This chapter presents the theory that will be used to explain different forms of public sector organization in the rest of this book. It discusses the assumptions that underpin the analysis, the transactions theory that is used to explain institutional choice, and the way that this theory will be applied and tested. It also places the approach adopted here in the context of the relevant economic and political science literature.

ASSUMPTIONS

The key assumptions describe the nature of decision making and the roles and motivations of the three main actors: legislators, administrators, and constituents.

Nature of decision making

Assumptions about the nature of decision making used here are characteristic of most economic literature and of the “rational choice” literature in political science. Decisions are assumed to be made by individuals who act as if largely self-interested and rational in pursuit of this interest.

Self-interest does not imply that individuals do not care for others, but rather that individuals put their own interests ahead of others when these conflict. The implication is that we cannot rely entirely on “good nature” to ensure that individuals act in the interests of others. It is therefore possible to fashion incentives to improve the alignment of individual interests with wider objectives. For example, while people may be attracted to the civil service by a desire to serve the public, they are likely to devote greater effort to this service if they think that increased effort will enhance their chances of promotion.

This chapter uses the approach described in Chapter 2 to explain the administrative choices the enacting legislature makes in the regulatory arena. Regulatory activity has a number of distinctive characteristics that help shape the mix of transaction problems legislators face and the potential institutional solutions available. In particular, the very nature of regulation often allows for direct participation of affected private interests in administrative decision making. The private benefits of this participation are often higher – and the informational costs of effective participation lower – than they are for other forms of public administration. Moreover, there is often a close professional link between public regulatory administrators and private lawyers; indeed, they can work on opposite sides of the same case. This makes it easier for outsiders to judge the performance of individual regulators, which means that the external labor market can exert a strong influence.

Most of this chapter is devoted to the way in which these two influences are used to control various types of agency problem. This does not deny the importance of the different aspects of ongoing legislative intervention that have received so much attention in the literature: legislative oversight, the budgetary process, appointments, and legislative direction. Rather, it helps clarify the role that these various interventions play.

The discussion in this chapter is confined to regulatory agencies in the United States.

Legislators make very deliberate choices about the boundary between private and public sectors and the institutional characteristics of the many different types of organization that make up the modern public sector. They typically take an active and detailed interest in the specific institutional arrangements they will employ in any given situation, like governance, financing, and employment arrangements; the extent to which decision making is delegated to the administrative level; and the procedures governing private participation in this decision making.

The controversy often associated with these institutional issues suggests that much is at stake in how they are resolved. Their importance is demonstrated time and again in those areas where concentrated private interests are affected by a particular piece of legislation. Wider institutional questions can also be among the most important of their time; witness, for example, the controversy in many countries at different times about civil service reform and about nationalization and, latterly, privatization. For many, these institutional questions are the key to determining “who gets what” from legislation.

These decisions are made at the political level and are driven by a common underlying political calculus. Electoral competition encourages legislators to take decisions that will increase their net political support and to protect their preferred policies from administrators and future legislators. It is no surprise that regularities appear in the way legislators draw the boundary between public and private sectors and in the institutional arrangements they impose across the public sector.

This chapter uses the transactions approach to explain the characteristic features of the merit civil service. These features have defined the administrator's conditions of employment in many countries during this century.

The conclusions reached in this chapter will be controversial. It is common for students of public bureaucracy to suggest that its institutional arrangements undermine incentives for bureaucratic efficiency, responsiveness, and accountability. This leaves us at a loss to explain the persistent and widespread use of these arrangements. Part of the problem is that few critics are explicit about the problems these institutional arrangements have been designed to solve: “What” is public bureaucracy supposed to be efficient at doing, and “to whom” is it supposed to be responsive and accountable? It is difficult to believe that institutional arrangements that are so common and persistent are a clearly inefficient way of addressing the problems faced by the legislators who continue to use them. It is more likely that these problems have not been correctly identified.

The transactions approach suggests that civil service arrangements survive because they help enacting legislators solve the transaction problems they face, especially commitment and agency problems. In addressing the agency problem, the enacting legislature will look for arrangements that promote the selection of administrators who have the incentives to administer legislation in the way the enacting legislature intended. In addressing the commitment problem, the enacting legislature will also want administrative arrangements that explicitly limit the extent to which future legislatures can control administrative outcomes.

While the production of goods and services for sale is typically the preserve of the private sector, most countries use state-owned firms to some degree. The appropriate boundary between public and private ownership is often the center of intense political debate, most recently over privatization. The experience with privatization demonstrates that legislators make very deliberate choices in setting this public–private boundary. The controversy that often surrounds privatization and nationalization suggests that ownership matters – indeed, that much is at stake.

It is very difficult to construct a simple explanation for SOEs that captures the great diversity of situations where legislators in different countries, and at different times, have chosen public over private enterprise. Despite this diversity, however, there are some striking empirical regularities. In particular, public enterprises are concentrated in the same sectors – like postal services, railways, telecommunications, electricity, gas, and airlines – across many different countries. There has also been a worldwide move toward privatization since 1980 that stands in marked contrast to the postwar growth in state-owned enterprise. These regularities suggest that not only is the choice of public ownership very deliberate, but also that many of the factors that are important in determining this choice are common to a large number of countries. Country-specific factors may be important in certain circumstances, or at certain times, but any explanation of these regularities has to apply to countries with very different histories, cultures, and ideologies.

This book documents two sets of interrelated changes that have taken place since the early 1980s. One resulted in a dramatic transformation of the international political economy. The political divisions of the world shifted significantly, while economic interdependence increased sharply. The second led to a rapidly growing differentiation among third world countries. The average per capita GDP of the East Asian newly industrialized countries (NICs), for example, now exceeds $8,000, more than that of some European nations. At the opposite extreme, per capita GDP in Sub-Saharan Africa is only around $300, and it has been shrinking for more than a decade. Indeed, the differences are now such that the composite term “third world” has become an anachronism.

The aim of this final chapter is to suggest an approach to specify the causal relationships between the international changes and third world performance. It centers on the role of geography and regions. “Region” is admittedly a vague concept; the geographic boundaries of a region can be drawn or redrawn at the whim of an observer. Nonetheless, geographic location is important because it is associated with shared historical and contemporary experiences. Especially important for our purposes here are links with external actors and processes. The argument is that groups of countries sharing a geographic space will be exposed to international influences through a regional prism. The result leads to characteristics that skew chances of achieving development, defined as rapid economic growth with relative equity of distribution.

As the world watches the horror of endemic violence, state disintegration, refugees, and starvation in Somalia and Rwanda, it is worth noting the more disquieting fact that an increasing number of African states are tottering on the brink, threatening to follow Somalia and Rwanda into the abyss. These now include Liberia, Chad, Zaire, Sudan, Togo, and Angola. Nor is the postindependence record elsewhere encouraging. Previous African “success stories,” like Ivory Coast and Kenya, are now assailed by chronic political and economic problems. Flickers of hope are few, small, and far between – Botswana, Mauritius, and, perhaps, Ghana, Zambia, and Zimbabwe. And, of course, great hopes are held out for South Africa, but it too can be expected to encounter many difficulties on the road from apartheid to a nonracial democracy.

Against this backdrop, economic performance of most African states south of the Sahara in the past two decades gives little cause for cheer, particularly to the ordinary citizens of the region. After registering average annual per capita growth rates of 2.9 percent in the immediate postindependence period (1965–73), the rate has since experienced consistent decline, stagnating at 0.1 percent between 1973 and 1980, and falling by 0.8 percent on average between 1980 and 1992. At best, therefore, most Africans are as poor as they were at independence 30 years ago.

One of the most dramatic political-economic changes over the past 15 years has been the shift in patterns of international finance. At the beginning of the 1980s, a select group of prosperous third world nations had privileged access to an enormous volume of commercial bank credit. They could also attract fairly important levels of direct investment. For all practical purposes, finance was no longer a binding constraint on the development strategies of this group of countries. Although poorer developing nations could not rely on private credit or investment, many of them had access to substantial amounts of funds via bilateral donors and the international financial institutions (IFIs). The industrial world, to a much greater extent, relied on its own domestic capital markets to meet its financial requirements.

By the latter half of the 1980s, in contrast, third world countries from Latin America and Africa had become largely marginalized from global capital flows, which were increasingly circulating among industrial nations. Insofar as they were still available to developing countries, capital inflows were swamped by amortization and especially by burgeoning interest payments. Indeed, a significant number of developing countries had become capital exporters. The result was a reversal of what development theorists had traditionally argued were the appropriate roles for developed and developing economies. The former were supposed to save more than they spent and export more than they imported, while the latter were supposed to consume more than they were able to save and import more than they exported.

The East Asian newly industrialized countries (EANICs) – Hong Kong, Singapore, South Korea, and Taiwan – occupy a distinctive position in the international system. In the 1960s and 1970s, they were the chosen few that seized the structural opportunities for upward mobility in the international political-economic system. During the second half of the 1970s and early 1980s, they launched effective economic adjustment programs that enabled their economies to ward off the looming competition from the “second-tier NICs” of Southeast Asia and to moderate the new protectionist pressures in the OECD countries. As a result, in the mid-1990s, the EANICs are poised to become the first group of postcolonial states to join the ranks of the developed countries in the postwar era.

Since the mid-1980s, however, the EANICs have been facing a new set of challenges that threatened their established modes of capital accumulation and patterns of state intervention. Beginning in the early 1980s, both economic officials and business leaders in the EANICs found themselves operating in a very different international environment due to the epic changes in the global political system, the tumult in the international monetary regime, and the discord in the management of multilateral economic relations. To strike a balance between the need to harmonize their economic relations with their major trading partners and the need to facilitate the structural adjustment of their economies, EANIC governments were compelled to reset their policy priorities and retool their policy instruments.

Over the past several decades, the world economy has undergone a fundamental shift toward an integrated and coordinated global division of labor in production and trade. In the 1950s and 1960s, production tended to be organized within national boundaries. International trade consisted, to a large degree, of raw materials flowing from the periphery to the industrialized core of the world economy, while manufactured exports were sent by U.S., European, and Japanese firms from their home bases to all corners of the globe. Direct foreign investment in manufacturing emerged as a response to the protectionist policies implemented by core and peripheral nations alike that wished to diminish the foreign exchange drain of an excessive reliance on imports and augment the employment benefits from locally based production.

Today the most dynamic industries are transnational in scope. Modern industrialization is the result of an integrated system of global trade and production. Open international trade has encouraged nations to specialize in different branches of manufacturing and even in different stages of production within a specific industry. This process, fueled by the explosion of new products and technologies since World War II, has led to the emergence of a global manufacturing system in which production capacity is dispersed to an unprecedented number of developing as well as industrialized countries.

New patterns of specialization between countries entail the fragmentation and geographic relocation of manufacturing processes on a global scale in ways that slice through national boundaries.

The earthquake that hit the international system at the end of the 1980s is conventionally summarized in one phrase: “the end of the cold war.” In reality, however, it involved at least four distinct elements: the end of the East–West conflict; the breakup of the Soviet Union and its alliance system; the collapse of communism as a global challenge to the West; and the triumph, in ideology if not in practice, of a political and economic model of liberal capitalism. The first three are historical processes that have important implications for the third world. The fourth is more a postulate than a reality, posing as many questions for the future of the third world as it provides answers about the end of the cold war.

The end of the East–West conflict has removed the bipolar contest that fueled most third world conflicts, when it did not generate them, and served as the framework for many North–South financial and military flows. While the end of the cold war has made great power military conflict seem less likely than at anytime in the past century, new strategic issues have emerged, born of the breakup of the USSR, with regard to the regional impact of postcommunist rivalries and to nuclear proliferation. One very important concomitant of the end of communist hegemony has been the breakup of multinational states, ending the understanding in place since 1945 whereby the existing map of the world, unjust and arbitrary as it was, should prevail.

Dramatic international changes are forcing third world countries to adapt their agendas and institutions to become part of a new global political economy. In the case of Latin America, massive shifts in international financial flows, the muting of East–West conflict and renewal of U.S. hegemony, the new primacy of markets, and the return to competitive political systems have been the most significant international changes. Accommodation to these changes is producing multiple tensions and conflicts, and it is not yet clear whether the adjustment will produce competitive economies.

During the post–World War II period, Latin American countries' inward-oriented development strategies – the import-substitution industrialization model – determined their main domestic policies and foreign relations. Now the region is facing new systemic conditions, following a decade of severe economic weakness during the 1980s. Looking back at the “lost decade” and comparing it with the success of the Asian economies, most Latin American leaders have concluded that they have no alternative but to accommodate their domestic policies to the new international context. Their initial success in doing so can be seen in recent economic data: inflation is under control in most countries; financial resource flows and investments have increased, despite the turbulence following Mexico's peso devaluation; and growth is beginning to resume. Nonetheless, Latin America lags behind its East Asian rivals in terms of growth and technological progress.