Alfredo Sfeir-Younis, Special Advisor to the Bank’s Managing Director, opened this Bank InfoShop event with introductory remarks. He quoted Fukuyama’s assertion when the Soviet Union’s collapse that liberal democracy was the inevitable destination of mankind.
Francis Fukuyama, Professor of International Political Economy at John Hopkins University, said research suggests that as an industrializing country ascends to about $6,000 per capita of GDP, then democratic institutions will begin to develop. The link between democracy and development, he said, presupposes economic growth which presupposes an existing political environment that will allow development. None of which determines where states come from, thus the genesis of his latest book, State-Building: Governance and World Order in the 21st Century. Two major types of state growth in the previous century were communism and the welfare-state that was ultimately re-engineered by Ronald Reagan and Margaret Thatcher. He cited Max Weber’s viewpoint that the state is an instrument of enforcement. States do not seek to coerce overtly, he noted. They provide public goods. They regulate. They intervene with markets. Fukuyama suggested a key activity is the state’s ability to enforce the rule of law.
The scope and strength of state activity have led to many questions over the past decade. Neoclassical economists would argue that states should provide public goods that cannot be provided elsewhere. He noted that there are cultural differences between the U.S., which favors liberty while Europeans favor equality. Either model relies of adequate enforcement, but developing countries tend not to have strong enforcement. Countries evolve over time. China and India had strong public administration and over the last two decades have evolved to allow more private sector freedoms. On the other side are countries like the Former Soviet Union, which experienced a serious collapse of basic state functions. Fukuyama characterized structural adjustment efforts by the international financial institutions (IFI’s) as flawed. Privatization efforts in Russia fared poorly since they require a fair amount of state capacity before implementing, he noted.
Certain economic reforms are possible. Great debate continues over whether improving governance or reducing the size of the state achieves the best results. He paraphrased renowned economist Milton Friedman, who suggested his own thinking has evolved from advocating for privatization to advocating for the rule of law. Fukuyama noted there is much empirical knowledge now, much from the Bank, about the importance of institutions. He did question, however, how much influence the development community can have on countries in this area. Windows are opened generally by wars, revolutions or economic collapses.
Public administration is a technical discipline, he suggested, but less of a science than had been first believed. Delegation of decision making to subordinates is an important focal point. Centralized decision makers don’t have enough local knowledge to adequately address resource allocation. The key to governance reform is creating the right incentives, he suggested. Many public sector problems, however, cannot be reformed through traditional monitoring and accountability solutions because within organizations there are domains of uncertainty that are influenced by the ambiguities of changing environments. He noted public sector activities are difficult to monitor. Institutions with high transaction volume, many decision makers, and inadequate ways to measure the quality of decisions, is where the greatest problems lie. Social capital and education may be possible approaches for formal accountability in organizations. Knowing what to do ex-ante is not possible, he added. Fukuyama called General Douglas MacArthur’s decision to keep the Emperor in place following the defeat of Japan in World War II a critical and wise decision based on historical and first-hand experience. He juxtaposition’s this with the current situation in Iraq, but noted the key issue is what does one need to know in order to make choices. He said there is often a contradiction in helping countries with public services while doing institutional capacity building. External sources or local institutions are often better positioned to provide services, while long-term solution for countries are to develop their own institutional capacity. This turn key approach by the international community, therefore, is a mistake, he said. The paradox is with failed states, problems must be solved but long-term solutions reside in allowing countries to have ownership over activities. For his part, he would advocate for local ownership as early in the process as is possible.
Frannie Leautier, Vice President of the World Bank Institute, said she closely examined Fukuyama’s writing on principles such as why it was important to use development aid to build states, have international security, and address health epidemics and human and natural catastrophes. She noted it is essential both to create and to strengthen institutions building on existing norms but also exogenously. Scope and strength issues have national and international dimensions, and she noted the author argues that capacity is more important than size. Another key principle is the scope of state activities as well as the potential for state capacity to be destructive. On the transferability of "stateness", Leautier acknowledge there are areas that Fukuyama noted where high specificity and low transaction costs make this possible. Creating stateness through a momentous event is difficult, however, and she suggested history has shown that states are more likely to evolve. Political capacity allows states to evolve. Two aspects of capacity stand out for her. The first is to maintain and guard rights and standards in a globalizing world and the other is the capacity to nurture and allow creativity and entrepreneurship is an increasingly competitive environment. She characterized Fukuyama’s analysis of state capacity as strong. She cited Jean Francois Richard’s theoretical work that states unable to adapt to a globalizing world may find their capacity digressing. In the 1970’s, states reduced their scope. The next decade was one where states were in a building environment. The current period is one of capitalizing on opportunities. Leautier said it is more difficult for a state to challenge and integrate than it is to protect or control. Concurrently, in the 1970’s the Bank looked at whether states could put together sound projects, in the 1980’s putting together strategies was the priority, and the 1990’s harmonization of donor activities was a major focus. Fukuyama addressed the role of donors as well, noting they also must transition themselves from simply helping traditional states with things like the rule of law to helping modern states that creates an environment for economic, political and cultural growth. On the question of whether capacity building was a science or art, she noted that the Shanghai conference on Scaling Up Poverty Reduction revealed success was achieved by sound management and good localized implementation. Fukuyama, notion that donors should focus on building capacity rather than delivery services is one she found sound. On the issue of supply and demand, Leautier noted the book had a number of examples of where donors killed capacity because they had not the patience for local systems to work. Conditionality has limited value according to the author. She cited the issue of decentralizing the IFI’s as a way to build capacity. Building capacity is hard for many reasons including the different time horizon donors operate within and even defining public services may be difficult. Fukuyama does have advice: providing key stakeholders with a greater voice; building organizational cultures focused on results; and transforming preferences by developing leaders. For donors to achieve this shift from delivering services to building capacity means a shift from incentive to normative structures, Leautier said. This means donors must work at the organizational level and would require significant changes in the development community. She characterized the Bank’s recent record as mixed. On issues of voice and accountability, there is progress. On the rule of law and control of corruption, there is wide variation. Overall government effectiveness has improved, but in some key countries progress has stalled. She briefly described some of compatibility of WBI’s work along these themes. Leautier closed with several key questions for the audience to consider that Fukuyama raised in the book.