Sebastiano Fadda and Pasquale Tridico

Transcription

1 Introduction Institutions and development Sebastiano Fadda and Pasquale Tridico Book objectives and economic background The financial crash of and the subsequent global economic crisis have raised questions about the viability of capitalism and the desirability of alternative economic systems. In this context, Keynesian and Marxist ideas have become more popular. These two approaches, along with other heterodox approaches cultural political economy, Schumpeterian and evolutionary approaches, for example share a common basis and similar perspective on economic issues, that is, the need for institutional analysis and for providing better institutions and governance in the post- crisis era, with the aim of promoting economic development. This book, borrowing from several heterodox approaches, poses fundamental institutional, evolutionary and ontological questions that are crucially important for the emergence of new governance after the financial crisis. The recovery from the current economic crisis requires a new policy paradigm and new global governance, as well as a new institutional analysis. On one side, we argue that, contrary to the recent austerity policies implemented in the EU in particular, a higher level of government involvement is required in order to sustain aggregate demand, make full employment possible, and create a transparent financial sector, serving the real economy and encouraging productive investments. On the other side, we argue that institutions and policies need to follow a different theoretical paradigm. We know that countries vary with regard to the character and depth of the financial sector crisis, as well as to the impacts of the financial crisis on the real sector of the economy. Presumably, the most financially open and deregulated economies, and the economies that are most financialized, are also those most directly affected by the collapse of the financial bubble and the property boom. These economies would be defined as liberal market economies. In contrast, coordinated market economies seem to have coped with the crisis better. In both groups of countries, the subsequent variations with respect to real economic impacts are influenced by national institutional complementarities and specific policy choices. Such variations pose interesting questions and suggest interesting possibilities for solving the current crisis. _00b_Institutions & Devel.indd // 0::

2 Introduction At global level, more democratic governance is needed, along with a radical change in the leading role of the main economic organizations and institutions dealing with global economic affairs. At the European Union level, there are several challenges and pressures which need to be addressed: a new institutional framework able to satisfy the needs of the periphery (South and East) and of the core of Europe; a common policy in the fields of innovation and industrial development; and the old dilemma between EU enlargement and policy deepening. However, the main issue is still the debate around the euro its main institutions, the rules, the relationship between surplus and deficit countries and this will be explored in the book. More specifically, with reference to the economic policy measures taken at the European level to cope with the sovereign debt crisis, their inadequacy is due, in addition to some incorrect views about the working of the economic system, to the inadequacy of European economic governance, which makes the decisions dependent on the interests of some of the most influential and powerful member states on the one hand, and on the financial and bank establishment on the other. And this, in turn, is due to the fact that the European Monetary Union is a kind of hybrid: neither a federal state nor an international organization of states. Such an issue needs to be solved, we propose, through the progressive building of a new EU project, more comprehensive, based more on democratic and representative principles, more socially oriented and inclined to treat national imbalances with solidarity, as an internal EU issue rather than as the issue of a single member state. Institutions and policies during the neoliberal revolution: a brief overview By the end of the 0s and during the 0s, heterodox theories new institutionalism (evolutionary economics, regulation theory), the capability approach, etc. began to make progress. However, the policy paradigm followed so- called Reaganomics, that is, policies and (structural) reforms introduced by US President Reagan during his two presidential administrations ( 0). These policies mainly consisted of the implementation of monetarist policies monetary strength, anti- inflation, minimal deficit policy, the privatization of state assets and the complete liberalization of prices hence the official end of post- Keynesian policies. Reaganomics also involved the state s withdrawal from strategic industries, such as coal, steel, telecommunication, and energy, as happened in the United Kingdom during Margaret Thatcher s administration, and as happened other European countries at the beginning of the 0s. The aims of those policies were basically twofold: anti- inflation and domestic debt reduction, because high debt and inflation rates would curb economic performance. Soft monetary policies, such as credit, monetary expansion and exchange rate devaluation, would allow for an inflation spiral. Moreover, annual deficits, caused by an inefficient bureaucracy, state interventionism, too generous welfare and demand subsidies would increase the total debt and decrease the _00b_Institutions & Devel.indd // 0::

3 Introduction credibility of the economy, with a negative effect on foreign direct investment (FDI), the business environment and trust. Hence, the targets became macroeconomic stabilization (reduction of inflation and debt) and structural adjustment, through a liberalization of prices and sectors, privatization of state assets and deregulation, i.e. the state s withdrawal from the economy. These policies became a standard paradigm, implemented in order to adjust, stabilize and privatize the economies through a structural adjustment program, often uncritically implemented as a universal receipt applicable in all market economies, including transition economies and less developed economies (Stiglitz ). This set of policies became known as the Washington Consensus, in a phrase originally coined by John Williamson in. The phrase referred to a decalogue of policies propounded by Washington- based international financial institutions. The policies became a synonym of neoliberal policies supported by North American and West European economists. We call this paradigm the new neoclassical synthesis, in which new institutional economics and old orthodoxy attempt to save the neoclassical paradigm, through transaction costs, reinforcement of property rights and hyperliberalization. After fifteen years, this consensus has by now largely dissipated (Rodrik 00: ). Since the mid- 0s, recurrent economic crises in countries such as Mexico, Russia and later Argentina, champion of the IMF programme, have demonstrated the poor economic performance yielded by orthodox Washington Consensus policies. The reforms of the 0s and 0s produced disappointing results (Rodrik 00). Moreover, the consensus among economists on those policies dissipated. Finally, civil society became more critical, and organized Table I. Washington Consensus and Augmented Washington Consensus Washington Consensus () Augmented Washington Consensus (000) ) Fiscal discipline ) Reorientation and reduction of public expenditure ) Tax reform (little or no progressive rate) ) Financial and interest rate liberalization ) Unified and competitive exchange rate ) Trade liberalization ) Openness to FDI ) Privatization (state industries are inefficient) ) Deregulation (excessive regulation causes corruption) 0) Secure property rights Source: Williamson 0; Rodrik 00. ) Corporate governance ) Anti-corruption ) Flexible labour market ) Adherence to WTO disciplines ) Adherence to international financial codes and standards ) Prudent capital account opening ) Non-intermediate exchange rate regime ) Independent central banks/inflation targeting ) Social safety nets 0) Targeted poverty reduction _00b_Institutions & Devel.indd // 0::

4 Introduction against the consequences of neoliberal policies, i.e. globalization and no state intervention. International financial institutions recognized some failures (Stiglitz ), and as a result the so- called Augmented Washington Consensus was proposed. The new programme proposed an additional set of policy prescriptions circulating, along with the original policies, within the renewed Washingtonbased international financial institutions, at the end of the 0s. The theoretical justification of the Augmented Washington Consensus seems to be tautological because it claims that the poor results of the policies are due to compromised effectiveness (Rodrik 00). Hence, the condition for development is the establishment of important state institutions. Although it involves some important innovations, this approach seems naïve and fails to consider crucial elements, such as national specificity, the variety of policies available and the fact that there are different ways to reach similar objectives. Moreover, the apparent importance that the Augmented Washington Consensus gives to the role of institutions is based on a general precept of the more the better, rather than on a deep institutional analysis of the country where these policies will be implemented. In this approach to the explanation of policy failures, no importance is given to economic complexity and social dynamics. Instead, policy failures are explained in terms of a country s insufficient capacity to implement and effect Washington Consensus policies. Institution and economic development Empirical evidence shows that during the 0s and the 0s the countries that were most successful in terms of growth followed heterodox policies (Rodrik 00; Kolodko and Nuti ). China, India and Vietnam in particular but also the new Asian Tigers, i.e. Indonesia, Malaysia and Thailand, along with the old four Asian Tigers (South Korea, Singapore, Taiwan and Hong Kong) adopted heterodox policies or did not follow Washington Consensus orthodoxy completely. In those countries one can simultaneously observe mixed policies including: trade protectionism with FDI openness; state interventionism with the strong protection of property rights and enforcement of contracts; family capitalism and international investors; planned economy sectors and market- oriented zones; a government- controlled banking and financial system within the international competition system; and so forth. On the contrary, Latin American, Sub- Saharan and former Soviet Republic countries, where IMF- based programmes were more strictly implemented, had much worse economic performance (Bosworth, Barry and Collins 00). Rodrik (00) claims that there are some limited common objectives that can be considered common or similar for the majority of these countries. Nevertheless, the means by which these aims are reached may be heterogeneous. These common objectives may be: () macroeconomic stability; () integration in the world economy; () property rights and contract enforcement. As regards the first objective, macroeconomic instability comes not only from inflation and debt but also from an excessively deregulated financial system, uncontrolled FDI _00b_Institutions & Devel.indd // 0::

5 Introduction flows, trade liberalization, etc. Hence, macroeconomic stability must be reached by different means, with these problems also taken into consideration. The solution must be context dependent. The second objective refers to integration in the world economy. International openness does not lead to economic development per se. Domestic and heterogeneous institutions are necessary for the management of social conflicts, the protectection of weak economies and to assist with management. Finally, property rights and the contract enforcement system should be clear, with efficient incentives and a transparent rule of law. However, institutional arrangements should decide what type of property rights is most appropriate in each context, i.e. private, public or cooperative, and what type of sanction or enforceable system be used, what type or degree of state interventionism, what type of legal regime, and so forth. In general, specific objectives are needed for specific aims; this is the rule, with particular attention to social cohesion, management of conflicts, solidarity and political stability (Summers 00). Hence, institutions and institutional building remain crucial, their existence being a condition for development and a prerequisite of economic growth. The linkage between institutions and economic development is one of the most debated themes within both institutional and economic growth literature (Ostrom 00). Institutional economics criticizes both endogenous and exogenous growth theories as unable to explain the growth process in developing countries in particular, as well as the divergent and convergent forces occurring between those countries and the developed economies. Some developing countries are able to grow at a very high rate, much higher than other developing or developed economies, while others have never started a true process of growth (Olson ; Olson et al. ). Some of the modern institutional theories attribute much of the difference in rates of growth to the quality of institutions, governance abilities, the specific advantages of a particular territory, social capital, trust and other nonmaterial factors (Scott ; Bellandi 00; Becattini 000; Knack and Keefer ). Trust is a resource that does not involve a cost. It is based on a fundamental but personal assumption, perception and experience. Trust and other norms such as loyalty, a positive attitude towards cooperation between economic agents, consolidated relationships between agents, certain property rights, social opportunities and rights, the respect for contracts, management of social conflict, social cohesion and so on shape the social infrastructure of a country; it is this infrastructure that is essential for the start of a development process in a developing country (Kornai et al. 00; Raiser Haerpfer et al. 00; Sabatini 00). All the social values and norms that impose respect the common observance of rules and principles, mutual trust, respect for agreed contracts increase exchanges and stimulate cooperation processes, including the sharing of technologies, knowledge and information. Uncertainties in economic relationships and information asymmetries diminish and the costs of transaction decrease to the great advantage of productivity and economic growth. _00b_Institutions & Devel.indd // 0::

6 Introduction Now, in this time of crisis, trust emerges as a crucial variable for recovery, investment and growth. Lack of trust leads to a lack of investment, drains liquidity from financial markets and squeezes credit paid by banks to firms. Along with trust, another crucial factor during the crisis appears to be governance. Some economists have focused their attention on national governance abilities, and more so on international governance. In particular, Olson et al. () elaborate a model which they use to explain how good governance and institutional quality, as captured by some institutional indexes, increase economic growth and determine the main differences in output between countries. The same idea was developed by Acemouglu, Johnson and Robinson (00), who, however, take economic development back to its distant origins, as found in the basis of the historical institutions of every country. Jones and Hall () show that differences in output between countries are mainly explained by differences in social infrastructure, that is, the gap that results from variations in the economic institutions. The differences in social infrastructure are the most important in explaining the different magnitudes of residual growth, which in turn is the main factor in income differences. Finally, Rodrik () explains countries improved economic performance following the Second World War in terms of the presence of more appropriate social institutions, which were able to mitigate social conflicts and external shocks. Furthermore, the work of Rodrik () suggests that, in a global economy, external shock, crisis and unstable financial markets can be better governed only if there is appropriate and widely accepted governance. This should go beyond the current IMF framework, which is based on institutions designed in North America and Western Europe. This framework ensures that wealthy countries (mainly the G) also possess more power, including more vetoes and votes, than others. A good starting point for change could be the broadening of these privileges to the G0 or other wider organization (see Stiglitz 00). Hence, economic development is a complex issue because it is an outcome of the interaction of several factors, institutions and policies. Serious predictions of economic growth cannot assume that a single specific factor makes some countries richer than others. Many exceptions, for instance, can be raised against the idea that human capital is the main factor that contributes to growth; for example, countries such as Poland, Russia and Egypt have education levels that are very close to those in the richest economies, yet their GDP per capita is much lower. Another problem with human capital is the possibility of reverse causality between growth and education, and it is important to understand which comes first. Human capital is definitely an important factor for economic growth (Barro and Sala- i-martin ; Barro ), but it has also been shown that differences in human capital alone can explain no more than one- fifth of the difference in living standards (Olson ). A similar argument can be put forward with regard to the relation between technology and growth. Richer countries can afford high levels of research and development (R&D) expenditure, and they can enjoy positive returns and spill- over from that. Investment in technology is definitely correlated, both theoretically and _00b_Institutions & Devel.indd // 0::

7 Introduction empirically, with economic growth, but the root of the problem seems to be how countries can afford high levels of investment in technology and, consecutively, how some nations have more advanced technology than others (Yeager 00). Another factor that is often considered very important for economic growth is the possession of natural resources (Shaban ; Walker and Ryan 0). The United States, Norway, Germany and other wealthy countries possess abundant natural resources, such as oil, coal, land, etc. However, many other betterendowed or equally well- endowed countries such as Russia, Brazil, Nigeria, Venezuela and Saudi Arabia are less wealthy, while some poorly endowed countries such as Japan, Singapore, Taiwan and Hong Kong are much wealthier. The same exceptions can be found when considering trade and population density. In the first case, together with the success of some export- led countries such as Ireland and the Asian Tigers, the history of economies also records cases of successful inward- oriented countries, such as France and other old European member states after the Second World War. Even the Asian Tigers, before entering the global economy, created a strong infant industry and promoted import- substitutions policies. From a theoretical point of view, similar contradictions can be traced between some economists, who support the idea of a strong correlation between trade and growth (Bhagwati 00; Galor and Mountford 00), and others, who minimize the impact of trade on growth (Krevise 000), arguing that in some cases negative effects, such as inequality, wage discrimination and inequality between the skilled and unskilled, seem to prevail (Nayyar 000). With regard to population density, today we cannot say that poverty is always associated with high density, as some economists, following Malthusian predictions, initially believed. Switzerland, Germany (particularly the former West Germany) and newly industrialized Asian countries have a high population density and this has not been an obstacle to their economic development. In contrast, many Latin American countries, such as Brazil and Mexico, have a low population density, but this has not encouraged development. Hence, a comparative analysis reveals many problems and many controversial aspects related to development. Economic growth does not seem to be associated with one particular factor that can bring about development. No single mentioned factor is able to explain economic differences between countries. Moreover, the failure of the Washington Consensus during 0s in several countries, such as Mexico, Argentina and Russia (Stiglitz ; Rodrik 00), also showed that there is no single recipe for economic policy that is suitable for all countries, while the interaction between variables, national institutions and path dependency can better explain the recent economic success of many countries in Asia or the economic boom of some European countries after the Second World War (Rodrik, ). In China, for instance, and a few other emerging economies where heterodox policies have been implemented, the Washington Consensus was not implemented. Yet China s economic growth is defined as phenomenal and its _00b_Institutions & Devel.indd // 0::

8 Introduction economic success is real (McMillan and Naughton ). China s success occurred without complete liberalization, without privatization and without democratization (Qian 00). In, China s GDP was half of Russia s; in, Russia s GDP was half of China s. Market incentives occurred without liberalization and secure private property rights. China was poor, overpopulated, short of human capital and natural resources and constrained by an ideology that was hostile towards markets. Nevertheless, GDP growth took place, and was, under such initial conditions, really surprising (Qian 00). GDP in China has already overtaken that of the largest European economies (Italy, France, the United Kingdom, Germany) and today it is even bigger than that of Japan, which had been the second- largest economy after the USA (The Economist 00). China has benefited from a consistent and coherent set of rules and programme of governance over the last 0 years, and this has allowed impressive growth to take place. Under such governance, the Chinese economy has not been threatened by the current crisis. The country did not suffer financial instability, and economic growth appears to be very solid still, above per cent annually. Institutions for development after the crisis Institutions shape collective actions and therefore determine public choices, policies and organization (Olson ), both in capitalist economies and socialist economies. Institutions emerge as an important guide for investments, for behaviour in financial markets, for expectations and reactions of economic agents (Tridico 00). They limit what is right and what is wrong, what is appropriate and what is useless. They determine strategies and trajectories of change. This is particularly important in countries experiencing deep transformations and affected not only by formal institutional change but also by informal rules. As Sen has emphasized, a broad approach of this kind permits simultaneous appreciation of the vital roles, in the process of development, of many different institutions, including markets and market- related organizations, governments and local authorities, political parties and other civic institutions, educational arrangements and opportunities of open dialogue and debate (including the role of the media and other means of communication). (Sen : ) Formal and informal institutions implicitly include trust, respect for agreements and for agreed rules, financial regulations, mutual confidence among the parties to an economic transaction, exchange of information and circulation of knowledge, all of which lead to a higher level of social capital (Raiser ; Kornai et al. 00; etc). Increasingly, economists now focus on the relationship between social capital and economic growth. In fact, relationships of trust, loyalty, behavioural norms, cooperation, respect, certainty in economic relations _00b_Institutions & Devel.indd // 0::

9 Introduction and other similar factors seem to be a mirror of the intensity of economic relations, of economic exchange, of the self- reinforcement of rules and contracts and of information and knowledge circulation. For better performance, an economic system needs all these elements, which can be defined as nonmaterial factors. In the financial markets there seems to be insufficient social capital, very little trust and an expectation of aggressive strategies employed by all agents. Markets become very unstable and are subject to cyclical euphoria and panic, as Kindelberg (00) has discussed. The nonmaterial factors also encompass the dimension of social capital, which impacts significantly and positively on economic performance. In fact, these factors eliminate or reduce problems that arise due to the phenomena of adverse selection and moral hazard, lack of information, uncertainty, rentseeking and free- riding (or opportunism). A higher level of trust may result in an increase in investment, an improvement in economic relations (Arrow ), the overcoming of risk (Olson ), the promotion of social interactions and, therefore, the creation of networks that allow for the flow of knowledge, the exchange of information, cooperation between agents and the creation of increasing benefits for all. Each society may have its own rules, formal and informal, but what is important is that they provide a consistent institutional framework for a good business environment, reduce uncertainty and implement appropriate and effective institutions and policies. A consistent part of economic growth comes from the residual or black box, which is not explained by traditional variables such as capital and labour (Solow ). This residual, which is generally associated with technological progress, can be explained by better endowment of certain variables, such as (formal and informal) institutions, organization, human capital, infrastructure and most importantly social capital (Knack and Keefer ; Olson et al. ; Jones and Hall ). The crisis of the Eurozone is one that involves, first and foremost, the trust around the sustainability of the euro. Since the Eurozone has no central government, the euro is guaranteed by the member states individual economies. Lack of trust in the fundamentals of those economies causes lack of trust in the euro. Moreover, the lack of a proper Central Bank, which would guarantee, similarly to the US s Federal Reserve, the national debts of member states, weakens the euro s institutional framework further. In the context of the Eurozone, the sustainability of the euro relies on the support of individual politicians in power and member states governments. As long as governments support the euro, it will survive. It follows that uncertainty prevails at each election within a Eurozone member state. In the absence of appropriate institutions, such as a Eurozone central government or a Eurozone central bank with real power and functionality, the euro is liable to be threatened and weakened, particularly during times of crisis, which worsen the economic profiles of member states and increase scepticism for the Eurozone. Institutions such as a central government or bank would survive the elections, and would therefore better guarantee the euro s sustainability. _00b_Institutions & Devel.indd // 0::

10 0 Introduction At the global level, as De Long (00) and Arestis and Pelagidis (00) and many others have emphasized, surplus countries, such as Germany and Japan, need to implement expansionary policies rather than austerity measures, spending more and taxing less. In Europe, the European Central Bank should lower the interest rate to the Federal Reserve level (which is near zero) and should have an ambitious programme for buying national bonds. The proposal to issue European Union bonds should also be accepted, in order to create a proper Eurozone central bank with a collateral European debt agency (EDA). In this context each Eurozone member could issue European bonds up to at least 0 per cent of GDP. This would create, over time, a sovereign bond market of similar size to the US one. Initially, the EDA would finance 0 per cent of member states debt issues but this could be raised to 00 per cent during crises. A mechanism to switch between national and European bonds at a discount rate should be allowed as well, for countries in trouble. This would avoid the problem that secondary markets in many EU sovereign bonds are not sufficiently liquid during crises. The European Financial Stability Facility (EFSF ), which is today endowed with a fund of 00 billion, should become a permanent agency and should continue to buy the government bonds of countries in crisis. A strong institution working as a lender of last resort should be created for the EU, or at least for the Eurozone. The biggest European economies, such as Germany, the United Kingdom and France, should expand aggregate demand to allow for more imports from Mediterranean economies (Spain, Portugal, Greece and Italy), in order to allow the latter to reduce their deficits. Current account deficit is in fact dangerously financed by German, British and French banks, which buy national bonds from Mediterranean economies. If those Southern economies cannot repay their debts, correlation default will follow, in turn, in North European banks. Since institutions matter, it is important to implement institutional policies. Hence, the question is how to change institutions, how to implement a new institutional deal that will bring about economic development. Sophisticated and institutionally aware economists define development as an economic growth and (or plus) institutional change (Toye ). But since institutionally aware economists define institutions as standardized behaviour patterns, it follows that in order to change institutions we need to change those patterns. Hence the right definition seems to be: development as growth through institutional change (Fadda 00: ). In other words, the development process involves breaking with previous institutions, routines and standardized behaviour patterns that have not allowed for economic growth (Kuznets ). Institutional change depends on specific factors, such as country s history, values and traditions, which in turn give its context specific features. Therefore, institutions evolutionary paths can be very different across different countries, since these paths are not only determined on the basis of formal rules and constitutions (North 0). Hence, the question is how institutions evolve and what determines the institutional change. The new institutional economics (NIE) approach to the theory of institutional change is based on a fundamental assumption: institutions reduce the economic _00b_Institutions & Devel.indd 0 // 0::

11 Introduction cost of transacting; hence, agents will use institutions in order to diminish transaction costs (North 0). The behaviour of agents will follow the direction of the relative changes of prices. At the new prices and with the new methods, the old institutions will no longer be able to diminish transaction costs (North 0); therefore, the institutions will change. 0 On the contrary, the old institutional paradigm stipulates that institutions are composed of two important factors: () available technologies; () power relations between different groups. Hence, institutions will change not only when formal institutions are introduced by design, but also when informal rules and values change. A parallel approach to institutional change is the one put forward by evolutionary economics. According to this approach, institutions evolve by adapting their behaviour to new circumstances because human habits in which institutions originate are constrained by a sort of natural selection (Hodgson ). Institutional evolution is similar to Darwinian evolution (Veblen ). Therefore, institutions evolve with the natural survival and evolution of economic system and of the state. Hence, economic institutions face natural selection. During this selection, in interacting with the external world, amidst mutual functionality, interdependence and complexity of relations, automatic mechanisms are excluded (Freeman ). Well- adapted and stronger institutions survive, while weak institutions cease to exist. Moreover, a crucial role in this process is played by innovation (Lundvall ). According to this approach, the change in institutions is strictly endogenous. Socio- economic evolution is considered to be the transformation of a system through endogenously generated change and technical innovation (Dosi ). For institutional economists, the link between institutions and development is very clear: formal and informal rules define a system of penalties and prizes that determine a set of standardized behavioural patterns. These patterns in turn shape both individual and collective action, affecting economic performance and development. Hence, development policies should promote institutional change, i.e. a change in the values and rules that inhibit growth, and not only a change in formal rules or the implementation of reforms (i.e. structural adjustment), which in social terms may be very costly. At this point, it is important to stress the connection between Sen s notion of capability and the definition of institutions: both are crucial for economic development. As Fadda (00) puts it, choices are determined to a large extent by what we want to do, and this is determined by capabilities, as elements of institutions, and capabilities should not be taken as given. Hence, we can reelaborate the definition of development given above, and think of it as economic growth through institutional change led by the evolution of capabilities (Fadda 00: ). Institutional policies affect the institutional path of development. However, some policies are appropriate in some regions or countries but not in others (Rodrik ). In general, the majority of these policies are to be considered as specific to the context of the country or, to be more precise, to the context of the _00b_Institutions & Devel.indd // 0::

12 Introduction region. Hence, local governance has an important role to play in policy- making. The dimension of space becomes a crucial proxy, giving effectiveness to policies. Local institutions provide for these policies (see Becattini, 000). In contrast to the Washington Consensus approach, an institutional approach takes into consideration the whole institutional framework, with its values, its formal and informal rules and not only a few institutions to reform or to force onto a country. Moreover, this approach does not have a standard and general recipe for development; rather, it offers a wider analysis according to which policy makers can design context- specific policies that are tailored to the particular situation of the country or of the region. Economic development and institutional development can be considered as two sides of the same coin. Institutional policies and development policies will come together with the aim to make development less uneven, to anchor economics more in the real world and to improve living standards. As Coase puts it, In the real world, to influence economic policy we work through institutions. The choice in economic policy is a choice of institutions. And what matters is the effects that a modification in these institutions will actually make in the real world (Coase : ). The structure of the book In Part I, the book explores fundamental institutional, evolutionary and ontological questions for the sustainability of a stable economic development path. Recovery from the current economic crisis requires a new policy paradigm and new global governance. At the global level, we argue, the main condition that has made the present crisis so explosive is the lack of proper global economic governance. Both at the global and at the European level, the difficulties in finding a solution to the conflicting interests of individual states often prevent the adoption of effective regulatory decisions. This occurs because the socioeconomic model on which current governance is based is undemocratic and lacking in full political representation. The new socio- economic paradigm, as proposed in the first part of the book, tries to overcome this dilemma. More particularly, in Chapter, by Pasquale De Muro, Salvatore Monni and Pasquale Tridico, the core idea is that the main determinants of development policies are institutions that are created from development theories, and that the latter i.e. the ruling ideas about development are a mental product of the accumulation regime, which in turn is regulated by development policies and institutions. The authors present an interesting illustration to explain this process (Figure.). These relationships among development policies, institutions, theories and accumulation regimes are dynamic and dialectical (circular). Therefore, they claim, historically there has been a dialectical evolution of development policies, theories and institutions. In Chapter, Hardy Hanappi shows that evolutionary theory is held together by two distinct elements: on the one hand, it is the object of investigation emerging forms of life that defines the scope of this scientific discipline; on the other hand, the topic studied feeds back into the _00b_Institutions & Devel.indd // 0::

13 Introduction toolbox of methodologies, to be used by researchers in evolutionary theory. There emerges an evolutionary research approach. Though both elements historically have evolved simultaneously and with close interplay, they may nevertheless be described independently, at least in retrospect. And these two perspectives are what this chapter aims to outline. First, from a diachronic perspective, the emergence of life forms as a sequence of alternations between relatively stable evolution and revolutionary changes in entities and relationships is discussed. Second, from a synchronic perspective, the methodological consequences of historical observations are highlighted. In the last and third part of the chapter, the logic of the first two parts is inverted: reviewing the given evolutionary toolbox of methodologies, it is asked whether this can shed light on the current, revolution- loaded state of the global economy. But in evolutionary theory, understanding always implies change, simply because understanding itself is part of the evolutionary process. This argument, Hanappi suggests, provides the third element of evolutionary theory: it has inevitably to be a driver of actual revolutionary change in the real world. The necessary practical involvement of this scientific discipline is particularly visible in evolutionary political economy at the current stage of world history. It sets out to redesign the consciousness and interactions of newly emerging (aggregated) global agents. Chapter, by Geoffrey M. Hodgson, claims that the financial crash of 00 and the subsequent global economic crisis have raised questions about the viability of capitalism and the desirability of alternative types of economic system. In this context, Marxist ideas have become more popular. Some basic theoretical conceptions in Marxism are compared in this paper with alternative developments from original institutionalism, particularly from its roots in the writings of Thorstein Veblen and John R. Commons. Marxism and this version of institutionalism share many ideas, including the historical specificity of capitalism. But their grand views of history are different, with Veblenians rejecting the inevitability of socialism or any teleological developmental goal. The Veblenian tradition has also a very different view of human agency and its psychological underpinnings. Furthermore, the Veblenian emphasis on the role of habit and tacit knowledge undermines any notion of comprehensive central planning, which was a central goal in Marxism. Commons developed important insights about the role of law in the economy. Together these writers, Hodgson argues, provided ideas that could help form a systematic theoretical alternative to both Marxism and mainstream economics. This is described as new- old institutionalism. In Chapter, Bob Jessop revisits the argument advanced by advocates and critics of capitalism alike, if somewhat hyperbolically, that liberal democracy is the best possible political shell for capitalism. This is contestable, theoretically, historically and comparatively. Indeed, the relationship between capitalism and democracy is deeply contradictory and historically contingent. The connection is further challenged by recent trends in national politics, such as authoritarian populism, authoritarian statism, and post- democracy. More doubts are raised by growing gaps between world market integration, the continuing _00b_Institutions & Devel.indd // 0::

14 Introduction importance of national territorial states and forms of global governance. These are producing an increasing democratic deficit, especially regarding control over the international, transnational, and supranational economic and extra- economic aspects of the emergent world market, and are reflected in the resort to technocratic and other forms of unelected, non- accountable executive powers linked to international regimes, and obscure parallel power networks. These trends are decades old but have been strengthened by the expansion of a finance- dominated accumulation that is tied to new forms of political capitalism. After reviewing some of these general issues, Jessop turns to financialization as another debilitating factor in the decline of democratic governance, a factor that is largely overlooked in neoclassical, but not in libertarian, economics. The last chapter of Part I, Chapter, by Ugo Pagano, hosts an interesting debate about human nature and human evolution in relation to its impact on the modern economy and the current economic crisis. The paper is a postscript to Pagano s article published in the Journal of Bioeconomics in April 0. The aim of this postscript is twofold. The first goal is to reply to the comments received by the Journal of Bioeconomics in response to the original article, and to clarify the points made in the article by comparing them with alternative views of human nature and human evolution. The second objective is to point out the relevance of long- term analysis, as presented in the article, to the current crisis. The article considers the plausibility conditions that a thesis on the evolution of human nature should satisfy, and argues that the sexual subsidy thesis considered in the article satisfies these conditions. Furthermore, Pagano applies the same test to two alternative explanations advanced as alternatives to the sexual subsidy hypothesis: the lethal weapons theory and the group selection theory. The author then argues that a long- term perspective is useful in examining the fate of globalization and the future of the so- called knowledge economy. Finally, he argues that the analysis of long- term dynamics, between the intensive use of a non- rival good such as knowledge and its private appropriation, is relevant for the understanding of the present great depression and can help in the selection of appropriate policy tools. In Part II of the book we explore possible alternatives and examples of governance that would be useful to implement after the financial crisis. This second part starts Chapter, by Sebastiano Fadda, who shows that with globalization nation states have become unable to provide effective governance of economic activity. Two problems have arisen: the inefficiency and ineffectiveness of international regulatory bodies; and their compatibility with the sovereignty of individual nation states. Both formal and informal supra- national institutions appear to lack two fundamental features of democracy: the participation of the people; and the accountability of policy makers. The measures taken by the EU to cope with the crisis are inadequate, due to incorrect views about the working of the economy and to the lack of proper European economic governance, with decisions being dependent either on the interests of the most influential member states or on the financial establishment. In fact, the European Monetary Union is a hybrid: neither a federal state nor an international organisation of states. It is _00b_Institutions & Devel.indd // 0::

15 Introduction doubtful whether Europe is converging towards a federal state, and whether this is at all possible at the present time. Pasquale Tridico s main objective in Chapter is to show that the recovery from the current economic crisis in the US and the EU requires a new policy paradigm and new global governance. He argues that, contrary to the recent austerity policies in the EU and the US, a new level of government involvement is required in order to keep aggregate demand stable, make full employment possible, and create a transparent financial sector, serving the real economy and encouraging productive investments. Moreover, at the global level two main issues seem to affect the markets negatively: first, the lack of an independent international currency; and second, the instability of one of the biggest markets, the Eurozone. The first problem requires a wider international solution; the second requires political responses at the EU level in order to deepen integration. Dany Lang, in Chapter, shows that the Treaty on Stability, Coordination and Governance (TSCG), signed in March 0 by the Eurozone s heads of state and government, is totally unnecessary. Everything in it had already featured in European laws adopted in 0, primarily via the reform of the Stability Pact and the boosting of economic and budgetary policy coordination, which was included under the Six- Pack. The author criticizes this treaty, because it fails to solve the major issues of the Eurozone. In particular, it does not confront the imbalances of a capitalist system that 0 years of systematic deregulation have surrendered to erratic market forces. It does not deal with the constant blackmail and recurrent crashes that the markets inflict upon EU societies. It does not deal with the absurd situation that allows the European Central Bank, which is prohibited from funding public deficits directly, to flood private banks with over a trillion euros in very low interest- rate ( per cent) loans, so that the banks can then lend a portion of that amount to governments at per cent, per cent or 0 per cent, but only at their discretion, as nothing compels them to do so. It does not deal with the dramatic rise in social inequality, unemployment, insecurity and economic instability that has resulted from the growing importance of financial capitalism. It does not deal with the tax giveaways that boosted tax exemptions and emptied the public coffers, resulting in deficits and debt. Finally, it does not deal with the freezing of investments that are essential to an ecological transition, without which there is a risk of creating worldwide chaos. Finally, Chapter, by Massimiliano Gambardella, argues that the technological shock has increased the digitization of data, completely changing the situation in terms of access to knowledge. New actors are now able to cross economic barriers and start new projects, creating new and innovative products. Moreover, in the current time of crisis it is more difficult to obtain funding, particularly for small start- ups and young artists. The author explores the use of emergent Creative Commons (CC) licenses in order to involve users in the production process and then use it as an alternative source of funding and innovation. The chapter proposes a model to explain how CC licences can be used to obtain funds and user contributions. This study is useful for understanding how _00b_Institutions & Devel.indd // 0::

16 Introduction intellectual property rights can be managed and alternative sources of funding found, particularly for start- up projects. Moreover, this study could be helpful for legislators who want to update policies to take into account these new levers to stimulate funding, which are harder to obtain in times of crisis, and to innovate. Notes Originally these policies were addressed to Latin American countries in (see Williamson 0). Later, most of the countries in Asia, Sub- Saharan Africa and Eastern Europe were advised by the promoters of the Washington Consensus to adopt such policies. In particular, in the former communist countries, the beginning of the internationalization of the Washington Consensus coincided with the beginning of the transition from a planned economy into a market economy. As Nuti () critically pointed out, that transition was considered by Washington- based international financial institutions to be summed up by the following equation: transition = liberalization + privatization. As well, the crisis in South Korea, and then in other Asian Countries, seemed to be caused by the sudden introduction of short- term liberalization of capital (see Nayyar 000; Stiglitz ). Nevertheless, Asian countries are quite particular as regards the orthodox implementation of IMF policies. Rather, policies in Japan, in South Korea and in other well- performing Asian Tigers seem anomalous, with extensive industrial trade protection, particular financial corporate governance and quite strong state interventionism. As Rodrik (00) suggests, if a developing country were to achieve the above- listed institutional aims, it would already be a developed country. Hence, not only the aims, but also the means to reach those aims, are utopian dreams for developing countries: the aims are too ambitious and consciously unreachable. The indexes are: the risk of expropriation; the risk of repudiation of contracts by governments; quality of bureaucracy; level of corruption; law and order tradition; and international country risk. Olson et al. () found that governance variables explain around 0 per cent of growth rate changes among countries. Acemouglu et al. (00) proved that different European colonization strategies provided exogenous institutions that impacted consistently on productivity and on differences in income per capita among developing countries. In 0, a proposal in this direction was made by Jean- Claude Juncker, former president of the Eurogroup, and Giulio Tremonti, former minister of finance for Italy. This is a temporary EU fund, which was created during the Greek crisis in the spring of 00, providing an initial support of 00 billion. Kuznets states: The transformation of an underdeveloped in to a developed country is not merely the mechanical addition of a stock physical capital: it is a thoroughgoing revolution in the patterns of life and a cardinal change in the relative powers and position of various groups in the population [...]. The growth [...] must overcome the resistance of a whole complex of established interest and values. (Kuznets : 0) 0 From this it clearly emerges that, for the NIE, the concept of efficient institutions refers to those institutions most able to diminish transaction costs. This statement fails to take into account the fact that economies may follow the laws of physics, such as the automatic mechanism of equilibrium. We will return to this legislation later on _00b_Institutions & Devel.indd // 0::