Unit 06

UNIT 6
GOVERNANCE, ROLE OF THE

STATE, MARKET AND CIVIL
SOCIETY
Governance, role of the state, market and civil society are crucial factors
in every economy. This unit covers the concepts related to governance in
lesson-1, role of state and market in lesson-2 and the role of the civil
society in lesson-3.
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Unit-6 Page-294
Bangladesh Open University
Lesson 1: Governance1
Objectives:
After studying this lesson, you will be able to:
 Understand theoretical concepts related to governance.
 Analysis the market and Government.
 Describe the economic performance.
Introduction
The concept of governance is not easy to define. In case of an institution,
it may be said that the term refers to processes through which an
organisation is governed. When it is linked to a country the term relates
to processes having complex historical, cultural, social and political
determinants. It deals with the science of government behaviour and
performance. Economic theories emphasise efficiency in explaining the
role of institutions in development, while political and sociological
theories emphasise the role of authority, beliefs and ideology.
Analytical Concepts: A Snapshot

Economic theories hold that institutions are created when it is efficient to
create them, i.e. when the benefits of building institutions exceed the
transaction costs of doing so and political theories focus on redistribution
rather than efficiency and hold that policies and institutions are shaped
by those in power to stay in power and to transfer resources to
themselves (La Porta et al. 1998).
There are approaches2 which examine both government and markets not
only from the perspective of allocating resources through prices, voting
systems or discretionary power, but also from the point of view of
informational advantages, incentives and rights of control over resources.
These approaches recognise that there are political as well as market
failures, and are rooted in informational, transactional and political
constraints on government activity. Informational constraints on
organisations are channeled through moral hazard and adverse selection.
Transactional constraints arise because contracts seldom provide for all
contingencies, which must be specified, and need to be monitored and
enforced. The more uncertain the future is, the higher transaction costs
are likely to be. The type of governance structure, and in particular the
ownership structure, matters in the presence of transaction costs.
1
The section draws on J. J. Dethier: Governance and Economic Performance: A
Survey, ZEF Discussion Papers on Development Policy No. 5, Center for
Development Research, Bonn, April, 1999.
2
Se Note 1.
Economic Development and Planning Page-295

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Governance structures are characterised by agency relationships. The

standard model of operation of an agency is one where the principal
devises a scheme of incentives or penalties, such that the agent’s action
is altered at least partially in the direction that favours the principal’s
interest. This typically requires a trade-off between efficiency and risk
sharing, and the result is a second best. Agency relationships are often
more complex in the political than in the economic sphere. Most
important, it is not always clear who the agent is. (Dixit 1996).
In addition to informational and transactional constraints, governments
face legal and political constraints. Legal and political institutions
provide the rules of the game according to which individuals and
organisations operate. The rules both constrain and facilitate economic
conduct. Informational constraints, economic and political transaction
costs and the law give rise to several forms of rents in addition to the
more familiar forms of rents arising from market imperfections
(monopolies, environmental externalities, etc). Incentive schemes are set
up in order to overcome these constraints and maximize efficiency.
A great variety of schemes affecting both the quantitative and qualitative
aspects of economic activity are available. Generally speaking, the
theory of incentives shows that there is no first-best world and that every
situation will involve trade-offs. Adverse selection implies a trade-off
between efficiency and ex ante rent extraction. Moral hazard implies a
trade-off between efficiency and ex post rent extraction.
Good development policy-making involves not only selecting the right
policy instruments, but also designing appropriate incentive schemes and
institutions such that credible pre-commitments are in place, and agents
can realistically be expected to maximize social welfare.
Two paradigms are used to discuss incentive problems arising from
informational, transactional and institutional constraints. The first is
complete contracts. In this case, a government is viewed as a group of
agents motivated by formal and well-defined incentive schemes. Agents
are induced to choose desirable actions and to reveal information fully
and truthfully. The second paradigm is incomplete contracting, reflecting
the fact that contracts cannot provide for all contingencies. This latter
paradigm probably corresponds more closely to the actual workings of
governments than does the complete-contract paradigm. In this case, a
government is viewed as having control rights over several decisions.
These control rights are determined by political processes and customs,
and are summarised by constitutions and laws.
There are major differences between private and public organisations. A
government is not a single agent (a benevolent dictator) maximising
social welfare, as is often assumed in economic models. A government is
a complex organisation consisting of many officials and multiple
agencies, which are often in conflict with each other. A government
consists of various tiers, each having a separate mandate and authority.
Inadequately coordinated decision-making can lead to costly social
policies. The main prerequisites for achieving successful governmental
Unit-6 Page-296
outcomes appear to be accurate information, credible commitment,

effective monitoring and enforcement. If these prerequisites are lacking,
inefficiencies arise, mutual gains disappear and opportunism prevails.
Economic outcomes are measured in terms of efficiency and welfare.
The concept of efficiency has been attacked from two directions. One
fundamental criticism of neoclassical economics is that ‘efficiency
losses’ in resource allocation are usually measured against hypothetical
situations involving zero information costs or zero transaction costs.
Demsetz (1969) points out that traditional definitions of efficiency ignore
the real scarcities and costs of information, and tend to presume that
people behave differently than they do.
Government and Markets
The government-markets nexus is the “core” of the problem of economic
performance. Markets and governments are interdependent in at least
three ways (Drèze and Sen 1995).
 First, markets can hardly function in the absence of legal

enforcement of contracts and particular rights. For instance, it is
intuitively clear that one major reason why markets are weak in
countries such as Somalia is the breakdown of law and order.
 Second, the government has a major role to play in facilitating

market-based economic growth, whether in dealing with skill
formation in the labor force, technological externalities, or
economies of scale.
 Third and more controversially, the market mechanism is dependent,

for its outcomes, on government action. One interpretation of the
“second theorem of welfare economics” which formed the
intellectual underpinning for extensive government intervention in
developing or former socialist countries (Stiglitz 1994) is that
government can play a major role in redistributing endowments, for
in-stance by instituting a land reform benefiting poor peasants.
Recent developments in welfare economics have shown that issues
of efficiency and distribution cannot be separated.
Rodrik (1997) has put forward an interesting hypothesis about the role of
institutions that serve to mitigate social risks and the complementarity of
governments and markets. He makes the empirical point that countries
with greater exposure to trade, and thus to external risks, have bigger
governments and that the degree of openness is a good predictor of the
expansion of governments. This, incidentally, is confirmed by the recent
cross-country study by La Porta et al. (1998), who find that larger
governments tend to perform better. Equating size and growth of
government with the provision of social insurance, Rodrik argues that
elaborate social safety nets and social security systems are found in
fiscally responsible countries such as Chile or Germany, which are very
sensitive to exposure to external risk. He considers that social risk-
mitigating systems ensure social welfare and political stability by acting
as a "shock absorber" in case of large external shocks in a rapidly

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globalising economy, a view largely shared by social-democratic

economists.
Institution and Economic Performance
Economic performance is greatly determined by the quality of
institutions. Rules and regulations are required to make markets unction
more effectively. Countries grow more if these rules are clear,
predictable, enforceable, and supportive of private enterprise. A number
of recent studies have established the primacy of institutions for a well-
functioning market economy (Knack and Keefer 1995, 1997a, and
1997b; Mauro 1995). Strong institutions foster economic growth by
securing property rights, by enforcing commercial contracts, and by
making economic policies more stable and predictable. Differences in the
quality of institutions help explain the gap in economic performance
between rich and poor nations. Behind the spectacular economic success
of the developed countries lies a transparent framework for formulating
economic policies-a framework that is guided by clear rules. Developing
countries with efficient institutions are more likely to have faster
economic growth than those countries without such institutions. ' A
country with an initial per capita income of $500 that has the lowest risk
of contract repudiation by the government will grow 2.22 percentage
points a year faster than a country with initial per capita income of
$1500' (Knack and Keefer 1997b).
There are several reasons for such links between strong institutions and
economic growth: First, an economic activity based on clear and
conducive rules diminish the arbitrary influence of powerful lobbies,
reducing the costs of economic exchange (transaction costs). Second, the
existence of copyrights, patents, and an assisting economic framework
encourages new innovations that are critical for sustained economic
growth. Institutions are needed both for the creation and assimilation of
new investments and technology. Third, institutions affect how the key
factors responsible for production, such as land, labour, capital, and
technology, are created, used, and transferred. Fourth, institutions
determine the efficiency with which governments formulate and
implement policies. The lack of high-quality institutions can result in an
inefficient and corrupt bureaucracy. Fifth, informal rules determine the
civic behaviour of a society. A responsible civil society can better assert
its basic economic and political rights. It can also forge well-developed
traditions of hard work and honesty-civic traditions that have clear
economic pay-offs. The more civil a society, the more able it is to realise
the basic human capabilities of its people.
The Provision of Public Goods

The economic case for having some goods provided by private or by
public organisations
cannot be made if one assumes a world of complete contracts since there
is no difference between state and private provision of goods and
services (Shleifer 1998). Coase (1988) has emphasized that the existence
Unit-6 Page-298
of an externality does not imply that there is a prima facie case for public
intervention. The Coase solution is to solve the problem without state
intervention, apart from fixing property rights, but this is not always
practicable. It does not generally work for education or health.
Bardhan (1997) points out, this calls for a more detailed theory of the
state than is usually available from the old “market vs. state” debate. On
the one hand, it is necessary to recognize the limitations of the state as an
economic governance structure, arising from its lack of access to local
information, its lack of local accountability and its vulnerability to
wasteful rent-seeking processes. On the other hand, especially in poor
countries, it is often desirable that the state play an active role, catalysing
the mobilisation of people in participatory development and providing
supra-local support of a financial and technical nature. In situations of
high economic and political inequality where elites dominate local
governance structures, benefits are not likely to percolate easily to the
poorer (and weaker) segments of the population.
Should public goods be provided by the government or by the private
sector? To what extent are market mechanisms better guarantors of
efficiency and/or social welfare than political processes or deliberative
government interventions? Theory provides guidelines, but the answers
to these questions have to be given on a case-by-case basis. Hart, Shleifer
and Vishny (1997) develop a model based on incomplete contracts to
assess the provision of public goods by private or public firms. Private
providers have stronger incentives to improve the quality of service and
reduce costs than do public providers. However, private providers’
incentives to cut costs are too strong because they can ignore the adverse
impact on quality. Hart, Shleifer and Vishny apply their theory to the
private management of prisons, a controversial trend which, according to
critics, has been driven entirely by ideology and politics and yields low
economic benefits (Schlosser 1998).
Democracy, governance and growth

North (1990:109) describes the ideal political system for maximising
economic performance as one in which affected parties have full
information about prospective legislation, preferences are communicated
to legislators who faithfully represent those preferences, votes are
weighted by gains and losses with losers being compensated, and this
process occurs at a low enough cost to make it all worthwhile. Although
noting various reasons why democracies fall short of this ideal, North
concludes: "The institutional structure most favorable to approximating
such conditions is a modern democratic society with universal suffrage.
Vote trading, logrolling, and the incentive of an incumbent's opponents
to bring his or her deficiencies before constituents and hence reduce
agency problems all contribute to better outcomes."
The Nobel Prize winner Amartya Sen has argued that the openness and
accountability of democratic societies explains why India - despite its
poverty - but not China has managed to avoid large-scale famines. A free
press, in particular, increases public awareness of famine, raising its

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political costs to India’s leaders, who thus have a greater incentive than
the Chinese leadership to adopt policies to combat hunger (Dreze and
Sen, 1982).
A sizeable cross-country empirical literature, critically reviewed in
Przeworski and Limongi (1993), examines the relationship between
regime type and economic performance. Results are mixed, with the
most recent and sophisticated analyses concluding that democracies are
no more or less likely than non-democracies to grow rapidly.
Persson and Tabellini (1994) formalise this intuition in a growth model,
and claim to have found supporting evidence in the cross-country data:
income inequality is associated with slower growth among democracies,
but not among non-democracies, where the median voter theories do not
apply. However, other researchers using somewhat different data sources
on inequality, and on regime types, have found that income inequality
affects growth equally in democracies and non-democracies (e.g.,
Alesina and Rodrik, 1994). Knack and Keefer (1997) replicate the
Persson and Tabellini findings, but show that when reasonable
corrections are made for mis-measurement in their income inequality and
regime type data, the impact of inequality on growth is just as strong or
non-democracies as for democracies. Coupled with other evidence
suggesting that non-democracies also face pressures to redistribute from
rich to poor (e.g., through political violence; see Alesina and Perotti
(1996), it remains an open question whether insecurities in property
rights associated with majority-rule voting counteract some of the
governance advantages of democratic regimes.
A second possible reason for the failure of democracies to systematically
outperform autocracies is related to interest group pressures on the state.
The political openness characteristic of democracy may also allow freer
rein for the growth-slowing rent-seeking activities of special interest
organisations (Olson, 1982).
Conclusion
An overwhelming body of accumulating evidence indicates that good
governance and economic freedoms are crucial for attaining rapid
increases in the living standards of the broad mass of people in a
developing economy. Transparent, predictable governmental institutions
and policies are conducive not only to rising per capita incomes but also
to declines in absolute poverty.
Note
Many economists are trying to understand institutional causality. New
developments in the economics of organisation, information and
incentives have led to a major reformulation of welfare issues, both in
microeconomics and macro-economics. Basic references are Williamson
(1985), Tirole (1989), Laffont and Tirole (1993) Persson and Tabellini
(1990). Hirshleifer and Riley 1992 and Salanie 1997 are theoretical
overviews that are more accessible. As discussed by Tirole 1994,
extending this theoretical framework to include governments as
Unit-6 Page-300
organisations is a more recent, but growing, preoccupation. On institu-

tions and transaction costs, the ‘new institutional economics’ has
produced a voluminous literature. Useful surveys are Eggerston (1990),
Lin and Nugent (1995) and Rutherford (1996). These two types of
literature — incentive theory and institutional economics — share
concerns with more traditional public finance (Jha 1998 contains a recent
exposition), e.g. on the provision of public goods and on incentive
problems arising from distortive taxation, and with public choice
(Mueller 1989 remains the best survey), e.g. on decision-making
processes relating to public goods. Recent surveys on the economic
theory of politics, which has developed as a separate branch of
economics and is also relevant for governance, can be found in Persson
and Tabellini (1994) and Alesina & Roubini (1997).

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Questions for Review

1. How do you define governance?
2. Analyse the statement that good development policy-making
involves not only selecting right policy instruments, but also
appropriate institutions.
3. Do you think there is correlation between democracy and economic
performance?
4. What are basic characteristics of good governance? Provide specific
criteria of economic and political good governance.
Further Readings
1. Alesina, Alberto and Enrico Spolaore (1997), ”On the Number and
Size of Nations,” Quarterly Journal of Economics, p.1027-1056
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the Macroeconomy. Cam-bridge: The MIT Press.
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(1996), “Political Instability and Economic Growth,” Journal of
Economic Growth, vol.1, p.189-211.
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Delayed?” American Economic Review, vol.81, p.1170-1188.
5. Allen, Carleton Kemp (1964), Law in the Making, 7 th edition,
Oxford: Oxford University Press.
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Individual Values, New York: Wiley.
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Stabilize: Lessons from Post-Communist Countries,” Brookings
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9. Baird, Douglas, Robert Gertner and Randal Picker (1995). Game
Theory and the Law. Cam-bridge, MA: Harvard University Press.
10. Bardhan, Pranab (1990), “Symposium on the State and Economic
Development,” Journal of Economic Perspectives, vol.4, No.3,
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Alleviation: Policy Issues in Less Developed Countries", The
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Development. A Political Economy Approach. Paris: OECD
Development Center.
13. Bardhan, Pranab (1997b), “Corruption and Development. A
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p.1320-1346.
Unit-6 Page-302
14. Bardhan, Pranab (1998). The Political Economy of Development

in India. Second expanded edition, Delhi: Oxford University Press
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Lesson 2 : Role of the State and Market

Objectives:
This has been one question that has constantly occupied economists since
the birth of the subject. There have been a number of swings in the
dominant opinion on the subject, but the two major swings that have
occurred during the last half century after the Second World War. The
early postwar years witnessed the world-wide rejection of the laissez
faire doctrine. This new consensus was dramatically overturned since the
mid-1970s, following the Neo-Liberal counter-offensive. Both the past
praise and the current criticism of the East Asian miracle, however, have
brought the question of the role of government to the forefront.
 understand basic concepts relating to the role of state;

 examine concepts and assumptions arising out of the neo- liberal
school of thought ; and
 comprehend critique of the mainstream view from the
institutionalist point of view Introduction
Introduction3
The discussion of the role of government is vital for improving
development strategy. There is a growing consensus that governments
can play a vital role in successful development efforts, but wrong kind of
government intervention can be highly detrimental. The re has been
recognition that the key issue is the scope and effectiveness of
government activities, rather than simply the size of the government's
budget or personnel.
The View from the Market: Three Conservative Propositions

Many critics of the government base their beliefs on premises that
markets by themselves yield efficient outcomes, and second, efficiency is
more important than, say, distribution between persons or generations.
Based on these judgments, critics of government have argued:
 Government is unnecessary because anything the government can

do, the private sector can do better;
 Government is ineffective because anything the government does,

the private sector can and will undo;
 The incentive structures inherent in public institutions imply that

government actions generally decrease societal welfare, or, at the
3
The section draws on Stiglitz, Joseph, “Redefining the Role of the State What should it do? How
Should it Do it? And How should these decisions be made? presented on the Tenth Anniversary of
MITI Research Institute, Tokyo, Japan, March 17, 1998

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very least, inhibit productive economic activity by taking resources

away from one group and giving them to another, often less
deserving group.
According to Stiglitz (1998), the first proposition is simply not true:
government has powers that the private sector does not have. The second
proposition is even more obviously wrong, he adds. The third
proposition, according to Stigliz, is the most difficult to deal with.
Certainly, there is no general proposition concerning the efficiency of
actions which emerge from political processes. There are good reasons to
believe that public and private interests are far from perfectly aligned.
The principal agent problems which arise in the public sector are, in
many respects, not dissimilar to those which arise in large corporations in
the public (Stiglitz, 1994).4 In both cases, the rewards of managers are at
best only loosely linked to performance.
Market failure and public failure
While market failure theories dominated thinking about the role of
government in the decades following the proof of the fundamental
theorems of welfare economics, public failure theories began to dominate
discussions in the Reagan/Thatcher era. The public failure theories can
be thought of as an elaboration of the third Conservative proposition
above. It was asserted that
 Special interest groups would, without constitutional bars, seek to

establish market impediments that generate rents;
 The opposing public interests were too diffuse to successfully oppose

the special interests. While aggregate costs might exceed aggregate
benefits for society, a public goods problem arose when costs were
much more diffuse than benefits.
 Competition for rent seeking tended to dissipate the rents, but the
rent dissipation simply added to the waste.
While there is plenty of evidence to suggest that rent seeking was
important, these propositions do not seem to adequately describe the
process. Stiglitz (1998) provides three reasons for his view. First, there is
a curious intellectual inconsistency: while many conservatives seemed to
argue that Coase's theorem (or what might more appropriately be called
Coase's conjecture) worked well in the private sector, it seemed to have
no sway in the public. Inefficiencies within that sector did not seem to
get "bargained out." Second, it was simply assumed that there was
perfect competition in rent seeking. In reality, however, competition in
rent seeking was every bit as imperfect as competition elsewhere in the
economy. There are quite general theorems which established that if
there were even epsilon sunk costs, even strong potential competition
was not enough for the dissipation of imperfect competition rents.
4
Stiglitz, J.E. 1994. Whither Socialism?. Cambridge, MA: MIT Press.
Unit-6 Page-314
(Stiglitz, 1987)5. Third, rent-seeking activities tend to be concentrated in

certain sectors, e.g. trade and agriculture, although there are clearly
opportunities for significant rents elsewhere. Understanding why these
are not pursued, or at least successfully pursued, may provide important
new insights into the rent-seeking process.
Reading of the Lesson

The present lesson concentrates on a selection, an essay written by Dr.
Ha-Joon Chang, Faculty of Economics and Politics, University of
Cambridge, UK entitled An Institutionalist Perspective on the Role of the
State - Towards an Institutionalist Political Economy.6
Dr. Chang critically examines some of its basic concepts and
assumptions of the Neo- Liberal agenda from the institutionalist point of
view. He argues that there are more than one views of what the "ideal"
market can do. He opines that that the Neoclassical theory is essentially a
theory of the market, but capitalism, as a socio-economic system, is more
than a collection of markets, and is made up of many institutions. He
holds the view that the market is a fundamentally political construction.
The paper reiterates the need to build a theory of politics which takes a
much broader, balanced, and sophisticated view of politics than what is
offered by Neo-Liberalism.
5
Stiglitz, J.E. 1987. "Technological Change, Sunk Costs, and Competition," Brookings Papers on
Economic Activity, 3, 1987. (Special issue of Microeconomics, M.N. Baily and C. Winston (eds.),
1988, pp. 883-947.)
6
This is a slightly revised version of the paper presented by the author at the International
Conference on "Institutions and Economic Development - Towards a Comparative Perspective on
State Reform", November 12-14, 1997, Rio de Janeiro, Brazil. This is forthcoming in L. Burlamaqui,
A. Castro & H-J. Chang (eds.), Institutions and the Role of the State, Edward Elgar). The paper is
reproduced with the permission of the author.

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AN INSTITUTIONALIST PERSPECTIVE ON THE ROLE OF THE STATE -

TOWARDS AN INSTITUTIONALIST POLITICAL ECONOMY
Ha-Joon Chang
1. Introduction
What is the appropriate role of the state? This has been one question that
has constantly occupied economists for the last 2-3 centuries since the
birth of the subject (for some excellent historical reviews, see Deane,
1989, and Shonfield, 1965). During this period, there have been a
number of swings in the dominant opinion on the subject, but the two
major swings that have occurred during the last half century after the
Second World War are particularly remarkable in their scope and
suddenness (see Chang & Rowthorn, 1995a, whose Spanish translation
appears in Chang, 1996). The early postwar years witnessed the world-
wide rejection of the laissez faire doctrine that failed so spectacularly
during the interwar period, and the resulting emergence of a widespread
consensus on state activism. By the 1960s, the end of laissez faire
capitalism was announced in many quarters and there was a widespread
consensus that we are now living in the "mixed economy" (alternatively,
"modern capitalism" or "organised capitalism"). However, this new
consensus was dramatically overturned since the mid-1970s, following
the Neo-Liberal counter-offensive, which sought to end the mixed
economy and re-introduce market principles to the extent that would
have been unimaginable during the early postwar years.
The upsurge of Neo-Liberalism during the last two decades or so has
fundamentally changed the terms of debate on the role of the state (for
more details, see Chang, 1994a, chs. 1-2). The state is no more assumed
to be an impartial, omnipotent social guardian and is now analysed either
as a “predator” or as a vehicle for politically powerful groups (including
the politicians and the bureaucrats themselves) to advance their sectional
interests. No other motives than maximisation of material self interests
are accorded to any agent even in the “public” domains of life,
denouncing the role of politics as a legitimate way to correct the market
outcomes according to the “collective will”. The resulting “minimalist”
bias in the terms of debate means that those who want to make a case for
state intervention have to fight their adversaries at each and every step of
their arguments, whatever the merits of their arguments may be, whereas
those who want to discredit state activism can often do so with a very
simplistic logic supported by, often unrepresentative, anecdotes.
Although the Neo-Liberal agenda itself has a lot of intellectual
limitations and biases, as we will discuss in the rest of the paper, the
legacy of Neo-Liberal counter-offensive has not been entirely negative.
For one thing, it exposed fundamental problems with the “technocratic”
view on the role of the state that prevailed in the heyday of welfare
economics (‘50s and ‘60s) and brought politics back into economics
(although it ultimately aimed to abolish politics; see section 3.4.). And
more importantly, its explicit engagement in “political economy”
discussions opened the door for the subsequent rise of "institutionalists”
criticisms (e.g., see Evans et al. (eds.) 1985; Hall (ed.), 1989; Toye,
Unit-6 Page-316
1991; Evans, 1995; Chang & Rowthorn, 1995b).1 And following the
institutionalist criticisms, even some proponents of Neo-Liberal doctrine
have recently come to admit (but without necessarily recognising the
contributions from their critics) the importance of institutional factors in
understanding the role of the state (North, 1994, and World Bank, 1997,
are good examples of such change). Having achieved that important, if
unfairly unacknowledged, victory over the Neo-Liberals, however, I
think it is fair to say that the institutionalists still lack a full-blown
political economy that can replace the Neo-Liberal political economy. In
this paper, I will make some suggestions as to what I think should be the
building blocks of what may be called an institutionalist political
economy. For this purpose, I will dissect the Neo-Liberal research
agenda on the role of the state from an explicitly institutionalist
perspective and identify what I think are the fundamental flaws in it, and
in that process suggest what should be the elements in the institutionalist
theory of state intervention that can overcome these flaws.
2. Disentangling the Neo-Liberal Agenda
The Messianic convictions with which many proponents of Neo-
Liberalism have delivered their messages have created the impression
that it is a very coherent doctrine with clear conclusions. However,
contrary to this popular belief, the Neo-Liberal doctrine is in fact a very
heterogeneous and internally inconsistent intellectual edifice. So before
going into the detailed criticisms of this doctrine, it will be useful to
delineate the basic fault lines in the Neo-Liberal intellectual agenda and
reveal some of its obvious weaknesses.
2.1. The Unholy Alliance: Neoclassicism and the Austrian-

Libertarian Tradition
The biggest contradiction in the Neo-Liberal research programme comes
from the fact that it was born out of a marriage of convenience between
Neoclassical economics as the source of intellectual legitimacy (given its
dominance in the academia) and what maybe broadly called the
Austrian-Libertarian tradition as the source of political rhetoric. The gap
between these two intellectual traditions is not a minor one, as those who
are familiar with, for example, Hayek's scathing criticism of Neoclassical
economics would know (e.g., see essays in Hayek, 1949). However, the
marriage of convenience goes on, because the Austrian-Libertarian
tradition supplies the popular appeal that Neoclassicaleconomics can
never dream of supplying itself (who's going to risk their lives for
"Pareto Optimality"? - but many have been willing to for "liberty" and
"entrepreneurship"), while the Austrian-Libertarian tradition, given its
lack of intellectual legitimacy in "respectable" circles, needs the aura of
"science" that Neoclassical economics carries around.2 But in return for
the increased power of persuasion that they acquired by allying with the
Austrian-Libertarian tradition, Neoclassical economics had to pay a
heavy price. In order to maintain the alliance with the Austrian-
Libertarian tradition, it has had to suppress its interventionist streak,
given the strong anti-statism of the latter. So how is this done? One such
method of suppression is to accept the logic of "market failure" behind

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welfare economics but then not to extend it beyond the set of "politically
acceptable" areas. So, for example, the externality argument is often
applied to politically less controversial areas such as the environment or
education, but is rarely applied to such politically more controversial
areas as "selective" industrial policy a la East Asia, which can be
justified by the same logic equally well. Given that there is no theoretical
way in Neoclassical economics to determine what is the "correct"
boundary for state intervention, it becomes necessary to argue that
market failures exist as logical possibilities, but rarely occur in reality -
naturally without providing much evidence (Friedman, 1962, is a good
example).3 2 This point is best illustrated by the experiences during the
early days of "reform" in the former Communist countries. What
captured people's imagination in those days was the Austrian-Libertarian
languages of freedom and entrepreneurship, and not the arid Neoclassical
languages of Pareto Optimality and General Equilibrium. However,
when the post-Communist governments in these countries chose their
foreign economic advisers, it was according, largely, to how high a
standing they had in the Western academic "hierarchy", which was
determined by how good they were in handling the concepts and the
tools of Neoclassical economics. Friedman's list of legitimate functions
of the state is as follows: maintenance of law and order; definition of
property rights; service as a means whereby people modify property
rights and other rules of the economic game; adjudication of disputes
about the.6 The second method of suppressing the interventionist instinct
of Neoclassical economics is to separate, partly deliberately and partly
subconsciously, the "serious" academic discourse from the "popular"
policy discourse and compartmentalise them. So Neoclassical economists
in universities may be doing researches justifying stringent anti-trust
policy, but the "lax" anti-trust policy by the government may be justified
in terms of some other logic which has no place in Neoclassical
economics - say, by citing the need "not to discourage entrepreneurship",
etc.. The recent "reform" experiences in the former Communist countries
that we just talked about is a most poignant example of such practice.
The last method of suppression is to fully accept the logic of market
failure and build models that may have strong interventionist
conclusions, but later dismiss them on the ground that "real life" states
cannot possibly be entrusted with such policies that are technically
difficult (due to informational asymmetry) and politically dangerous (due
to the possibility of bureaucratic abuse and/or interest group capture).
Various writings by the American trade economist Krugman provide the
best example, where frequently a few paragraphs, at the end of an article,
of "pop political economy" analysis dismissing the integrity of the state
would be used to discredit his own elaborate "strategic trade theory"
model endorsing state intervention that went on in the rest of the article.
To put it bluntly, the name of the game is that, a Neoclassical economist
may build a model that interpretation of the rules; enforcement of
contracts; promotion of competition; provision of a monetary framework;
engagement in activities to counter technical monopolies and to
overcome "neighbourhood effects" [his term for externality] widely
regarded as sufficiently important to justify government intervention;
supplementation of private charity and the private family in protecting
Unit-6 Page-318
the irresponsible, whether madman or child (Friedman, 1962, p. 34). A

well-known Neo-Liberal economist, Robert Lucas, reviewing Krugman's
book with Helpmann, asked why they had written the book in the first
place if they were going to say in the end that the interventionist policies
that follow from their models cannot be recommended because of the
political dangers that they carry. See Lucas (1990)..7 recommends state
intervention as far as it is "technically competent", but he/she has to
prove his/her political credential by rubbishing his/her own model on
political grounds.
2.2. The Indeterminacy of the Neoclassical Position on State
Intervention
Even when we ignore the above-mentioned tension between the
Neoclassical element and the Austrian-Libertarian element in the Neo-
Liberal intellectual edifice, there are still disagreements amongst the
Neoclassical economists themselves on exactly what the role of the state
should be, as we implicitly suggested above. As I indicated above,
Neoclassical economics has a strong interventionist streak that is best
manifested in welfare economics. Especially, as Baumol (1965) and
othershave pointed out, once we begin to follow the logic of externality
faithfully, it seems doubtful whether we should have any market
transaction at all. Most goods create some negative externalities in their
production processes in the form of pollution, except in those few cases
where proper compensation is actually made. When considering "linkage
effects" (Hirschman, 1958, ch. 6) or "pecuniary externalities" (Scitovsky,
1954), many goods may additionally be classified as having positive
externalities. Some economists even argue that some goods which have
conventionally been treated as lacking externalities, say basic foodstuff,
can be seen as creating externalities when they are not consumed in the
proper amount and therefore induce crime (Schotter, 1985, pp. 68-80).
Moreover, there exist interdependences between individual preferences.
For example, people have what Elster (1983, ch. 2) calls counteradaptive
preferences - "the grass is always greener on the other side of the fence".
The psychology of luxury good consumption - part of one's pleasure
derives from the very fact that one consumes what others do not - is
another example of interdependent consumer preference. The list can go
on, but the point here is that, even using a purely Neoclassical logic, one
can justify an enormous range of state intervention. Indeed, in the 1920s
and.8 the 1930s people like Oskar Lange were trying to justify socialist
planning on the basis of essentially Neoclassical models (Lavoie, 1985;
Pagano, 1985). Thus seen, whether a Neoclassical economist is an
interventionist or not depends more on his/her political preference rather
than the "hard" economics that he/she practices. Seen in this way, it is
important to reject the myth propagated by Neoclassical economists that
the boundary between "good" and "bad" intervention can be drawn
according to some "scientific" rules.
2.3. Concluding Remarks

Neo-Liberalism is based on an unholy alliance between Neoclassical
economics, which provides the intellectual legitimacy, and the Austrian-

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Libertarian tradition, which provides the political rhetoric. This, in turn,

means that the interventionist streak of Neoclassical economics has to be
suppressed. Such suppression involves, we pointed out, intellectually and
morally indefensible practices like drawing an "arbitrary" boundary
around the state without acknowledging its arbitrariness, using different
discourses for "serious" academic research and for "popular" policy
discussion (again without acknowledging such compartmentalisation),
and denouncing interventionist conclusions of formal models with
unsubstantiated "pop" political economy. We then argued that, even
Neoclassical economics itself does not provide us with any unambiguous
"scientific" criterion to draw the boundary between "good" and "bad"
interventions. Thus seen, despite its pretence of intellectual coherence
and clear-cut messages, Neo-Liberalism is an internally heterogeneous
and inconsistent intellectual doctrine with confused and confusing
messages.
3. Some Institutionalist Criticisms of the Foundations of the Neo-

Liberal Analysis of Market, State, and Politics
Having pointed out the fundamental fractures in the very set-up of the
Neo-Liberal doctrine, let us now make some detailed criticisms of it from
an institutionalist perspective, questioning the very way they envisage
the market, the state, and other institutions, as well as the relations
between them.
3.1. What is a Free Market? : Defining and Measuring State
Intervention
3.1.1. Defining State Intervention
The Neo-Liberal discourse on the state is basically about whether "free"
markets produce socially optimal results, which it thinks is most of the
time the case, and whether therefore state intervention may be able to
improve the free-market outcomes, which it thinks is rarely the case.
Whether or not we agree with the conclusion, the discourse seems
straightforward enough, but is it? This question may look stupid. Don't
we know that a "free" market is a market without state intervention? Of
course, the argument may go, we may have disagreements on which is a
"good" state intervention and which is a "bad" one, but don't we all know
what state intervention means? I am not actually sure that we do. The
trouble is that the same state action can be, and has been, considered an
"intervention" in one society but not in another (which could be the same
society in a different point of time). Why is this? Let me answer this
question with a few examples. First, let us take the case of child labour.
Few people in the OECD countries at present would consider the ban on
child labour as a state intervention "artificially" restricting entry into the
labour market, whereas many Third World capitalists (and indeed the
capitalists in the now-OECD economies in the late 19th and the early 20th
century) regard it as just t hat. In the advanced countries, the rights of the
children not to.10 toil but to be educated are so totally accepted, and
have been incorporated into the structure of (property and other) rights
and obligations underlying the labour market (as the right to self-
Unit-6 Page-320
ownership has been, since the abolition of slavery), they are not a matter
of policy debate (i.e., there is no debate on whether the ban on child
labour is "efficient" in some sense). In contrast, in the developing
countries (of today and yesterday), such rights of children are not so
totally accepted, and therefore state action regarding child labour is
considered an "intervention", whose impact on "efficiency" is still a
legitimate subject of policy debate. For another example, many
environmental standards, which were widely criticised as unwarranted
intrusion on business and personal freedom (e.g., automobile emission
standards) when they were first introduced in the OECD countries not so
long ago, are these days rarely regarded as "interventions". Therefore
there would be few people in the OECD countries who would say that
their country's automobile market is not a "free" market because of these
regulations. In contrast, some developing country exporters who do not
accept such stringent environmental standard as "legitimate" may
consider them as "invisible trade barriers" that "distort" the market. Still
for another example, many Neoclassical economists who criticise
minimum wages and "excessively" high labour standards in the advanced
countries as unwarranted state interventions that "artificially" set up entry
barrier into the labour market do not even regard the heavy restrictions
on immigration that exist in these countries as a state intervention (not to
speak of supporting it), although immigration control sets up an
"artificial" entry barrier into the labour market as much as the above-
mentioned “interventions” do. This contradictory attitude is possible only
because these economists believe in the right of the existing citizens of a
country to dictate the terms of the non-citizens' participation in "their"
labour market, without explicitly stating their "political" position on this
matter. The examples can go on, but point is that, depending on which
rights and obligations are regarded as "legitimate" by the members of the
society, the same action could be considered an "intervention" in one
society and not in another. And once something is not even considered to
be an "intervention" in a particular society at a given time (e.g., ban on
child labour or slavery in the OECD countries), debating their
"efficiency" becomes politically unacceptable - although here is no God-
given reason why this should be the case. The corollary is that,
depending on the rights-obligations structure, the same market with the
same state "intervention" in the same area – for example, regarding child
labour - can be seen as "free" (from state intervention) in one society and
not in another. So, therefore, if we want to decide whether a particular
market is “free” or not, we need to understand the underlying institutions
which define the rights-obligations structure for the participants in the
relevant market (and indeed certain non-participants, when it involves
"externalities"). The institutions that need to be understood in this
context will include, among other things: (i) the formal and informal
rules that govern the ay in which interests are organised and exercised
(e.g., rules on political associations, rules on incorporation, rules on
lobbying); (ii) the formal and informal "ideologies" relating to the
notions such as "fairness" and "natural rights" that prevail in the society
(e.g., rights for everyone to self-ownership, rights for children to
education); (iii) the formal and informal institutions that determine how
the rights-obligations structure could be changed (e.g., procedures for

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legal changes, social customs about when and how some de facto
rights/obligations can become "legitimate", if not necessarily legalised).
Thus, the apparently simple exercise of defining what is a "free" market
(and what constitutes "state intervention") is not so obvious any more -
and this is, to repeat, even before we can discuss whether some markets
are "failing" and therefore state intervention may make them "more
efficient”. From the institutionalist perspective, we may even say that
defining a free market is at the deepest level a pointless exercise, because
no market.12 is in the end “free”, as all markets have some state
regulations on who can participate in which markets and in what terms. It
is only because some regulations (and the rights and the obligations that
they are creating) can be so totally accepted (by those who are making
the observation as well as by the participants in the market) that some
markets appear to have no “intervention” and therefore be “free”. 3.1.2.
How do We Measure State Intervention and Why does It Matter? For the
purpose of international and historical comparison, people have used
some quantitative measures of state intervention. At one level, this seems
a straightforward exercise. However, how good a measure of state
intervention is depends on the theory (of state intervention) that
underpins it. Therefore, we need to look beyond the "numbers" that are
supposed to measure the extent of state intervention and analyse the
theories that lie behind those umbers. Let us explain what we mean by
this. Traditionally, the most popular measures of the degree of state
intervention have been the total government budget as a ratio of GDP
and the share of the public enterprise (PE) sector in GDP (or total
investment). It may be true that these measures give us as good an idea
of how "big" the state sector is but it is not true that they are good
indicators of the degree of state intervention. This is because a "big"
government is not necessarily a more "interventionist" government. The
point is very well illustrated by the East Asian countries of Japan, Korea,
and Taiwan. On the basis of these traditional measures, until recently
many people believed that we could "objectively" establish that the East
Asian countries are "non-interventionist" (e.g., World Bank, 1991, p. 40,
Box 2.2.). And except for the (conveniently ignored) fact that Taiwan has
one of the largest PE sectors in the non-socialist, non-oil-producing
world, this observation does not seem to be too far from the truth - that
is, as far as we accept that the "vision" of the role of the state that lies
behind these measures correctly reflects the actual role of state
intervention in these countries. However, the mode of state intervention
in East Asia has been quite different from what is envisaged in the
"vision" that lies behind these traditional measures, and thus they
"wrongly" measure the extent of state intervention in East Asia. In the
"traditional" vision, the state exercises its control basically through the
ownership of the means of production, which is (wrongly) equated with
the control over its use, and the reallocation of resources via taxes and
subsidies, for example, in the manner prescribed in welfare economics.
However, state intervention in East Asia has. The ratio of government
expenditure to GDP for Japan in 1985 was 33%, far lower than those in
other industrial nations except the US (37%). Corresponding figures
include 47% for Germany, 48% for the UK, 52% for France, and 65%
for Sweden (World Bank, 1991, p. 139, Table 7.4). In the case of Korea,
Unit-6 Page-322
the ratio of central government expenditure to GNP in 1989 was 16.9%,

a figure substantially lower than those for other semi-industrialised
countries. Corresponding figures were 21.2% for Mexico, 30.6% for
Brazil, 32.5% for Chile, and 33% for South Africa (World Bank, 1991,
pp. 224-5, Table 11). Comparable data for Taiwan is not readily
available. As of the mid-1970s (1974-77), the share of public enterprise
output in GDP in Korea was around 6.4% and that in Taiwan around
13.6%. The average for developing countries was 8.6%. Korea, then, was
somewhat less interventionist than the average on this account (but
higher than Pakistan (6.0%), the Philippines (1.7%), Argentina (4.8%),
which are all regarded to be cases of failed state intervention), and
Taiwan substantially above-average interventionist. The corresponding
figure for Japan is not available, but on the basis of the share of the
public enterprise sector in gross fixed capital formation, Japan (11.6%)
as of the mid-1970s was of about average interventionism amongst
industrialised countries - the average being 11.1% (see Short, 1984,
Table 1). A more recent estimate by the World Bank puts the share of
public enterprise sector in GDP for the 1978-91 period at 6.9% for
Taiwan and at 10.6% for Korea, when the unweighted average of the
corresponding figures for 40 developing countries in the sample was
10.9% (World Bank, 1995, Table A.1.). However, in light of other
qualitative evidence, the World Bank figure seems to grossly
underestimate the importance of public enterprises in Taiwan. In my
view, this may be due to the fact that there are many "public" enterprises
that are owned by the ruling Kuomintang Party, which may be officially
classified as "private" enterprises. Unfortunately, I have not been able to
acquire any systematic data on this been conducted less through state
ownership and budgetary outlays, but more through measures which
need little state ownership or budgetary outlays. They include: (i)
regulatory measures (on entry, capacity, price, technology, etc.); (ii) the
state's influence on bank lending decisions (especially in Korea and
Taiwan, the majority of the banks have been state-owned); and (iii)
various "informal" channels of influence on the business sector (a
manifestation of what Evans describes as "embeddedness" of these
states; see Evans, 1995). The example does not, in fact, stop in East Asia.
For example, some commentators point out that the US federal state,
despite its laissez faire rhetoric, has strongly influenced the country's
industrial evolution through defence procurement programmes and
defence-related R&D contracts - especially in industries like computer,
telecommunication, and aviation (Johnson, 1982). So, again, the
prevailing vision of the role of the state, where "defence" is accepted as
one of the "minimum" functions of the state (almost shading into "non-
intervention"), makes people underestimate the importance of the US
federal government in the country's industrial development. The point
that we are trying to illustrate with the above examples is that how we
measure state intervention matters, because the particular measures that
we use embody a particular vision of the role of the state which may not
be universally applicable, because the institutional assumptions behind
that vision may not hold in those contexts other than the one from which
that vision emerged. Unless we recognise that different measures of state
intervention re based on different theories on the role of the state, which

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embody different assumptions about the institutions and the political

economy of state The most recent and striking example of this comes
from the aviation industry. The repeated rejections by the US federal
government of applications from McDonnell Douglas for a number of
critical defence projects have damaged the latter's profits so badly that it
had to merge with its major rival, Boeing, changing the fate of the
country's, and indeed the world's, civil aviation industry intervention, our
empirical investigation of the role of the state will be constrained by the
limitations of the theoretical perspective that lies behind the "measures"
of intervention that we use.
3.2. What does Market Failure Mean and How Much does It
Matter?: "Rival Views of Market Society"
3.2.1. When does the Market Fail?
The term, "market failure", refers to a situation when the market does not
work like what is expected of the "ideal" market. But what is the ideal
market supposed to do? Given the current domination of Neoclassical
economics, the ideal market is usually equated with the "perfectly
competitive market" in Neoclassical economics. However, the
Neoclassical theory of the market is only one of the many legitimate
theories of how the market works (and therefore what we can expect
from the ideal market and therefore when we can say a market has
"failed") - and not a particularly good one at that. In other words, there
are, to borrow Hirschman's phrase, many different "rival views of market
society" (Hirschman, 1982a). And therefore the same market could be
seen as "failing" by some people while others regard it as "normal" or
even "succeeding", depending on their respective theories of the market.
Let us illustrate this point with some examples. For example, many
people think that on of the biggest "failures" of the market is to generate
"unacceptable" level of inequality (whatever the criteria for
"acceptability" may be). However, in Neoclassical economics, this is not
a market "failure", because the "ideal" Neoclassical market is not
assumed to generate equitable income distribution in the first place. This
is not to deny that many well-intentioned Neoclassical economists may
dislike the income distribution prevailing in, say, Brazil, and may
support some "non-distortionary" lump-sum income transfers, but to
point out that even they would.argue that an equitable income
distribution is simply not something that the market should be expected
to generate and therefore the issue is beyond economic '"science". For
another example, a "non-competitive" market is one of the most obvious
example of a "failing" market for Neoclassical economics, while the
Schumpeterian theory (and before it the Marxian theory) argues that the
existence of "non-competitive" (in the Neoclassical sense) markets is an
inevitable, if a secondary, feature of a dynamic economy driven by
technological innovation. Thus, a classic example of market failure in the
Neoclassical framework, namely, the non-competitive market, is
regarded as an inevitable feature of a "successful" dynamic economy,
according to the Schumpeterian perspective or to put it differently, a
market which is "perfect" in the Neoclassical sense (e.g., no participant
in the market has any market power) may look like an absolute "failure"
Unit-6 Page-324
to a Schumpeterian because it lacks technological dynamism. The point

that we have just tried to illustrate with our examples is that, when we
talk about "market failures", we need to make it clear what we think the
"ideal" market is capable of doing. Otherwise, the concept of market
failure can become so elastic that it means hundred different things to
hundred different people. Thus, where one person sees a "perfection",
another person can see a miserable "failure" of the market, and vice versa
(the above example about monopoly illustrates this point very well).
Only when we make our "theory of the market" clear, we can make what
we mean by "market failure" clear.
3.2.2. How Much does the Market Failure Matter? Recall Schumpeter's
famous metaphor that the relationship between the efficiency gains from
competition through innovation and that from (Neoclassical) price
competition was "as a bombardment is in comparison with forcing a
door" (Schumpeter, 1987, p. 84). This, needless to say, does not exclude
the possibility (which is often realised) that an economy may be full of
monopolies but is undynamic. Now, how much does "market failure"
matter, however we may define it? The short answer is that it would
matter greatly for the Neoclassical economists while it may not matter so
much for other people, especially the institutionalist economists.
Neoclassical economics is an economics about the market (or more
precisely not even that - it is really about the barter exchange economy,
where, to borrow Coase's analogy, "lone individuals exchanging nuts and
berries on the edge of the forest"; Coase, 1992, p. 718). In Neoclassical
theory, even the firm exists only as a "production function", and not as an
"institution of production". Other forms of institutions that make up the
modern capitalist economy (e.g., formal producer associations, informal
"networks", trade unions) figure, if they ever, only as "rigidities" that
prevent the proper functioning of markets (for a criticism of the view of
non-market institutions as "rigidities", see Chang, 1995, whose Spanish
translation appears in Chang, 1996). Therefore, for the Neoclassical
economists, for whom "the market" is essentially "the economy", if the
market fails, the economy fails. And if the economy fails, the state has to
step in, as no intermediate institutions or organisation have a legitimate
place in their scheme. In contrast, for the institutionalist economists, who
regard the market as only one of the many institutional mechanisms that
make up the capitalist economic system, market failures may not matter
as much, because they know that there are many institutional
mechanisms other than markets through which we can organise, and
have organised, our economic activities. In other words, when most
economic interactions in the modern industrial economy are actually
conducted within organisations, and not between them through the
market (Simon, 1991), the fact that some (or even many) markets are
"failing" according to one (that is, Neoclassical) of many possible
criteria, may not really make a big difference for the performance of the
capitalist system as a whole. For example, in many modern industries
where there are high incidences of monopoly and oligopoly, the market
is "failing" all the time according to the Neoclassical.18 criterion, but at
the same time these industries were often very "successful" in the
Schumpeterian sense that they generated high productivity growth and

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consequently high standards of living. Such outcome was due to the

"success" of modern business organisations which enabled the
coordination of a most complex division of labour - so, where
Neoclassical economists see a "market failure", other economists may
see an "organisational success" (Lazonick, 1991). And if this is indeed
the case, state intervention in these markets, especially of the
Neoclassical anti-trust variety, may not be very necessary, and indeed
under circumstances may actually harm the economy. The point is not
that market failures do not exist or that they do not matter at all on the
contrary, the real world is full of market failures even by Neoclassical
standard (see section 2.2.) and they do matter. The real point is that the
market is only one of the many institutions that make up what people call
"the market economy", or what we think is better to be called
"capitalism". The capitalist system is made up of a range of institutions,
including the markets as institutions of exchange, the firms as institutions
of production, and the state as the creator and regulator of the institutions
governing their relationships. Thus, focusing on the market (and market
failure), as Neoclassical economics does, really gives us a wrong
perspective in the sense that we lose sight of a large chunk of the
economic system and concentrate on one part only.
3.3. "In the Beginning, There Were Markets."?: The Market

Primacy Assumption
More recently, the Neoclassical economists have started to discuss the
workings of non-market institutions, especially the firm (transaction cost
economics; e.g., Williamson, 1975) and the state (the "government
failure" literature; e.g., Krueger, 1990). However, these analyses have
important shortcomings as these institutions are analysed as "quasi-
markets" ultimately based on voluntary contracting (see Vira, 1997). One
thing that distinguishes even the most enlightened and open-minded
Neoclassical economists from the truly institutionally-conscious
economists is their belief in what I call the market primacy assumption.
In their view, "in the beginning, there were the markets" (Williamson,
1975, p. 20), and state intervention, organisations, and other institutions
are seen as man-made substitutes which emerged only after the defects in
the market ("market failure") became unbearable (Arrow, 1974, is the
most sophisticated example of this view). The most obvious example of
this market primacy assumption is the Contractarian "explanation" of the
origin of the state. In this view, the state has emerged as a solution to the
"collective action problem" of providing the "public good" of law and
order (especially the security of property), which is seen as necessary
(and often sufficient) for markets to function at all (Nozick, 1974;
Buchanan, 1986). Thus, in this view, even the very existence of the state
is explained according to the logic of "market failure" in the sense that it
is seen as having emerged only after the market has failed to provide law
and order due to the "public goods" problem - an explanation which is
obviously contrary to the historical truth and therefore can only be seen
as an "ideological" defence of an "unjust" system (for a criticism, see
Chang, 1994a, ch. 1). At this point, we must emphasise that the fact that
someone attributes institutional primacy to the market does not
Unit-6 Page-326
necessarily mean that he/she endorses a minimal state view, as the

problem here is not really about where the right "boundary" between the
state and the market should lie. There are may who start (at least
implicitly) from the market supremacy assumption but are keenly aware
of the failings of the market and willingly endorse a relatively wide range
of intervention. Indeed, as we pointed out earlier (section 10 Williamson
defends this starting assumption on the ground of "expositional
convenience", arguing that the logic of his analysis would be the same
ven if the starting assumption was that "in the beginning, there was
central planning" (pp. 20-1). However, as we shall see below, this
apparently innocuous assumption has a lot of important theoretical
ramifications and policy implications.), if these open-minded
Neoclassical economists began to take their own logic to the limit, they
could end up endorsing all kinds of state intervention. However, they
would still see state intervention, or for that matter any other solution
based on non-market institutions (e.g., hierarchical organisations like
firms), as "man-made" substitute for the "natural" institution called
market. The point is that, in the beginning, there were not markets.
Economic historians have repeatedly shown us that, except at the very
local level (in supplying basic necessities) or at the very international
level (in luxury trade), the market mechanism was not an important part
of human economic life until recently. In fact, although even Joseph
Stiglitz, one of the most enlightened Neoclassical economists of our
generation, says that "markets develop naturally" (Stiglitz, 1992, p. 75),
the emergence of markets was almost always deliberately engineered by
the state, especially in the early stage of capitalist development. Karl
Polanyi's classic work shows how even in the UK, where the market
economy is supposed to have emerged "spontaneously", state
intervention played a critical role in the process. He argues that "the road
to the free market was opened and kept open by an enormous increase in
continuous, centrally organised and controlled interventionism [italics
added]. To make Adam Smith's 'simple and natural liberty' compatible
with the needs of a human society was a most complicated affair.
Witness the complexity of the provisions in the innumerable enclosure
laws; the amount of bureaucratic control involved in the administration
of the New Poor Laws which for the first time since Queen Elizabeth's
reign were effectively supervised by central authority; Lange's defence of
socialist planning may be an extreme example, but Schotter's argument
for state provision of basic goods (on the ground that an inadequate
amount of consumption of such goods can create "externality" in the
form of crime), which we citedearlier, is a less extreme example of how
the logic can be carried much beyond where most Neoclassical
economists are currently willing to take it to or the increase in
governmental administration entailed in the meritorious task of
municipal reform . . . . " (Polanyi, 1957, p. 140). Also in the case of the
US, the early intervention by the state in establishing property rights,
providing critical physical infrastructure (especially railways and
telegraphy), funding of agricultural research, and so on, were critical for
its success in early industrialisation (Kozul-Wright, 1995; even the
World Bank now recognises this –see the World Bank, 1997, p. 21, Box
1.2). Most importantly, the US was the home of the idea of infant

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industry protection (Freeman, 1989), and was indeed the most heavily
protected economy among the industrial countries for around a century
until the Second World War (see World Bank, 1991, p. 97, Box Table
5.2; Kozul-Wright, 1995, p. 97, Table 4.8). Moving beyond the UK and
the US, we realise that there is virtually no country, except Hong Kong,
which achieved the status of an industrialised country without at least
some periods of heavy state involvement in the developmental effort.
The exact forms of intervention varied - "pre-emptive" welfare state in
Bismarckian Germany, postwar French industrial policy, early Swedish
state support of research and development, transformation of the
Austrian manufacturing sector since World War Two And he continues:
"Administrators had to be constantly on the watch to ensure the free
working of the system. Thus even those who wished most ardently to
free the state from all unnecessary duties, and whose whole philosophy
demanded the restriction of state activities, could not but entrust the self-
same state with the new powers, organs, and instruments required for the
establishment of laissez-faire [italics original]" (p. 140) During this
period, few countries had tariff autonomy either because of outright
colonial rule or because of "unequal treaties" - for example, Japan got
tariff autonomy only in 1899 when all its unequal treaties expired. Of the
cuntries with tariff autonomy, the US had by far the highest tariff rates.
Its average tariff rates since the 1820s was never below 25%, and usually
around 40%, when those in other countries for which the data are
available, such as Austria, Belgium, France, Italy, and Sweden, were
rarely over 20%. For detailed figures, see World Bank (1991, p. 97, Box
5.2.) public enterprise sector, the well-known state-led developments of
the East Asian countries - but the fact remains that all successful
developmental efforts involved substantial state intervention. So if
virtually all now-advanced countries, with the possible exceptions of
Britain at certain phases and Hong Kong, developed in some "unnatural"
way which involved heavy state intervention, it seems questionable
whether there is any point in calling the market a "natural" phenomenon.
What we have just discussed is not simply of historical interest. Whether
or not we accord primacy to the market institution makes a critical
difference on how we design developmental policies. For example, the
severe economic crises that many former Communist countries which
have opted for a "big bang" reform have experienced during the last
several years is one striking example which shows how the establishment
of a well-functioning market economy is impossible without a well-
functioning state (see Chang & Nolan, 1995, whose Spanish translation
appears as Chang & Nolan, 1996). In fact, if the markets evolve so
"naturally" as the Neoclassical economists believe, these countries would
not be in such trouble now. Likewise, the developmental crises that many
developing countries have gone through during the last two decades or so
also show how dangerous it is to assume the primacy of market
institutions and believe that it will naturally develop as far as the state
does not "interfere" with its evolution. The assumption of market
primacy has a lot more serious implications than it first appears to have.
Unit-6 Page-328
3.4. Can We Rid the Market of Politics?: The Disguised Revival of

the Old Liberal
Politics
One major assumption behind the Neo-Liberal doctrine is the belief that
politics allows "sectional" interests to "distort" the "rationality" of the
market system and therefore is something that has to be purged from the
market. Criticising the naivete of welfare economics which assumed the
state to be the all-knowing, all-powerful social guardian, the "New
Political Economy" of Neo-Liberalism tried to demonstrate how politics
is an inevitably corrupting force on the economy. The Neo-Liberal
political economists have argued that therefore we need to "depoliticise"
the economy by restricting the scope of the state and by reducing the
room for policy discretion in those few areas where it is allowed to
operate, for example, by strengthening the rules on bureaucratic conduct
and by setting up "politically independent" agencies bound by rigid rules
(e.g., independent central bank, independent regulatory agencies). There
have been many powerful criticisms of Neo-Liberal political economy,
and we do not feel that this is a place to go into the details (e.g., see, in
chronological order, Toye, 1987; King, 1987; Gamble, 1988; Toye,
1991; Chang, 1994a and 1994b; Evans, 1995; Chang & Rowthorn, 1995a
and 1995b, both whose translation appear in Chang, 1996). However, we
want to point out some basic issues in order to highlight some
fundamental problems in the Neo-Liberal (and indeed Old Liberal) view
of politics. 3.4.1. All Prices are "Political". First of all, the establishment
and distribution of property rights and other entitlements that define the
"endowments" that Neoclassical economics takes as given is a highly
political exercise. The most extreme example will be the various stories
of"original accumulation" such as the Great Plunder or the Enclosure in
the early days of British capitalism or the "shady" deals that dominate the
privatisation process in many ex-communist countries these days, but the
continuous political campaigns that established environmental rights and
consumer rights as legitimate rights at least in the OECD countries are
less dramatic but perhaps equally important examples. Moreover, there
are practically no prices in reality which do not have some "political"
element in it. To begin with, two critical "prices" which affect almost
every sector, namely, wages and interest rates, are politically determined
to a very large degree. Wages are affected not only by minimum wage
legislations, but also by various regulations regarding labour standards,
welfare entitlements, and most importantly immigration control. Interest
rates are also highly political prices, despite the guise of "de-
politicisation" that those who support central bank independence want to
give to the process of interest rates determination. The recent debate in
Europe on the relationship between political sovereignty and autonomy
in monetary policy, which was prompted by the approaching European
Monetary Union, shows this very clearly. When we add to them those
numerous regulations in the product markets regarding safety, pollution,
import contents, and so on, there is virtually no price which is "free from
politics". Of course, all these are not to deny that a certain degree of de-
politicisation of the resource allocation process may be necessary. For

School of Business
one thing, unless the resource allocation outcome is at least to a degree

accepted as "objective", the political legitimacy of the market-based
system itself may be threatened. Moreover, an enormous amount of
"transaction costs" would be incurred on search and bargaining activities
if every allocational decision is regarded as negotiable, as it was in the
case of the ex-Communist countries. However, this is not to say that no
price under no circumstances should be subject to political negotiations,
because in the final analysis, there is no price which is really free from
politics. We were reminded of this clearly in the British coal crisis in the
early 1990s, where the British coal-miners were told to accept the logic
of the "world market" and face mine closures with grace. However, the
world market prices, which the then British government argued to be
beyond political negotiation, turned out to be determined by the
"political" decisions of the German government to give subsidies to their
coal, of the French government to allow the export of their subsidised
nuclear electricity, and of the many developing country governments to
allow, at least de facto, child labour in their coal mines. 3.4.2. De-
Politicisation: The Disguised Revival of Old Liberal Politics If what
appear to be "objective" outcomes of "impersonal" markets are in the end
the results of certain (explicit and implicit) "political" decisions about
property rights, entitlements, and prices, the Neo-Liberal proposal for
"de-politicisation" of the economic policy-making process as a means to
restore "economic rationality" also cannot be taken at its face value. One
basic problem with the Neo-Liberal proposal for de-politicisation is that
the "rationality" that such exercise wants to "rescue" from the corrupting
influences of politics can only be meaningfully defined with reference to
the existing institutional structure, which is itself a product of politics
(Vira, 1997, for a further exposition of this point). So when the basic
institutional parameters of the economy have been, and can only be, set
through an "irrational" political process, a call for de-politicisation of the
economic process on "rationality" ground rings hollow. Another problem
with the Neo-Liberal proposal for de-politicisation is that its politics is
not what it pretends to be. The call for de-politicisation is often justified
in a populist rhetoric as an attempt to defend the "silent majority" from
the greedy politicians and powerful interest groups. However, the
diminution of the legitimate domain of politics that de-politicisation will
bring only serves to further diminish what little political influence that
these underprivileged people have in modifying the market outcomes,
which, we repeat, are heavily influenced by politically-determined
institutional parameters. Thus seen, the Neo-Liberal call for the de-
politicisation of the economy aims to revive the Old Liberal politics in a
disguised form (Bobbio, 1990, provides an excellent anatomy of the Old
Liberal politics). Like the Neo-Liberals, the Old Liberals believed that
allowing political power to those who "do not have a stake" in the
existing institutional arrangements will inevitably result in the
modifications of either such arrangements or of its outcomes mediated
through the market. However, unlike the Old Liberals, who could openly
oppose democracy, the Neo-Liberals cannot do that, so they try to do it
by arguing against "politics" in general and making proposals which
ostensibly seek to reduce the influence of those "untrustworthy
politicians" but ultimately aims to diminish democratic control itself
Unit-6 Page-330
(e.g., proposals for "independent" central bank or regulatory agencies).

The last, but not least, problem with the call for de-politicisation is that it
may not be a politically feasible recommendation. For good or bad
reasons, all countries have accumulated politically organised groups and
have developed certain (at least implicitly accepted) ways to "politically"
modify certain market outcomes. Some of these, of course, could be
easily eliminated, but others may be so entrenched that they may be
eliminated only at very high political and economic costs. Hence the
apparent paradox that radical economic liberalisation frequently requires
harsh authoritarian politics, in order to achieve the high degree of de-
politicisation that is required for such policy, as graphically exemplified
by the liberalisation attempt by the Pinochet regime in Chile (also see
Gamble, 1988). But the truth is that, however harsh the political regime
which pursued it may have been, de-politicisation has never been, and
can be, complete in practice, and even backfire.
4. Conclusion: Towards an Institutionalist Political Economy

After pointing out some internal fault lines and indeterminacy in the
Neo-Liberal intellectual agenda, we critically examined some of its basic
concepts and assumptions from the institutionalist point of view. As we
have repeatedly emphasised, the real point We should also note that
political activities are often ends in themselves and people may derive
value from the activities per se as well as from the products of such
activities (see Hirschman, 1982b, pp. 85-6) of our criticism is not that
Neoclassical theory is too little (or for that matter too much)
interventionist. As we have pointed out repeatedly, a full-blooded
Neoclassical economist can legitimately endorse anything from a
minimal state to socialist planning, depending on his/her assumption
about technological (and implicitly property rights) conditions. What we
are really trying to argue is that the way in which the relations between
the state and the market (and other institutions in those rare occasions
when they feature) is envisaged in Neoclassical economics prevents an
adequate understanding of some fundamental issues surrounding the role
of the state. We propose that an approach which may be called
"institutionalist political economy" should be the way forward, and
suggest some elements of this theory. Our starting point should be to
reject the assumption of market primacy that underlies Neoclassical
economics. As we pointed out earlier, Neoclassical economics sees the
market as a "natural" institution (if it is ever acknowledged that it is an
institution) which spontaneously emerges, but sees other institutional
arrangements, be they state institutions or firms (or "hierarchies"), as
emerging only when the market "fails". However, saying that the market
emerged as a result of the failure of "planning" (not necessarily by the
state, but also by other organisations) or "hierarchy" is probably closer to
the historical truth, which of course is much more complex. We should
see the market as an institution which, both logically and historically, has
no primacy over other institutions, and therefore as "natural" (or, for that
matter, as "artificial") as other institutions. Only when we do that, will
we be able to see the relations between market, state, and other
institutions in a balanced and historically more accurate way. Secondly,

School of Business
we should remember that there are more than one views of what the
"ideal" market can do, and that the Neoclassical view is only one of
many plausible views I have attempted to develop this theory in a
number of my previous works. See Chang (1994), Chang (1995), Chang
& Rowthorn (1995b), and Chang (1997)..28 - and not a particularly good
one at that. Accordingly, it becomes possible that the same market may
be seen as failing by some with one "theory of the market" and as
succeeding by others with another theory. Only when an economist
makes his/her own theory of the market explicit, we will be able to judge
the merit of his/her view that the market is "failing" (or not) and thus to
accept or reject the "solution" to the problem, whether it is some kind of
state intervention or the establishment of some non-market institutions
and/or organisations. Thirdly, we need to realise that the Neoclassical
theory is essentially a theory of the market (and a very schematic and
misleading one at that). However, capitalism, as a socio-economic
system, is more than a collection of markets, and is made up of many
institutions, including, among others, the firms as institutions of
production, the marketsas institutions of exchange, the state as an
institution of politically addressing collective interests, and various
producer and consumer groupings (e.g., conglomeration of firms,
producer associations, trade unions, purchasing cooperatives,
subcontracting networks). Thus seen, market failure becomes, somewhat
paradoxically, less of a problem in the institutionalist framework than in
the Neoclassical framework, because in the former framework even
widespread and severe market failures would not necessarily suggest that
the whole "economy" is failing, whereas the latter framework would see
it as just that. Fourthly, we need to understand that the market is a
fundamentally political construction. A market cannot be defined except
with reference to the specific rights/obligations structure that underpins
it. And since these rights and obligations are determined through a
political process, and not by any "scientific" or "natural" law as
Neoclassical (and other Neo-Liberal) commentators want us to believe,
all markets have a fundamentally "political" origin. Therefore, it is
impossible to decide whether a market is "free" or not, without
specifying the position of the person(s) making that statement regarding
the legitimacy of the current rights/obligations structure. Added to this
are the more explicit administrations of prices that are found in many
markets through price caps, price ceilings, state setting of certain prices,
and quantity controls. While some prices may be more politically
administered than others in a given context, ultimately no price is free
from politics. This brings us to our fifth element in the institutionalist
theory on the role of the state, namely, the need to build a theory of
politics which takes a much more broad, balanced, and sophisticated
view of politics than what is offered by Neo-Liberalism. Neo-Liberal
thinkers see politics as a market-like process, where material benefits are
exchanged for political supports, but as a process that ultimately corrupts
the "rationality" of the market, because of the discretionary powers that it
confers to those who can make and/or influence political decisions.
However, this is a fundamentally jaundiced view of politics. The main
problem with this view is that the "rationality" that it want to preserve
through "de-politicisation of the economy", which is in fact an
Unit-6 Page-332
euphemism for emasculating democracy, makes sense only in relation to

the underlying rights/obligations structure, which is a fundamentally
political construction. Thus, we need a theory of politics which is not
merely an extension of market logic. Lastly, we need to pay attention to
the institutional diversity of capitalism (Albert, 1991; Berger & Dore
(eds.), 1996; Chang, 1997). Unfortunately, Neoclassical economics has
little to say about the issue of institutional diversity, because it is a theory
of an abstract market economy, or rather of an "exchange economy"
based on barter, as we have pointed out earlier. Partly for this reason, the
Neo-Liberal economists have found it difficult to admit that there are
many ways for the state to intervene other than through taxes/subsidies
and public ownership, thus misrepresenting, although for the issue has
been discussed in various areas, including: the organisation of finance
(capital-market-based vs. bank-led vs. state-dominated); corporate
governance (U-form vs. M-form; H-firm or A-firm vs. J-firm); wage
bargaining structure (centralised vs. decentralised); union organisation
(centralised vs. industrial vs. company vs. craft); mode of state
intervention (Anglo-American, East Asian, Scandinavian, etc.); industrial
policy (general vs. selective). For more details, see Chang (1997)
somewhat different reasons, certain countries as being much less
interventionist than they actually are (e.g, Japan, Korea, the USA; see
section 3.1.2.). In discussing this issue of institutional diversity,
understanding the role of the state is critical, not simply because the
international differences in the mode of state intervention is a major
source of this diversity, but also because the exact institutional forms of,
say, corporate governance or labour representation, will have to be
legitimatised in the eyes of the (current and prospective) market
participants, either through formal legislation by the state or through
informal support from the state. Constructing an institutionalist political
economy which satisfied all the above criteria (and I am sure that there
are more important criteria that I did not think of is surely a tall order.
However, without a radical restructuring of the ways in which we
conceptualise the market, the state, and politics, and the ways in which
we analyse the relationships between them, we will not be able to
overcome the Neo-Liberal world view, which has dominated the political
and the intellectual agenda of our time, in my view with many negative
consequences.

School of Business
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Unit-6 Page-336
Review Questions
1. “The state is no more assumed to be an impartial, omnipotent social
guardian and is now analysed either as a “predator” or as a vehicle
for politically powerful groups,” – place your own observation on the
statement.
2. Do you agree with the statement that “the Neo-Liberal doctrine is in
fact a very heterogeneous and internally inconsistent intellectual
edifice?”
3. What is a free Market? How do we measure state intervention and
Why does It Matter?
4. What does market failure mean and how much does it matter?
5. “Can we rid the market of politics?” – analyse.
6. Do you agree with view that “all prices are political"?
7. Write a criticism of “institutionalist political economy.”

School of Business
Lesson 3: Role of the Civil Society

 Understand the role of the 'civil society' in Bangladesh in terms of

political and developmental discourse.
 Explain the gaps between promises and reality according to Rehman

Sobhan.
 Make appropriate comment on the statement “a strategy of a more

egalitarian development is not only socially just, it would also make
Bangladesh more competitive in a fast globalizing economy”.
Introduction
The idea of 'civil society' has achieved prominence in political and
developmental discourse over the past two decades. Civil society,
particularly by the development partners, has been widely seen as an
increasingly crucial agent for limiting authoritarian government,
strengthening popular empowerment, reducing the socially atomizing
and unsettling effects of market forces, enforcing political accountability,
and improving the quality and inclusiveness of governance. With the
end of the Cold War and the ideological rationale for aid, donor
enthusiasm for civil society has been reflected in a growing number of
programmes and projects aimed both at creating and strengthening an
intermediary stratum of non-governmental organisations and in fostering
partnerships between such organisations, government and business.
Whilst the market seemed to hold its sway, the concept of civil society
began to enter academic discourse to conceptualise effective challenges
to oppressive state systems.
Definitions of 'civil society' are diverse and often rooted in alternative
social and political philosophies. The recent conception of civil society
can be traced to that of an intermediate associational realm situated
between the state on the one side and the basic building blocks of society
on the other (individuals, families and firms). The contribution of civil
society to good governance may has been summarised in Manor (1998) 7
under four headings: public policy and decision making; enhancing state
performance; transparency and information; and social justice and the
rule of law.
Public Policy and Decision Making: Civil society organizations can play
a role in mobilizing particular constituencies to participate more fully in
politics and public affairs. Wealthy and socially dominant groups are
better able to organize themselves by virtue of superior resources while
poor and socially disadvantaged groups -- marginal peasants,
7
The section draws on Manor, James, “Civil Society and Governance: A Concept Paper,”
presented as the basis for a research project on civil society and governance, funded by the Ford
Foundation, and coordinated by and held at the Institute of Development Studies, University of
Sussex, England, June 1998.
Unit-6 Page-338
sharecroppers, landless labourers, artisans, informal sector workers,

urban slum dwellers, disabled people and certain categories of women --
are usually much less able to exercise influence over public policy and
resource allocations.
Transparency and Information: Civil organizations are thought to
contribute to better governance by improving transparency and
increasing the availability of information about the making and
implementation of government policy.
Enhancing State Performance: The q8uality and effectiveness of public
services and expenditures are integral to good governance. Civil society
organizations can contribute by working directly with government in
shaping, financing and delivering public services in a variety of ways.
Social Justice, Rights and the Rule of Law: The fourth area where civil
society can make a contribution to good governance is in the field of
social justice, rights and the rule of law.
Reading for the Lesson

The present lesson concentrates on a selection, an essay written by
Professor Rehman Sobhan entitled Building a Responsible Civil Society:
Challenges and Prospects.9
According to Professor Rounaq Jahan10, the editor of the volume in
which Professor Sobhan’s article appeared, the author attempts to
synthesize the major trends in the polity, society and economy and
argues that building on existing political assets and past experiences, the
country can recapture the goals underlying the nationalist movement -
nationalism, democracy and social justice.
Sobhan counts the tradition of civil society activism, the relatively
homogeneous society and the emerging two party system as major
political assets. He notes the gaps between the promise and reality and
highlights the challenges e.g. the need for private finance for party
building and election campaign that has made the political parties
captives of special interest groups, the political confrontation between
the two dominant parties that has resulted in "illiberal democracy", the
growing donor dependence that has driven the state to surrender
ownership of its own development agenda and has increased the
inequalities between the rich and the poor.
8
The section draws on Manor, James, “Civil Society and Governance: A Concept Paper,”
presented as the basis for a research project on civil society and governance, funded by the Ford
Foundation, and coordinated by and held at the Institute of Development Studies, University of
Sussex, England, June 1998.
9
Sobhan, R “Building a Responsible Civil Society: Challenges and Prospects,” in Rounaq Jahan
(ed) Bangladesh: Promise and Performance, Dhaka: University Press Limited, 2000. The essay is
reproduced with the permission of the author and editor.
10
The present introduction is an excerpt of Rounaq Jahan, “Introduction: Bangladesh: Promise and
Performance,” in Rounaq Jahan (ed) Bangladesh: Promise and Performance, Dhaka: University
Press Limited, 2000.

School of Business
Despite these problems Rehman Sobhan believes Bangladesh can

overcome its current crisis. He argues that a more proactive civil society
and a reorientation of politics and priorities will set the country into a
path for democratic governance and a just social order. He posits that the
prevailing political practices that emphasize private interest can be
challenged if a critical mass of civil society activists join political parties
and attempt to change the culture of party politics from within. He
underscores the importance of pursuing a strategy of incremental civil
society mobilization first around social issues e.g. improving the quality
of primary education and health care services and cleaner urban
neighbourhoods and then move on to more difficult political issues such
as challenging the politically connected muscle-men who terrorize the
campuses of educational institutions, the rich businessmen who default
on bank loans, powerful bureaucrats and political leaders who are
personally corrupt and patronize corruption and so on.
Sobhan believes that a strategy of a more egalitarian development is not
only socially just, it would also make Bangladesh more competitive in a
fast globalizing economy. He identifies several priority actions, e.g.
democratizing human development, upgrading technical skills of both
men and women, providing health care to the poor, and creating a stake
for the deprived in the development of the economy. He also emphasizes
the importance of economic diplomacy and suggests building a workable
pattern of relations with neighbouring countries, particularly India for
better terms of trade and economic exchanges.
Rehman Sobhan concludes that the new millennium holds out an
enormous promise for Bangladesh but the realization of this promise
requires structural changes both in politics and society. Civil society has
an important role to play in initiating these changes but it needs to first
restore a sense of public purpose within itself.
BANGLADESH IN THE NEW MILLENNIUM: BUILDING
A RESPONSIBLE CIVIL SOCIETY
Rehman Sobhan
Introduction
Bangladesh was conceived in hope but born in pain. As we enter the new
millennium after 29 years of independence the sense of pain appears to
prevail over the sense of hope. For a generation such as ours which lived
in hope that an independent Bangladesh would lay the foundations of a
democratic, secular, self reliant and egalitarian society based on justice,
contemporary Bangladesh remains a far cry from the aspirations of its
founding fathers. Our democratic system was held captive in the
cantonment for 16 years. The restoration of a pluralist democracy since
1991 has not fulfilled the promise of accountable governance. Secularism
was not only eliminated as a pillar of the constitution but we have since
become more communal and intolerant of the rights of minorities in our
society. Over the years our commitment to nationalism has been eroded
not just by our external dependence for resources to underwrite our
Unit-6 Page-340
development but we have surrendered our autonomy over economic

policymaking to our aid donors. Above all we have become less
egalitarian as a society to the point where two societies appears to co-
exist in one country. This growth in inequality has little to do with
efficiency or merit but originates in an unjust social order which rewards
malfeasant behavior and provides insufficient incentives to the creative
and hardworking elements in society.
In such an environment people have tended to trade their expectation of a
better future for their country for the pursuit of private agendas where the
self and household delimit our aspirations so that private gain prevails
over societal progress. Inspite of this erosion of hope and the obsession
with private gain enough people remain captivated with the vision of a
better Bangladesh to ensure that the flame of hope lit by those who
fought for our liberation, however dim it may appear today, remains
unextinguished. In particular junctures of time, 21st February, 26 March,
15 August, 16 December, we stoke this flame through bouts of mass
remembrance. But the day passes, the emotions die down and we return
to our self-centered lives. Such days have thus degenerated into rituals of
synthetic remembrance which generates insufficient resonance to sustain
a process of renewal in our personal and public affairs throughout the
rest of the year.
The real tragedy of contemporary Bangladesh lies in the fact that, viewed
from a global perspective, it is a country which in its emergence as an
independent state was possessed of a variety of positive assets which
could have transformed it into a dynamic, democratic society. Over the
years new areas of opportunity have opened up which have kept the
embers still glowing in the twilight of our hopes. In the remainder of this
paper I will explore some of the contemporary developments and
circumstances of Bangladesh which provide some grounds for hope as
well as suggest areas of action where such hopes can be translated into
action for building a more liveable society. I will structure the paper
around three pivotal themes associated with such an agenda for
sustaining hope in -Bangladesh – democracy, nationalism and social
justice.
Democracy
Bangladesh’s political assets
Every major political event in the history of Bangladesh over the last 60
years originated in a process of democratic mobilisation. The liberation
of Bangladesh and the more recent overthrow of the Ershad autocracy
were sustained by such a process. There was therefore every expectation
that the Bangladesh polity would be grounded in a working democracy
underwritten by the hunger for democracy of its citizens. Today few
people would have reason to feel optimistic about the state of democratic
governance in Bangladesh. After a decade of democratic renewal in the
1990s which succeeded 16 years of cantonment raj our politics is
becoming increasing dysfunctional. The very institutions of democracy,
elections, parliament, political parties show signs of degeneration in their

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practises. The culture of intolerance which permeates our polity holds the
nation hostage to a confrontational style of politics which is gradually
making the democratic process unworkable.
Ironically this process of confrontational politics originates in what
should have been the most positive asset for sustaining a democratic
system in Bangladesh. Since 1991 Bangladesh has witnessed the
consolidation of a viable two party system. This system is anchored by
the Awami League elected to power in 1996 and the Bangladesh
Nationalist Party (BNP) which was elected to office in 1991 and held
office till 1996. Each party operates with a national support base and
retains a credible prospect of capturing state power through the electoral
process. The amendment to our constitution in 1996 has institutionalised
the preconditions for holding such free and fair elections under a non-
partisan, caretaker government which leaves the two parties with equal
opportunities to solicit the support of the voters. During the election
campaigns of 1991 and 1996 it was difficult to predict which party would
capture state power. The two elections were recognised to be more free
and fair than any election in the last 50 years and was seen by outside
observers to compare favourably with elections in our neighbouring
countries.
Bangladesh’s two party system should have minimised the scope for
political instability in contrast to India, Pakistan, Nepal, even some of
our South East Asian neighbours. Most of our neighbours either have to
cope with the uncertainties associated with a multiplicity of parties
sharing state power or remain exposed to the authoritarianism associated
with a single party dominated polity. As we read in the papers of ethnic
and communal conflicts in India, Pakistan, Sri Lanka, Mynmar,
Indonesia or Philippines, Bangladeshis can better appreciate our political
good fortune in inheriting a relatively homogenous language and culture
which has minimised the scope for identity politics. Whilst we have a
large religious minority and a small ethnic minority of tribal people, the
unifying legacy of the liberation war and the original commitment to
secularism ensured that religious vote banks would not emerge as a
factor in national politics. However, the constitutional assault on
secularism as well as the failure to recognise the legitimate rights of
tribal minorities marked a departure from the secular premise of
Bangladesh’s national politics. The subsequent reinduction of overtly
communal forces into national politics revived the tendency of some
parties to project fundamentalist ideas into the national political
discourse.
This erosion of Bangladesh’s secular tradition has contributed to the
suppression of minority identities and diminished opportunities for their
political participation. The 1997 Peace Agreement with the Jumma or
hill people of the Chittagong Hill Tracts (CHT) could have emerged as a
move to reaffirm Bangladesh’s non-communal tradition. But the treaty
has been used as a vehicle by opposition political parties to activate
communal forces in the polity by focussing on the communal divide
between tribals and Bangali settlers in the CHT. This intrusion of
communalism could open up fissures in our political landscape which
Unit-6 Page-342
could in the future expose us to the destabilising tensions afflicting our

neighbours.
The crisis of democracy
Unless our principal political parties are willing to practise tolerance in
their dealings with their opponents parliamentary democracy will
become a constraint rather than a resource for stimulating good
governance. A workable two-party democratic system demands tolerance
for each others positions, respect for the democratic rights of the
opposition and a regular process of consultation both in the functioning
of the democratic system as well as in the design of national policy. A
majority party, commanding less than 50% of the national vote has to
constantly consult with the opposition parties who represent more then
50% of the voters, if the political system is to remain effective. The
practise of ‘illiberal’ democracy based on a winner take all philosophy
may be legally correct but remains politically unsustainable. Where this
culture of intolerance amongst the political parties is further aggravated
by deep personal antagonism between the leaders of the two principal
parties in Bangladesh politics, to the point where minimal political
dialogue is not possible, then the system of democracy in Bangladesh
could become unworkable.
Already this practise of ‘illiberal’ democracy has contributed to the
proliferation of a breed of politicians exclusively preoccupied with
private gain where money and arms rather then democratic consent is
seen as the route to power. This new breed of politicians are now
evolving from the role of foot soldiers into field commanders, in the
confrontational environment of contemporary politics, where corruption,
violence, mendacity, slander and incendiary rhetoric pollute the
vocabulary of politics. It is small wonder that parliament is no longer
seen as an arena for intelligent, even coherent discussion of national
problems and policies. Nor is there any evidence that our principal
political parties are unduly preoccupied with finding solutions to the
myriad problems which oppress the ordinary people in Bangladesh.
It is now recognised not just in Bangladesh’s but also by our so-called
development partners that a transformation of Bangladesh’s
developmental landscape would be unrealisable without a transformation
in our political culture. Current producers as well as prospective
investors need social and political stability to sustain their
entrepreneurship. A visibly malfunctioning democratic system which
carries the threat of constantly imploding is not an ideal environment to
optimise productivity or initiate long term investment.
Adversarial politics is also aggravating the misgovernance of the
economy. Such politics breeds a politicised bureaucracy and a malfeasant
system of law and order. These instruments of governance, operating
without accountability or transparency, leads to the machinery of state
being used as a political resource rather than an instrument of
governance. In such a polity the state can neither discharge its regulatory

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or its operational role with integrity, impartiality or efficiency and

misgovernance is perpetuated.
In such a malfunctioning system decentralised government degenerates
into a cliché where local institutions remain powerless because national
politicians and bureaucrats remain unwilling to surrender the power and
patronage associated with the exercise of centralised power. What passes
for local government remains a miniaturised extension of national
governance, politicised and corrupted in its incidence because local
power remains delegated rather than derived from a system built upon
local accountability and resources.
Transforming the political culture

Can anything be done about transforming our political culture and
reforming our governance? We have to live with the reality of a two-
party political system and should seek to draw upon its advantages rather
than live with its liabilities. This recognition of the dominance of two
major parties in the polity remains without prejudice to the need for at
least two ideologically motivated parties since both our parties, whilst
divided by their historical inheritance, remain parties of the political
centre. However, within the prevailing bipolar polity in Bangladesh
democracy could be well-served by some ideologically inspired
diversity. Thus, a unified party of the left committed to the concerns of
the deprived segments of the population could present some genuine
alternatives to the voters. Such a party could address, within a coherent,
workable political agenda, many of the concerns largely espoused today
by the NGO community. Such a party, operating as part of a unified
political movement shorn of ideological posturings, should find a place
in parliament and emerge as the conscience-keeper of the political
system. It may also be feasible for a party of the right to emerge which is
thereby given space to project the fundamentalist political agenda within
the norms of democratic politics rather than as a terrorist conspiracy.
Given the reality of our two-party dominated system major efforts at
reform must be focussed on the two principal parties. The prospect of
these two political parties reinventing themselves does not, however,
appear to hold much promise. Pressure for political change in these
parties must, therefore, in large measure originate from civil society.
However, those in civil society who would seek genuine political change
for better governance in Bangladesh will have to expose themselves to
the inconvenience and hazards of political involvement in sufficient
numbers to make a difference. Such people will have to join political
parties and from within demand a reconstruction of its political culture,
including the democratisation of the party. Such a commitment by civil
society will not come easily because it involves, effort, risk and above all
time, which are more difficult to come by than sitting in seminars, giving
statements to the newspapers or even participating in the occasional
demonstration. Such an attempt to upgrade the quality of representation
in our political parties will generate resistance from enhanced vested
interests in the parties. But it is arguable that if such newcomers
demonstrate patience, humility and dedication in their commitment to
Unit-6 Page-344
political work, there remain large numbers of uncompromised political

workers and leaders who would be able to draw upon these newcomers
as allies in building a modern political party.
Reforming political finances

A major source of the degeneration in our political culture originates in
the need for mobilising private funds for financing party and electoral
activities. This pursuit of private finance for underwriting party activity
makes both parties and their leaders hostage to special interest groups.
Much of the corruption and malfeasance in decision-making originates in
the need to do favours to such political financiers. These same financiers
are now directly entering politics whilst political activists are gradually
evolving into businessmen. A peculiar symbiosis now binds politicians,
businessmen and bureaucrats together in a collusive relationship which
has infected the entire system of governance. Such a system of political
financing by its nature, remains devoid of transparency and contributes
to the retention of disproportionate power in the hands of party leaders
which further weakens the process of inner-party democracy.
Any effort to reform politics from within thus needs to reduce the
dependence of the political process on private financiers. One way to
break the hold of such financiers is to introduce public funding to
underwrite democratic politics through allocations in the national budget.
For example, a fixed percentage, say one percent of the total annual
revenue, could be allocated every year to both finance the political party
organisations as well as their participation in elections. This could put at
the disposal of the political parties a sizeable annual budget of around
Tk. 2 billion. Through a process of political consultation it would need to
be decided how such funds should be disbursed into the political system
and who should be eligible for such funds. The arrangement would have
to ensure that frivolous claims are not made on this fund by private
entrepreneurs or adventurers with no political following. Thus, for
example, budgetary allocations could be limited to those parties with
enough popular support to ensure their representation in parliament.
Budgetary resources could thereby be distributed to the parties in
parliament on the basis of their share of the vote in the elections to the
national parliament.
Since financing of political activity would originate from the public
exchequer its utilisation by a party would demand transparency in the
administration and accounting of the funds. This may involve audit of
party finances and greater inner party democracy in the disposition of
such funds. Such an institutionalised mechanism of political finance
need not eliminate the need for private financing of politics but this too
should be kept within a ceiling. Disposition of such private funds should
also remain fully transparent and governed by law as is the practice in
most mature democracies.

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The role of civil society

Upgrading the quality of political participation would need to move in
tandem with pressures for political reform emanating from a more pro-
active civil society. Trade unions, peasant organisations, women’s
groups, human rights and environmental activists, professional
organisation as well as business associations have all become
increasingly active in Bangladesh in recent years in seeking remedial
action from the government or in pursuit of particularist agendas. Such
efforts, whilst realising some gains, have tended to be episodic and have
thereby failed to build-up a critical mass to realise substantive change.
Such organisations, acting both individually and collectively will, thus,
have to commit themselves to civic involvement and advocacy as a full
time exercise. Such a surge in civic enterprise involves leadership,
entreprenureship, creative imagination and above all cooperation rather
than a quest for private or institutional aggrandisement or as an initiative
sustained by donor patronage. Such civil society organisations also need
to be made more democratic within themselves, kept accountable to their
constituents and transparent in their transactions.
Since the business community is also a part of civil society they must
engage themselves not just in the pursuit of their sectoral agendas but
concern themselves with the broader aspects of governance. This
involves both responsibility to help the community where they do
business as well as accountability and transparency in their practises.
Thus, the business sector needs to remain more accountable to all its
shareholders as well as its workers, to depositors who use private
banking services, to local communities where they operate and to the
public at large. Where the private sector draws upon public resources or
benefits from public policies such a process of public accountability
becomes all the more important because such resources have a high
opportunity cost. For example, the amount of defaulted loans to the
nationalised commercial banks (NCB) could comfortably meet the entire
demand for micro-credit in Bangladesh and also finance a corporate
stake for the deprived. Misuse of such funds is thus not a private affair of
the borrower and the lender but need to be accounted to the public, most
of whom do not have access to such funds from the NCBs.
A pro-active civil society means that Bangladeshis will need to come out
of their drawing rooms, seminars and coffee shops in increasing numbers
to assert their rights as voters and citizens. Parents of children in
government primary schools and users of primary health care centres
must come forward to demand effective service. Citizens in every
locality of Bangladesh must challenge the police to provide honest and
effective law enforcement. Municipalities must be pressured to provide
clean neighbourhoods. This exercise of civic power will need to be
escalated to make ministers, parliamentarians and bureaucracy
accountable for their every action or inaction so as to make them count
the political costs of malgovernance. If our citizens cannot make the
effort to demand better governance as a matter of right, then we must be
prepared to live in a misgoverned polity.
Unit-6 Page-346
Nationalism
Coping with globalisation
In this day and age of globalisation an exclusively national agenda is no
longer meaningful. Whether we like it or not Bangladesh will have to
participate in the process of globalisation and will have to interact more
closely with our neighbours in order to better equip ourselves to cope
with this process. Bangladesh, over the last two decades has already been
exposed to a process of external dependence because of the dominant
role of aid donors in underwriting our development finance and
influencing our policy agendas. Donors are, today, much more assertive
as a price for committing their aid to Bangladesh. Not only have donors
sought to use aid conditionality so as to impose policy reforms on
Bangladesh but they are now becoming more exigent in their demands
for better governance. This tendency of the donors to intrude from the
economic to the political domain in their attempt to influence
Bangladesh’s policy agendas indicates that two decades of donor driven
policy reform have yielded only modest returns.
In contrast to the increasing trend by donors to influence both policy and
governance the share of aid as a resource for development has declined
from around 10% of GDP in the early 1980s to 2 or 3% at the end of this
century. This decline in aid dependence in Bangladesh reflects both an
improved capacity for domestic resource mobilisaiton as well as an
expansion in our export earnings over the last decade. At the same time
the 1990s witnessed an absolute stagnation and decline in the share of aid
resources in total pubic expenditure. The tendency for donors to seek to
influence our national policy agendas appears to have risen inversely to
their contribution to our public finances, as a result their ability to
exercise leverage over our public finances today compared to a decade
ago has also weakened. The emerging policy vacuum in Bangladesh has
not been readily filled by the government of Bangladesh who still look to
our aid donors to set the policy agenda.
This decline in the importance of aid in Bangladesh is part of a changing
global scenario where donors are limiting their aid commitments and
countries such as Bangladesh are being propelled by their donors to seek
foreign direct investment (FDI). In this process Bangladesh is being
asked to use FDI to underwrite the development of its infrastructure in
areas where aid was once the dominant source of finance. Investment in
energy development, power, telecommunications, even highways and
bridges, once the core of the aid programme, are today viewed by donors
as part of the domain of FDI. Over the decade of the 90’s neither the
World Bank nor the Asian Development Bank committed any loans for
expansion or even upgradation of Bangladesh’s public sector power
generation facilities. Any funds on offer in this area by these agencies is
to be used as risk guarantee funds for prospective private power
producers. Bangladesh, therefore, has to not only make itself receptive
to donor advice but to make itself attractive to prospective private
foreign investors. In contrast to aid where access originates in the
specific relationship of Bangladesh with its aid donors, to attract FDI

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Bangladesh has to compete with other developing countries throughout

the world. Thus, today there is much less assurance available to
Bangladesh that a sufficiency of external resources needed to support its
development programmes will be realisable.
Today US and European Union (EU) policy in relation to the multifibre
arrangement (MFA) and import of RMG from Bangladesh is a far more
important factor in influencing our economic fortunes than their aid
commitment to us. As we enter the new millennium, the immigration
policies of Saudi Arabia, UAE, Malaysia, Pakistan or India are also no
less important to our future than World Bank loans to finance economic
reforms. Bangladesh thus needs to adjust its external economic relations
to make the best use of trading opportunities on offer under the process
of globalisation. However, as a beneficiary of such export opportunities
Bangladesh has to compete for such markets with many other developing
countries (DC) and less developed countries (LDC). Such a process of
globalisation will, therefore tend to favour those countries who can equip
themselves to compete in a harsh and unpredicable external environment.
What Bangladesh needs to do is to put in place an agenda for coping with
globalisation so that we can exercise some influence over the terms on
which we participate in the process rather than remain as helpless victims
of the vicissitudes of this process.
Whilst the process of globalisation is impacting on Bangladesh in a wide
variety of areas we limit our attention in this paper to those aspects
which remain likely to impact on our external earning capacity. The new
global trading system which will emerge out of the Seattle Round of
negotiations could have for reaching implications for Bangladesh. At the
top of our agenda we will, therefore, need to carefully review
Bangladesh’s role in the WTO. This review will demand that we analyse
our options and improve our negotiating capacity in order to obtain the
best terms which we can hope to extract from the Seattle negotiations.
We will need to study the agendas of our bilateral economic partners to
identify where export opportunities may open up for Bangladesh. We
should draw upon such assessments so as to enhance our diplomatic
capacities to enable us to exploit opportunities on offer to us. At the same
time we need to develop our supply side capacity to create and exploit
new opportunities available to us in the markets of these countries. For
example, we should equip ourselves to exploit the enlarged export quotas
on offer by the USA and Europe under the MFA and GSP. We should
also exploit emerging opportunities for exports of semi-skilled labour to
Japan, Korea, Malaysia, India, Pakistan, Europe and North America. We
should study their future market needs, invest in training our workers to
respond to such needs and negotiate globally and bilaterally to facilitate
competitive access of our workers to their labour markets. Bangladesh’s
future should not depend on the enterprise of our illegal emigrants but on
our capacity to ensure that free export of labour services becomes a
legitimate part of the process of globalisation.
Unit-6 Page-348
Bangladesh will need to invest in equipping ourselves to participate in

the globalisation of information both as users of knowledge as well as
providers of information services. We already lag far behind our
neighbour, India, which is moving rapidly to avail of global opportunities
on offer in the software market and newer areas of information services.
The growth in training schools for informatics and software in
Bangladesh is an indication of the enterprise of our youth to participate
in the information revolution. Such private initiatives should now be
backed by the state as part of a major strategic effort.
We will further need to diversify our production and export capacities.
Bangladesh is in danger of being trapped into a highly concentrated
export structure where RMG today accounts for 75% of our exports. We
may begin this process by moving to add value to the RMG sector
which has already carved out a market niche in the global trading
system. Value addition to our RMG sector may be realised through
investing in backward linkages through domestic manufacture of yarn as
well as fabrics and forward linkages in the area of design and marketing
of the RMG. If we play our cards right Bangladesh has a capacity to
expand our aggregate export earnings from RMG 10 fold in the next
decade. We may or may not be able to realise these goals but it is
important to recognise that such opportunities are open to us because we
have already established that we can export RMG and labour services on
competitive terms. The same areas of comparative advantage enjoyed by
Bangladesh in the RMG sector can be exploited in the area of leather
products, consumer electronics, toys, or other labour intensive economic
activities.
In recognising that our future lies in trade not aid Bangladesh should
redefine its relations with our donors. Our diplomatic initiatives should
move away from soliciting aid to securing and sustaining access to
global markets as well to that of our immediate neighbours. Whatever aid
is likely to be available to us should be focussed on enhancing our
capacity to participate in the global trading system. This enhancement of
our competitive capacities will demand investments in both basic
education as well as skill upgradation and in development of our
information linkages to the international system. This will also require
investments in physical infrastructure where aid should be used to reduce
our exclusive dependence on foreign private investors to meet this need.
Recapturing ownership over the development agenda

Bangladesh’s need to cope with globalisation should not leave us
exclusively preoccupied with enhancing our export capacity. Bangladesh
is possessed of a population approaching 130 million who provide a
large and growing demand for goods and services. Such a domestic
market is an important resource of Bangladesh not available to countries
with smaller populations. We need to gear our production systems to
service this demand rather than surrender our local market to foreign
suppliers in the name of globalisation. To this end we must refocus both
policy and political attention to meeting local needs even if this means
some challenge to the process of globalisation. Neither our neighbour

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India, or China or the US are so casual about surrendering their large

domestic market. We therefore need to invest as much attention on
ensuring more competitive local production of goods and services for the
local market as we do to export promotion. Promoting local production
capacity will be particularly beneficial to small scale and rural producers
who cater largely to local needs. Stimulating demand for small industries
has the further advantage of widening domestic development
opportunities because of the greater use by this sector for intermediate
inputs derived from local resources and skills. Since the small scale
sector has always been neglected as regards both policy and resources a
major thrust area for Bangladesh in the millennium should therefore be
towards promoting this sector by helping to upgrade their technology and
improve their competitiveness. At the same time we need to take lessons
from Japan, China and Republic of Korea who, as part of their high
growth strategy, attached an absolute value to using local capacities.
Such a perspective serves to restore a sense of pride in local producers as
well as to disseminate growth opportunities across the domestic
economy.
Our diminished need for aid should also be used as an opportunity to
resume ownership over our policy agendas. A move towards restoration
of ownership coincides with the now universal recognition amongst
donors that weak local ownership diminishes aid effectiveness and
neutralises the impact of externally driven reforms. Such a resumption of
ownership demands a credible effort within Bangladesh to develop our
own vision, commitment and capacity to design as well as implement
policy.
This demonstration of vision and commitments must largely originate
from our political leadership. In this respect the capacity of the state to
design policy has diminished as the machinery of state has lost
confidence in its ability to design policy. However, policy design and
implementation is no longer the exclusive monopoly of the state. Civil
society also needs to have its own vision and to demonstrate a
commitment and capacity to realise this vision. In Bangladesh there is no
shortage of professional resources to design and implement such a vision
nor do we lack the skills to build a political consensus behind such
agendas. The efforts of the caretaker government of President
Shahabuddin Ahmad in 1991 to commision 255 of our best experts
assembled in 29 Task Forces to advise the incoming elected government
on policy options, demonstrated the worth of our local professionals. The
incumbent Awami League government has also drawn upon such
indigenous skills to service a variety of National Commissions on policy
reform in such areas as Administration, Banking, Local Government,
Industry, Agriculture, Health, Media and other vital issues. Such
exercises have thrown up valuable policy advice but have not always
been operationalised into legislation or policy. Nor has much effort been
invested in building a broad political consensus behind the
recommendations of these National Commissions. Thus, even where the
government has moved to assume some ownership over policy design it
has not made the best possible use of these initiatives. This suggests that
Unit-6 Page-350
the government of Bangladesh remains disinclined to rely on domestic

professional skills in preference to advise originating from its donors.
Such a response by the government has a demoralising effect on
Bangladesh’s own professionals who thereby tend to fall back on donor-
driven consultancy work. This externally owned work is seen by our
professionals as a practical route to influence public policy whilst also
providing more lucrative compensation.
In the light of experiences over the last 25 years of Bangladesh’s history
nationalism for the 21st century implies a capacity to think as well as act
for ourselves. Such an autonomous process of policy thinking, thus,
needs to be backed by policy commitment as well as the development of
operational capacity to realise our own vision. We will, therefore, need to
build supportive political constituencies to sustain such a process of
national self-assertion. Acquiring these skills will not enable us to resist
globalisation but will better equip us to participate in the process.
Rhetorical protestations about national sovereignty emanating from
political practitioners who have over two decades abdicated sovereignty
over all aspects of development policy remains neither politically
credible or operationally meaningful. At the end of the day we have to
demonstrate to our development partners that resumption of policy
ownership is more than a slogan. We will have to demonstrate a capacity
to mobilise local resources, use local skills as well as enhance local
productivity and above all improve governance if the concept of
ownership is to graduate from rhetoric to reality.
Justice and Equity
The emergence of two societies
Our goals of democracy, secularism and nationalism will all remain
unsustainable if we cannot establish a more equitable society permeated
by a spirit of social justice. Whilst the constitutional commitment to
socialism meant different things to different people, this goal was
premised on the commitment to democratise economic
opportunities for the deprived majority of the population. Bangladesh did
not attain its independence through the goodwill of its masters but
through protracted struggle, sustained by the sacrifices of common
people. A democratic Bangladesh was thus, honour bound to build a
social order which gave common people a stake in the development
process.
Unlike many countries, including some in South Asia, at the time of our
liberation Bangladesh did not inherit an elite class of feudal lords or a
super-rich bourgeoisie. The emergence of extreme social and economic
disparities which characterises Bangladesh today was a post-liberation
phenomena driven by the externally driven policy agendas which guided
our economic policy. Such policy advise did little to accelerate
development or eliminate poverty but it did contribute to a process of
social polarization which has invested Bangladesh with a new elite,
many of whom have earned their wealth more by political access and
patronage than by their entrepreneurial skills. A society which

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maldistributes the rewards of development to a rentier elite will promote

neither growth nor equity. More important such a system perpetuates a
sense of unjust relative deprivation. Such a social order lacks popular
legitimacy and thus remains inherently unstable. Much of the social
anarchy which is permeating Bangladesh today derives from the feeling
in all segments of society that the fruits of independence have been
unjustly distributed.
Bangladesh’s unequal social structure is now perpetuating a process of
undemocratic politics where the deprived majority have little chance of
entering parliament and remain largely excluded from the tiers of local
government. Politics is increasingly becoming a rich man’s game played
with the objective of enhancing private wealth rather then to serve a
public purpose. A political system which effectively disenfranchises two-
thirds of the population remains fundamentally unstable because it denies
a political stake to those very classes who remain the ultimate defenders
of democratic institutions. No usurper could hope to seize state power if
they know that half-a-million working people would occupy the streets
of Dhaka and Chittagong to protect democratic institutions in which they
have a direct stake.
Building a just social order

To build a more just society we need to make our development agenda
more inclusive so as to widen the opportunities for the deprived to
participate in the development process and the market as both producers
and consumers. Such an agenda will serve to eradicate the moral crime
of poverty and stimulate as well as sustain growth because it will widen
the domestic market for indigenous producers. Such a redirection in
Bangladesh’s development agenda is a challenging professional and
political task which merits fuller discussion in another paper. To provide
a flavour of some of the issues which demand address in a more
inclusive development agenda we present below a selective rather than
comprehensive agenda for social reform:
Democratising human development

The emergence of two societies built around unequal access to education
and health care needs to be arrested. It is not enough to spend more
public money on primary education and health care if a small elite
monopolises access to superior private education or health care facilities.
A dualistic education system institutionalises disparities in lifetime
opportunities for upward mobility. Such a system ensures that those
privileged to receive an expensive private education will perpetuate
themselves as a ruling class whilst those who depend on public education
will always remain an underclass.
Europe’s social revolution after World War II was founded on
democratisation of education and health care built around public
provision of quality education and health care to all citizens irrespective
of income or social background. Bangladesh needs to follow this path. It
Unit-6 Page-352
would be unrealistic at this stage, perhaps unwise, to eliminate private

education. However, such institutions should be encouraged to provide
scholarships to the underprivileged so as to democratise access to these
institutions. Private resources may be supplemented by public funds for
financing scholarships for the deprived.
However, the main thrust in the democratisation of education should be
carried forward through an exponential improvement in the quality of
public education and health care from the primary to the tertiary level.
Such a public initiative will need to ensure that disparities in the quality
of public and private education are minimised. Such a democratisation of
education will not only demand more expenditure on public provision of
education but an upgradation of its governance which remains a much
more scare resource than money. As a beginning the government may
target 100 rural primary schools every year and invest in raising their
academic standards at least to the level of the private schools in Dhaka.
Such a programme is already, in some form, under implementation by
the Ministry of Education. It is to be seen whether such an upgradation of
rural primary education can be sustained within the prevailing
environment of weak governance. Better governance of education
cannot, however, substitute for poor motivation of our school teachers
and the lack of collective initiative by parents to enforce accountability
from the teachers. Thus, the quest for better education will need to
extend beyond the state and activate civil society to exercise their rights
as parents and citizens.
In upgrading our education system we cannot afford to neglect university
education. We must restore the opportunity for the children of poor
families to at least have access to our public universities to enable them
to compete for the best jobs on offer in society. Regretably Bangladesh’s
universities, once the cradle of our professional and political elite, have
been infected by all the maladies which have plagued the polity.
Universities have been politicised and factionalised at the level of both
teachers and students. Armed hoodlums occupy the halls of residence,
intrude into the development activities of the universities and have
destabilised the campus as organised gangs fight their turf wars for
private gain. Politics for these elements in the campus is a mercenary
activity used to serve private political and commercial agendas rather
than to serve a public purposes. The use of student muscle power as an
instrument of politics buys immunity from the forces of law and order for
these hoodlum. It is not surprising that the quality of public university
education in Bangladesh has deteriorated and parents who can afford to
do so are either sending their children abroad or into the proliferating
private universities. The crisis of our universities is thus part of our crisis
of governance and unless this is rectified this educationally driven
process of social disparity will be perpetuated into the future generation.
Upgrading technical skills

As the base of our public education expands and upgrades itself we
should aim to provide institutional facilities to enable youth graduating
out of rural schools who have limited opportunity to acquire marketable

School of Business
skills to broaden their employment horizons. The Bangladesh

government may intervene to consciously promote upward mobility by
setting up technical schools in every upazilla on the lines of such schools
in Germany, Japan and Republic of Korea. These proposed technical
schools should each aim to graduate perhaps 500 boys and 500 girls
every year, drawn from the poorer segments of society, who will be
equipped by the schools to operate a rapidly changing economy in the
21st century. Such technical schools should be well-equipped, staffed
with the best available professional skills and should calibrate their
courses to the needs of both the global and local market. This system
should widen and diversify economic opportunities for the poor,
deprived by both class and gender, to enable them to benefit from the
globalisation process.
Today in the age of the information revolution not every villager needs to
send their offspring to Dhaka for a better education. Enhancement in the
capacity of distance learning can provide village students with the same
knowledge base available to students in Dhaka. But this will require a
major investment in the telecommunications infrastructure as well as a
transformation in the techniques and institutions of education in
Bangladesh. This will need to not only train teachers to use the resources
of the information age but a transformation in the system of management
and motivation of public education.
Upgrading health care

Bangladesh has registered some gains in health. Its immunisation
programme has registered promising results. Its family planning
programme has raised the contraceptive prevalence rate (CPR) from
around 10% in the 1970s to 50% today which has helped to halve its
fertility rate in 20 years from 6.4 to 3.2. The absolute as well as relative
share of public expenditure going to health care has also increased in the
last decade. However all such gains stand to be neutralised by the
degeneration in the quality of our curative health care due to its poor
governance. It is this poor quality of care which is opening up major
social disparities in access to health care.
As in the case of education, primary health care should, therefore, be
provided at a level which is comparable to facilities on offer in the
private sector. It is clear that the better-off sections of society have come
to depend on private health care whilst the elite seek such care abroad in
India, Thailand, Singapore and in the West. This means that public health
care is exclusively used by those who cannot afford private care.
However, the public system carries heavy private costs paid to
functionaries within the public system. The public health system is
poorly governed which encourages rent-seeking and perpetuates a system
which is overloaded as well as poorly administered and maintained.
Under this system the quality of public care is so poor that it drives even
the deprived to seek more expensive private care. In such a system the
real costs of health care contribute to impoverish the borderline poor and
pauperise the hard core poor.
Unit-6 Page-354
Bangladesh thus needs a system of quality care for the deprived which
builds upon the comparative successes of the immunisation and family
planning programme. Such a system needs to ensure the effective
implementation of the new health care policy based on community
participation, prioritisation of preventative care and improved
governance of the system of curative care. This requires bigger
investments in public health as well as effective management.
The test of the new system at the village level will be measured by
whether the poor in rural Bangladesh are kept waiting long hours by the
doctor, can expect to be treated with respect in the local primary health
care centre, are not made to pay rents for realising health services; if
admitted to a upazilla hospital such patients should expect to sleep on
clean sheets, eat decent food and use clean toilets.
An upgraded health care system needs to be backed up by a system of
health insurance which provides both security and choice for the entire
population in Bangladesh. The development of a contributory health care
system based on insurance will serve to provide some stake to the users
in the operation of the system whilst reducing the fiscal claims on the
public exchequer. The insurance system pioneered by Gono Shasto
Kendro and other such insurance systems may be studied with a view to
designing a national system.
A stake for the deprived

Human development is important in its own right because it enhances the
capabilities of the deprived to both fulfil themselves and participate in
the market. If opportunities for the poor are to be enhanced we would,
however, need to move beyond enhancing their human development to
enable them to realise the full benefits which could be derived from
improved human capabilities. To this end we need to re-engineer our
institutions to provide the deprived with a stake in the development of
the economy. This involves taking the micro-credit revolution to its
logical conclusion by ensuring that every person eligible for such credit
has access to credit. This goal will demand not just the extension of
lending by micro-credit institutions but that our commercial banks
should also equip themselves to provide micro-credit to anyone who
needs it. Micro-credit will thus need to be integrated into the formulation
of monetary policy so that it can be served by the mainstream banking
system. Redirection of the lending practises of our commercial banks
should be backed by policy and institutional arrangements to relocate
credit from large defaulters to the commercial banking system to the
more creditworthy micro-borrowers. Such a relocation of credit would be
consistent with both market efficiency as well as the goals of national
policy where credit to the deprived need not remain the exclusive
concern of Grameen Bank or the NGOs. To redirect commercial bank
credit to the deprived will, however, need more than a change in
monetary policy and will have to address the crucial problem of
misgovernance and weak regulation which has compromised the viability
of our banking system.

School of Business
Our financial system will also need to be reconstructed to mobilise the

savings of the poor to finance investments both in the corporate sector
and in corporatising the rural economy. Savings of these segments,
mobilised by the micro-credit sector alone would be in the range of Tk. 5
billion. Part of these savings should be put to work, leveraged by
commercial bank financing to be used to buy a corporate stake for the
deprived in the modern production and export sector. Furthermore, since
the assets of micro-credit institutions have in large measure proven to be
relatively secure income generating assets, this credit could be
securitised and marketed in the domestic as well as international capital
markets. Such a prospective exercise is already under review in the
Grameen Bank which thereby hopes to tap a wider resource base at the
national and global level to underwrite the expansion of its micro-credit
operations in Bangladesh.
As the rural poor are integrated as stake holders, producers and
consumers into the corporate sector, the rural economy needs to develop
its own unique corporate bodies, such as Grameenphone, designed to use
local savings and attract outside capital. This will need corporate entities
which link micro-producers using micro-credit with national and even
global markets. This approach could both build corporate marketing
entities for small producers as well as invest in value addition for
primary producers as has been done by BRAC in setting up the Aarong
milk processing facility.
Working people in the urban areas, particularly working women in the
RMG sector, should also be given a stake in the enterprises where they
work. A more just society would need to recognise the contribution of
these rural women, drawn from deprived families, who through the value
added by their labours, provide most of the net foreign exchange
earnings accruing to Bangladesh’s export sector. This recognition of the
contribution of working women should be provided by accepting them as
partners in the development process through giving them an equity stake
in the factories where they work. This stake could be funded by bank
loans in the same way that commercial banks finance share purchases by
the elite of Bangladesh. Such a move to broaden the ownership of
corporate wealth need not limit itself to the RMG sector but should be
extended to other sectors of the economy. In a society where public
credit is a critical factor in facilitating participation in the market the
state exercises responsibility to use its own resources to widen the
ownership of wealth so as to substantially democratise opportunities for
access to the market.
The Government of Bangladesh should also recognise the contribution of
these RMG workers in stimulating our exports by ensuring that the
working conditions in all RMG units is at least in conformity with the
provisions of the prevailing laws of the land. Since the concerns of
working women extend outside their work place the government should
recognise the societal contribution of these women and invest in the
provision of improved housing, transport facilities and the security of
these women. Such measures to provide security and an improved
quality of life for these women would stimulate both their will and
Unit-6 Page-356
capacity to improve productivity in the RMG sector which could thereby

expect to enhance Bangladesh’s export competitiveness. In Bangladesh
justice and efficiency are not only fully compatible but remain
symbiotically linked.
In the final analysis the quest for justice in Bangladesh in the next
millennium should aspire to gradually erase the dividing line between
labour and capital. A sustainable democratic system demands a cohesive
social order which does not divide a society into haves and have nots. If
we aspire to build a more inclusive society in Bangladesh we need to
give every household a stake in the development of the economy whether
it is through title to land or permanence of tenancy rights or as partners in
corporate enterprises. The fruits of growth need to be shared and
incentives provided not just to a small class of property owners but to all
segments of society. Such a system of incentives will help to tap the
creativity and work potential of a much broader segment of the
population, will widen their income earning opportunities and graduate
them from recipients of public largesse into full partners in the
development process. Within a more just framework of development
which integrates issues of asset ownership with market access,
production growth and poverty eradication, equity and economic growth
can be made part of a holistic agenda for both sustainable development
and sustainable democracy.
External relations
In building a sustainable domestic order our leaders will have to also
build a workable pattern of relations with our neighbours through the
framework of SAARC. Both geography and history have linked
Bangladesh’s prosperity and security to the nature of its relations with its
neighbours. Bangladesh’s future agricultural development, depends in
considerable measure on the enhancement of water resources inputs and
in its capacity to cope with floods. This degree of water security can, in
the long run, only be realised through cooperation with India and Nepal
from where our principal rivers originate. Our energy needs will also
demand an integrated solution which links the energy production
capacity of Bangladesh with its immediate neighbours and even beyond
to the energy resources of West and Central Asia through a shared
distribution network. Furthermore, Bangladesh’s transport system will
need to be integrated not just with our South Asia neighbours but with
South East Asia and China through the Asian Highway and Railway
network. In order to enhance and develop Bangladesh’s production
potential we will need to have access to the wider South Asian market
particularly to India, through the mechanism of the South Asian Free
Trade Area (SAFTA). At the same time we will have to equip ourselves
to cope with the gradual integration of our economy into a South Asian
economic community.
Bangladesh’s principal external policy challenge will therefore be to
develop our relations with our neighbours, particularly India, into an area
of opportunity rather than conflict, on the basis of mutual self interest.
Such an agenda will be immeasurabily facilitated by a dynamic well-

School of Business
functioning economy and a working democracy which sees politics as a

positive sum game where our relations with our principal neighbour are
not treated as an extension of our dysfunctional domestic political
process. Bangladesh will therefore need to directly address the issue of
external relations particularly with India, as part of a national debate
where such a relationship can be seen to originate out of a political
consensus rather than serve to aggravate domestic political divisions.
Conclusion
Building upon our assets
This paper is designed to demonstrate that Bangladesh does indeed
command the potential to build a sustainable development process and
democratic order for the 21st century. In identifying possibilities for the
new millennium the approach was to focus on the art of the possible.
Thus in each area of discussion I have attempted to anchor the
opportunities for change on assets or initiatives already in place to which
some value addition was deemed possible. The prospects for the
consolidation of democratic and secular politics derive from the
objective reality of a two-party system located in a relatively
homogenous society. Scope for a reassertion of nationalism derive from
our visible strengths in export growth and domestic resource
mobilization which have contributed to the decline in aid dependence.
The new opportunities offered by the globalization process, are likely to
sustain our export growth. The quest for social justice is grounded in the
positive gains registered in micro-credit, widening of educational
opportunities, the successes of the immunization as well as the family
planning programs but above all in the resilience, industry and enterprise
of the common people of Bangladesh. The visible production potential as
well as credit worthiness of the deprived, the contribution of rural
women to the dynamism of the RMG sector and the emergence of a
number of globally recognized institutions targeting the deprived
demonstrates both institutional commitment as well as capacity to
mobilise these constituencies of the underprivileged.
In seeking to build our future upon our revealed capacities and
experience we need to take account of the possibility that such gains can
also be undone mostly on account of Bangladesh’s dysfunctional
political processes, persistent malgovernance and increasingly unjust
social order. The prevailing political practises appear to emphasise
private and party needs over the public interest, as a result the machinery
of state is becoming increasingly anarchic and predatory. The
progressive degeneration in the social commitment of the state has led to
a configuration of social power which has elevated a small, affluent elite
into positions of political influence which has empowered them to
monopolise resources and remain immune from both the laws of the land
as well as of the market.
Unit-6 Page-358
The dominance of the two party system in the Bangladesh polity

insulates the two parties from electoral challenge so that their
dysfunctional politics can perpetuate itself over successive regimes. At
the same time the power of Bangladesh’s new elite has enabled them to
use their resources to consolidate their dominance of our electoral
institutions at the expense of excluding the more resource-deprived
segments of society. This incestuous link between power and wealth is
compromising the representative character of the democratic system in
Bangladesh. At the same time, women remain underrepresented in
Parliament even though they are now better represented at the local level.
Successive parliaments have thus remained increasingly alienated from
their constituents, including the deprived as well as women.
Mobilising civil society
Can a more enlightened and pro-active civil society help to reconstruct
our political parties and contribute to empowering the deprived to
challenge the social dominance of the elite? Those with both power and
resources at their command have the capacity to deter, often by not very
democratic means, any challenge to their authority. This means that the
costs of such a civic mobilisation remain high whilst the returns are far
from assured. Much will depend here on the sense of outrage which will
serve to raise the threshold of risk and pain willing to be borne by the
citizens of Bangladesh. Whilst civic activism has increased in recent
years it is far from clear that the sense of outrage has reached a point
where issue-focussed activists are willing to expose themselves to a more
intensive involvement in advocacy by joining a major political party and
challenging the authority of its power brokers.
Some civil society activists have indeed evolved from social activists to
party political activists. But such persons tended to be in a minority so
that their social motivation tends to be eroded by compromises forced on
them by the realities of party politics. Their experience discourages more
such persons from entering politics when in fact politics needs a larger
proportion of such social activists who can generate enough critical mass
to influence the culture of party politics.
Under the circumstances feasible politics suggests a strategy of
incremental mobilisation. This may begin with issues of urgent public
concern where the capacity for resistance is relatively weaker. Civil
society mobilisation around such issues as improving the quality of
primary education and health care services or cleaner urban
neighbourhoods could yield high returns because no strong social forces
are likely to strongly resist these agendas. Resistance from unions of
primary school teachers and health sector employees may be
forthcoming if these employees are to be made accountable to local
citizens. But such unions are only powerful when mobilised to challenge
administrative authority in Dhaka. Their capacity to resist the
mobilisation of parents of school children in a union in Gaibandha or of
citizens seeking health care in rural Comilla is likely to be much weaker
particularly if the local elected government and the national government
do not give these public employees their political backing. Such civic

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mobilisation will need to be reinforced by a countervailing capacity of

citizens to take over schools and health care centres and run it themselves
or to organise themselves to clean the street in their neighbourhood. It is
not to be ruled out that a future regime in office may be persuaded to
politically back and even to institutionalise such interventions. Such local
initiatives can also be escalated to wider mobilisations at the upazilla,
district and even national level.
In other areas such as protecting the environment against polluting
autorickshaw owners or shrimp cultivators damaging the environment for
paddy farmers, where private financial interests are involved, the stakes
will be higher and the capacity for resistance stronger. Such
mobilisations would need to be more willing to take risks and accept
some pain. However, I cannot see the political or business elite of
Bangladesh opposing a sustained citizen’s mobilisation to take two-
stroke autorickshaws off the street or to compel Eastern Refinery to de-
lead the petrol it produces or to enforce some discipline in the flow of
traffic in our urban areas.
If we move upscale to challenge toll collectors and those hoodlums who
terrorise our campuses the risk quotient increases largely because the
challenged parties are often equipped with arms and better integrated to
the mainstream political parties so that they can use such arms with
relative immunity from the law enforcement agencies. However, as and
when citizens have rallied to protest against weak law enforcement the
government of the day has had to demonstrate some willingness to
enforce the law. Unfortunately, such citizen’s coalitions disperse after an
initial mobilisation thereby relaxing pressure on the government enabling
the criminals to resurface after a short period of hibernation. Thus, for
example, a credible civic mobilisation to restore order in our universities
would demand the emergence of a coalition of parents, students, teachers
and leading citizens, working in collaboration with the university
administration, which works together on a sustained basis until all the
hoodlums are not only driven out of the halls of residence and campuses
of the universities but are kept out on a long term basis. Such a
mobilisation will demand political skill to build and sustain a non-
partisan coalition, demonstrate high risk taking capacity and above all
perseverance to see the fight through to the finish.
Can similar mobilisations challenge bank defaulters, energy thieves,
corrupt senior bureaucrats and politically influential persons? As the
issues become more complex and the political influence of the affected
party increases the risks to citizens leading a mobilisation increases as
does the time which needs to be invested in taking the exercise through
to a positive conclusion.
A politics of the feasible

The nature of the problems indicated above suggest that particularist
coalitions of citizens focussing on specific issues need to be assembled
around people willing to invest time and to effort to see the mobilisation
through to its eventual conclusion. In each such coalition a smaller
Unit-6 Page-360
number of people would need to commit themselves on a full time basis

to sustain such struggles. Do we have such dedicated citizens who feel so
strongly about particular issues to take leave of their vocations, even if
necessary, of their families, to embark on such a risk prone enterprise?
Thus far, there is little evidence of such persons willing to commit
themselves to the finish though a much larger constituency is likely to be
available to support episodic mobilisations demanding small doses of
effort and involving moderate risk. If civil society is to take itself
seriously it will have to demonstrate a capacity to produce even a small
number of such coalitions committed to see a particular mobilisation
through to its final outcome.
Whilst issue-based mobilisations remain a feasible option political
activism by civil society remains much more problematic. The time and
risk involved is infinitely higher if one aspires to join a mainstream
political party and engage oneself in an endeavour to upgrade the quality
of the party. To be effective any such effort would demand that enough
people join a party to exercise some weight in the party. Those entering
politics should appreciate that they are not entering politics in a vacuum
but have to interact with political workers who have been in the field a
long time whilst such civil society members were comfortably engaged
in their profession. Many of these workers have long records of party
loyalty, material sacrifice and persecution by autocratic regimes. These
workers have, over the years, earned the loyalty of not just their party
associates but also the trust of their constituents who look to them in
moments of need. Whilst some of those workers could be categorised as
corrupt and/or as musclemen they too retain a degree of credibility in the
local community through their dependability in moments of the crisis and
cannot, therefore, be disregarded as political liabilities. Any newcomer to
local politics, no matter how professionally emminent or morally upright
they be should not therefore aspire to displace party cadres active in local
politics but should learn to work with them. If politics is to be seen as the
art of the possible we will have to recognise the coexistance of the good
and the bad elements in the politics of Bangladesh with such qualities
often co-existing in the same person. The real task of political
reconstruction in Bangladesh is to see that the good more often prevails
over the bad in influencing the course of politics.
As with all other professions political novices will have to prove their
own credentials to the people through work at the constituency level. It is
arguable that such newcomers, will contribute to the preponderance of
better influences in politics by bringing in new ideas, demonstrating
commitment, patience, humility and a capacity to work with no
expectation of immediate national advancement from their presence in
politics. Such newcomers would hope to thereby earn the confidence of
local people as well as party workers. Through such service they should
be able to build up loyalty amongst the party cadres, earn the respect of
senior workers and may even influence the leadership by demonstrating
their use value to the party. Few people in mainstream politics in
Bangladesh today demonstrate the qualities indicated above so that such
a qualitative change in political activity, even if originating from

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newcomers, would not go unrecognised. Political leaders are not totally

devoid of good sense in failing to recognise a political asset when they
see one. Gresham’s Law, whereby bad people drive away good people
from politics may be at work in Bangladesh but its applicability
originates in no small measure from tendency of those with something to
offer to treat politics as a spectator sport to be shunned by decent people.
Individual political enterprise will however not be enough. The point at
issue is to impact on the culture of politics where entrenched forces at all
levels remain strong, have a high political stake and material interests to
defend. Here individuals who join political parties will need to draw
upon the backing of a mobilised civil society who are willing to engage
in the high risk task of influencing political action. These new political
activists are needed to serve as a bridge between civil society and party
politics where the concerns of the citizens can be brought to bear on the
agenda and behavior of political activists. The problem with involving
civil society in politics will, however, have to address the reality that
civil society organisations of teachers, lawyers, doctors and engineers,
themselves remain divided along the faultlines of Bangladesh’s bipolar
political system. As a result few people command the credentials to reach
across the political divide and assemble a consensual coalition of citizens
committed to a public cause rather than a partisan agenda. In such a
context if civil society is to command sufficient authority in the polity
political identities will periodically need to be subsumed in the service of
a bigger cause and will need to build their own issue-based consensus in
the same way that politicians are expected to do so. There is something
absurd if not tragic about professional colleagues, with no real
ideological contradictions to divide them, becoming even more rabid in
their mutual antagonisms than the political parties who patronise them.
Such political contradictions do more than immobilise civil society, they
also undermine professional institutions. Thus, dysfunctional politics
tends to perpetuate dysfunctional institutions.
Towards a just society
Whilst improving the quality of politics is important the more vital task
remains to democratise politics as well as access to resources in a milieu
where strong vested interests with much to lose occupy positions of
power and influence at all levels. To challenge these forces in national or
even local government elections is costly as well as fraught with risk. In
contrast, assembling coalitions of the deprived, many of whom remain
captive to vertical patron-client relations with the powerful, is time
consuming and hazardous to the deprived who may lose what crumbs are
on offer by their patrons for demonstrating the temerity to challenge the
existing social order. Thus, the agenda for building a more just society
needs to reach out to a much broader constituency built up through
empowering the deprived, including women, who must be politically
mobilised to struggle for their rights. In this task civil society can be the
ally of the deprived but it cannot be their proxy. A discussion on the
processes and implications of empowering the deprived is a major
exercise which merits independent address in another paper.
Unit-6 Page-362
This paper has argued that the new millennium holds out enormous
promise for Bangladesh. But to realise this promise will demand
structural adjustment not just for the economy but in our politics and
society. Such a process of structural change is beyond the capacity of any
donor and will have to be an indigenous exercise. In seeking such
political change civil society will have to play a much more active role
than before and will have to move beyond social issues to address
political concerns. In playing a more pro-active role in the polity civil
society will have to increasingly demonstrate its commitment to
prioritise societal over personal concerns. Over the years Bangladesh has
paid a heavy price for the privatisation of our sense of public purpose. If
Bangladesh is to establish itself as a dynamic and just nation state in the
next decade a restoration of a sense of public purpose within civil society
remains indispensable.

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Review Questions
 What are the gaps between promises and reality, according to

Sobhan? Do you agree with his line of analysis?
 “A more proactive civil society and a reorientation of politics and

priorities will set the country into a path for democratic governance
and a just social order” – analyse the statement.
 Do you subscribe to the view that a strategy of a more egalitarian

development is not only socially just, it would also make Bangladesh
more competitive in a fast globalizing economy?
Unit-6 Page-364

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UNIT 6

GOVERNANCE, ROLE OF THE

Analytical Concepts: A Snapshot

Economic Development and Planning Page-295

Governance structures are characterised by agency relationships. The

outcomes appear to be accurate information, credible commitment,

 First, markets can hardly function in the absence of legal

 Second, the government has a major role to play in facilitating

 Third and more controversially, the market mechanism is dependent,

Economic Development and Planning Page-297

globalising economy, a view largely shared by social-democratic

The Provision of Public Goods

Democracy, governance and growth

Economic Development and Planning Page-299

organisations is a more recent, but growing, preoccupation. On institu-

Economic Development and Planning Page-301

Questions for Review

14. Bardhan, Pranab (1998). The Political Economy of Development

Economic Development and Planning Page-303

31. Buchanan, James (1975), “A Contractarian Paradigm for Applying

Bokros and Jean-Jacques Dethier, editors. Washington, DC: The

Economic Development and Planning Page-305

and Individualist Societies,” Journal of Political Economy, vol.

79. International Monetary Fund (1997b). Good Governance: The

Economic Development and Planning Page-307

editors, Handbook of Development Economics, volume IIIA,

112. Olson, Mancur (1965). The Logic of Collective Action.

Economic Development and Planning Page-309

129. Putnam, Robert (1993), Making Democracy Work. Civic

Decentralization in Government: An Incomplete Contracts

Economic Development and Planning Page-311

164. Williamson, Oliver (1996), The Mechanisms of Governance. New

Lesson 2 : Role of the State and Market

 understand basic concepts relating to the role of state;

The View from the Market: Three Conservative Propositions

 Government is unnecessary because anything the government can

 Government is ineffective because anything the government does,

 The incentive structures inherent in public institutions imply that

Economic Development and Planning Page-313

very least, inhibit productive economic activity by taking resources

 Special interest groups would, without constitutional bars, seek to

 The opposing public interests were too diffuse to successfully oppose

(Stiglitz, 1987)5. Third, rent-seeking activities tend to be concentrated in

Reading of the Lesson

Economic Development and Planning Page-315

AN INSTITUTIONALIST PERSPECTIVE ON THE ROLE OF THE STATE -

2.1. The Unholy Alliance: Neoclassicism and the Austrian-

Economic Development and Planning Page-317

the irresponsible, whether madman or child (Friedman, 1962, p. 34). A

2.3. Concluding Remarks

Economic Development and Planning Page-319

Libertarian tradition, which provides the political rhetoric. This, in turn,

3. Some Institutionalist Criticisms of the Foundations of the Neo-

Economic Development and Planning Page-321

the ratio of central government expenditure to GNP in 1989 was 16.9%,

Economic Development and Planning Page-323

embody different assumptions about the institutions and the political

to a Schumpeterian because it lacks technological dynamism. The point