would have been different from the one drawn for South Korea, even though in both cases development was strongly directed by a military authority headed by an authoritarian leader and ended up focusing on labour-intensive manufacturing exports. But the initial strategies and institutional structure of the two economies were quite different. On the one hand, Taiwan’s development was initially anchored in the modernisation of smallholder agriculture and the development of rural industries. On the other hand, an important role was paradoxically given to central planning, but combined strict market incentives for most economic agents.

This is the first chapter of the synthesis of the various institutional diagnostics undertaken in IDP, including those of South Korea and Taiwan. It compares the main economic development challenges, or advantages faced by the various countries, and the major institutional causes behind them. Development is seen as the structural transformation of the economy through the absorption of traditional low-productivity activities by the modern high-productivity sectors of the economy, rather than merely GDP growth rates. The comparative analysis is conducted with systematic reference to the well-known framework proposed by Arthur Lewis to represent this progressive diminution of ‘dualism’. If South Korea and Taiwan fit this framework rather well, the structural transformation is shown not to rely on growth engines sufficiently strong and labour-intensive to proceed satisfactorily in the IDP countries, except maybe in Bangladesh where the domestic engine is supplemented by massive outmigration of workers. It turns out that the cause for such a situation most often lies in the political economy context of the design, decision, and implementation of the appropriate development strategies.

This chapter examines a first set of generic institutional issues common to some or all IDP countries as well as South Korea and Taiwan, after taking stock of significant differences in initial conditions between these two countries and others, which necessarily affect the comparison of their development achievements. The generic institutional issues considered in this chapter are those that involve politics, more specifically the role of political leadership and state autonomy in development. That a full chapter is devoted to the role of politics reflects the huge importance of political forces in shaping or constraining development. This is probably the most salient lesson to draw from the six case studies, even though this dimension is largely under-estimated by many institutional analyses. Especially worthy of attention, but certainly not the only issue, is the type of relationships which exists between state authority and business interests, with the possibility that the latter capture the former. The discussion in the chapter occasionally draws on a broader set of experiences than that of the six countries considered in this volume.

This chapter summarises the institutional diagnostic studies in Benin and Mozambique. Benin’s past development performances are modest. A cotton exporter, its activity fluctuated widely due to a continuously changing organisation of the sector. Illegal cross-border trade with neighbouring Nigeria is another major activity. It generates income, but has limited domestic economic impact while raising informality and corruption. The oligarchs who run the two sectors had practically captured the state, pre-empting alternative development strategies. The situation may now have changed with one of them becoming president. Mozambique entered a civil war shortly after gaining independence. When peace was back, in 1992, development was triggered by the recovery from the war period, and the transition to a modern market economy monitored by Western donors. The country has now started exploiting its abundant natural resources (coal, oil, and huge gas fields). This strategy revealed a highly corrupt institutional setting and the neglect of the great mass of population in rural and often isolated areas, despite clear potential comparative advantages in agriculture.