At the end of this brief survey of the role of measurement in economics I shall attempt some general remarks on the lessons that seem to me to emerge and on a few other matters which arise out of the recent growth of quantitative economics and its use in economic policy. I have tried to illustrate the varied needs for measurement in describing economic situations and processes, in testing theories, in estimating the influence of one factor on another and in prediction. The importance of measurement for all these purposes is now generally recognized and an unprecedented amount of quantitative work is now being done by economists. The eighteenth field of research listed by Newmarch nearly eighty years ago has truly come into its own as a subject of intellectual interest and practical importance.

The past has seen many a battle of giants over the respective merits of the theoretical and empirical approaches to economic problems. There are signs that this false dichotomy is becoming recognized more and more widely for what it is. Only recently ‘measurement without theory’ has been condemned in high places and if theory without measurement has not come in explicitly for similar treatment the shift of interest as evidenced in the literature leaves the unexpressed views little in doubt. These remarks must not of course be taken as a plea against specialization; obviously a man who is an acknowledged master at conducting economic and social surveys may be no better than a raw hand at constructing theories of international trade or imperfect competition. They are intended only to combat the notion that either theory by itself or empiricism by itself has exclusive charge of the key to useful knowledge. No doubt in some branches of economics what is most urgently needed is a better theoretical formulation, in others a better description of what actually happens. In much of economics, however, there exist tolerable theories and a great many facts which have a bearing on these theories. The great need is to get the specialists in different aspects of a given field to work together, show a reasonable understanding of and respect for one another's disciplines and advance to problems which none could tackle on his own.

Just as unsympathetic specialization is a bar to advance so also is the undue exclusiveness sometimes to be observed in economists.

I mentioned earlier the desirability of introducing statistical design, as far as possible, into the procedure for collecting economic information in order to obtain the information in the most efficient way, to avoid bias and incompleteness, and to enable a measure of the reliability of the resulting estimates to be made. The field of social accounting is one in which a method of obtaining information which possesses these advantages is particularly desirable since here we are dealing with a system of empirical constructs which are related to one another. Moreover, measures of many of the component elements can only be made with considerable difficulty and uncertainty from information which already exists.

In attempting to demonstrate the isomorphism between the three types of account in a basic accounting structure and the three fundamental forms of economic activity I hope to have shown that it is possible in principle to collect the information required for social accounting investigations on an accounting basis. It is possible to draw up an accounting system which will reflect the kind of distinction in which we are interested as economists and it would be possible to use this system, appropriately modified and elaborated, for different parts of the economy as a basis on which to collect social accounting information. If this be granted then the difficulties we have to face are of a practical nature and the more important of them may be described as follows.

Having set up an accounting structure which makes use of the definitions and distinctions best suited for economic analysis, we have to see that this information can be obtained in practice from available records. This problem arises in a sense whatever method of collecting information is adopted, but it has to be faced explicitly if we start with a definite demand for information of a particular kind rather than with an acceptance of primary data as they already exist.

As far as business enterprises are concerned it can be seen that the accounting structure desired is not very different from the accounting structure in actual use. On many points of detail accounting conventions are satisfactory from the standpoint of an economist, but there are two kinds of problem which deserve special mention.

The Problem of Economic and Political Development

Success in economic as well as political development depends primarily on improving institutions. This has become the consensus among economists over the last twenty years, as the world has witnessed many development failures in spite of abundant capital, natural resources, and educated populations, who emigrate or stagnate if institutions do not put them to good use. The question now is: What institutions are right? As elaborated later in this chapter, some argue that developing countries should emulate the institutions of the most successful, high-income economies of the OECD. We and others, however, see evidence that most low- and middle-income countries are not ready to utilize many Western European or North American institutions or that these institutions function very differently if transplanted into these low- and middle-income economies.

The purpose of this volume is to develop and apply an alternative framework for understanding the dynamic interaction of political, economic, and social forces in developing countries, which was first laid out by North, Wallis, and Weingast (2009, hereafter NWW). The standard approach begins with neoclassical assumptions that growth will occur whenever profitable opportunities present themselves unless the intervention of political or social impediments prevent markets from working. In contrast, the alternative perspective presented here begins with the recognition that all societies must deal with the problem of violence. In most developing countries, individuals and organizations actively use or threaten to use violence to gather wealth and resources, and violence has to be restrained for development to occur. In many societies the potential for violence is latent: organizations generally refrain from violence in most years, but occasionally find violence a useful tool for pursuing their ends. These societies live in the shadow of violence, and they account for most of human history and for most of today’s world population. Social arrangements deter the use of violence by creating incentives for powerful individuals to coordinate rather than fight. The dynamics of these social arrangements differ from those described in neoclassical models, and this difference limits the value of the neoclassical tools for understanding the problems of development.

Introduction

Despite advances in social development and the presence of a very stable political order, during much of the twentieth century Mexico was unable to produce rapid economic growth. Even after dramatic economic transformations at the close of the century, including trade liberalization, privatization, and deregulation, economic performance has remained mediocre at best (Levy and Walton 2009). Democratization was a long and protracted process that only became a reality after a long delay, compared to political openings in Latin America and the rest of the world (Magaloni 2006). At the beginning of the twenty-first century the economy is stagnant; young men and women are unable or unwilling to find jobs in the modern formal economy (Levy 2008); and the state is unable to provide the most basic public good of controlling its territory and protecting its citizens from extortion and violence.

This chapter applies the theoretical framework developed by Douglass North, John Wallis, and Barry Weingast in their book Violence and Social Orders (2009) to the study of the social, political, and economic development of Mexico. In the context of this analytic lens, Mexico has already fulfilled what the authors call the “doorstep conditions” (rule of law for elites, perpetually lived organizations in the public and private spheres, and consolidated control of the military) that could enable it to transform into an open access order (OAO) society. But I argue that the prevailing political arrangement and the organization of economic interests have produced entrenched insiders who are preventing such transition.

The Philippines has exhibited characteristics of both a fragile and basic limited access order since independence in 1946, but the nature of the Philippine state has not been static. The country has experienced two critical junctures since independence, resulting in three distinct historical periods. Democratically elected representatives ruled the country from 1946 to 1972. The democratic experiment ended in 1972 when then incumbent president Ferdinand Marcos executed a coup against the system and began his rule as dictator. A nonviolent revolution ended Marcos’s authoritarian rule in 1986, and the country is once again ruled by democratically elected representatives.

These significant political changes were accompanied by changes in the nature of the country’s ruling coalition as well as the rents used to sustain the coalition (see Table 5.1). From 1946 to 1972, the country was dominated by a coalition of elite families and foreign capitalists who controlled access to economic and political power. The major source of wealth at independence was agricultural land, but this source was soon augmented by industrial policy-induced rents. The ruling coalition used these rents to secure loyalty and to defuse periodic violence from non-elite groups. The strategy was unsustainable, however, because the rent-creating policies did not produce enough resources to satisfy the increasingly restive non-elite groups. The threat of disorder and violence enabled Ferdinand Marcos to install himself as dictator in 1972.

Introduction

This chapter aims to explore the practical and analytical usefulness for development policy of a new framework for interpreting the evolution and performance of political and economic institutions suggested by Douglass North, John Wallis, and Barry Weingast (NWW) in their recent book, Violence and Social Orders.

A central distinction of the framework is between open access orders (OAOs) and limited access orders (LAOs). Most contemporary theorizing and prescription on the appropriate governance arrangements for low-income countries uses as its benchmark the institutions of OAOs: elections, and more broadly pluralistic, open and competitive political arrangements; and a free market economy underpinned by the impartial protection of property rights. The corollary prescription has been to advocate for the immediate, comprehensive construction of these institutions in less developed countries.

By contrast, NWW suggest that these institutions are the outcome of a long historical process, that the relevant dynamics are those of the LAO – and that the appropriate analytical and policy challenge is to understand how “doorstep conditions” that lead to OAOs can emerge out of LAOs. In LAOs, political stability depends on effective coordination among elites on access to, and allocation of, economic rents – with competition for rents carrying with it the threat of a violent disruption of the existing social order. Only in OAOs can competition – economic and political – and stability comfortably coexist. Moreover, OAOs emerge only as the culmination of a long (and by no means inevitable) historical process through which three necessary “doorstep conditions” have been institutionalized.

Thinking of developing countries as limited access orders with their own social dynamic rather than as flawed or incomplete open-access societies affords new insights into the impediments and paths to development. The perspective distinguishes between two development problems that are normally conflated. The second development problem involves the transition of societies from LAOs to OAOs. The first development problem involves the movement of LAO societies toward forms of social organization that enable more economic output, reduced violence, stable political outcomes, and greater individual well-being. World Bank borrowers face the first development problem: developing as an LAO, from fragile to basic and from basic to mature LAO, while avoiding regression. The lessons we draw from the case studies presented in this volume are primarily concerned with enabling places like the DR Congo to accomplish social outcomes that more closely resemble Mexico or Zambia. We also draw lessons about making transitions to open access, but our primary focus is on the first development problem because it is first in terms of human priorities. Understanding better the logic of limited access societies and the dynamics of how they change holds out greater rewards in terms of reducing poverty and violence.

The control of violence is central to the logic of all LAOs and hence is central to the problem of development. The traditional economic development framework focuses mainly on the second development problem and fails to understand violence or incorporate an appreciation of the dynamics of violence into policy recommendations. Indeed, the Washington consensus of the 2000s was dominated by efforts to embed institutions of open-access orders – property rights, entry into markets, elections, or institutions of good governance – directly into limited access orders. Because these reforms ignore the logic of the LAO, they often fail to produce development and sometimes exacerbate the problem of violence. The traditional development perspective typically treats violence as a country-specific phenomenon and leaves dealing with violence for local police and courts. By doing so, this perspective fails to understand that LAOs are organized to prevent violence and that this often hinders traditional reform efforts.

Limiting violence in India with its population of more than a billion people and its many languages, religions, castes, and regional diversities involves a complex web of economic and political compromises. The distribution of rents to powerful groups is jointly determined by institutions and politics at the national level and political arrangements within each state. While the national institutional and political system sets an overall architecture for the distribution of rents, individual states have their own distinct political and economic arrangements. This diversity creates tensions between the center and the different states, but the diversity at the level of states also explains how such a big country stays together at all. By contrasting the construction of the social order in two Indian states, Maharashtra and West Bengal, we explore how dominant coalitions can be constructed in very different ways within the overall architecture set at the national level. These differences in the ways in which rents are used to construct social orders at the level of each state also help to explain differences in economic policies and performance across Indian states.

In terms of the LAO framework, India after its independence in 1947 had many features of a basic LAO but gradually acquired significant characteristics of a mature LAO. This is true at the national level and in most states. But the transition conceals significant regional differences and many parts of the country have characteristics of a fragile LAO, often at the brink of intense insurgencies that sometimes break out. The Congress Party as an inclusive ruling coalition dominated Indian politics for the first three decades after independence from Britain in 1947. Its dominance came to an end by the late 1970s with a host of other parties, including regional parties, emerging that could construct alternative governing coalitions at the center. The significant increase in the effective mobilization of political organizations outside the Congress Party can be described as a gradual move in the direction of a mature LAO. At the same time, strategies of national economic management also went through changes after the 1980s as older variants of industrial policy were abandoned and the types of rents in the economy changed as a result.

Introduction

After having failed at transitioning from a limited access order (LAO) to an open access order (OAO) in the 1970s, Chile embarked on a second transition starting in 1990. If the democratic breakdown of 1973 dramatically proved the failure of the first transition, the consolidation of democracy and sustained economic growth experienced since the end of the Pinochet regime are symptoms of the presence of the three doorstep conditions necessary for an OAO to exist. The institutional structure that fosters gradualism and pragmatism and that guarantees private property rights – and that evolved out of the authoritarian enclaves left in place by the outgoing dictatorship – have allowed the doorstep conditions to become relatively permanent features of the social, economic, and political order in Chile. The solid economic growth in the 1990–2010 period, due to market-friendly policies, has allowed the government to adopt ambitious poverty reduction initiatives and other socially inclusive policies and has helped consolidate and legitimize the political and economic model. If Chile continues on this path, the nation will become the first Latin American country to complete a transition to an OAO. In what follows, I first discuss the previous failed experience of transitioning from an LAO to an OAO (1925–73) and, drawing lessons from those failed experiences, I then discuss the successful experience of economic growth and democratic consolidation since the end of the dictatorship in 1990.