By Mary Shirley*
At a time when top-down, macro analytics were the norm, Oliver Williamson challenged economists to analyze micro institutions from the bottom up to understand better the barriers to growth in weak institutional environments. When many development economists were modeling paths to hypothetical (and unattainable) ideals, Williamson argued for detailed comparative analysis of economically and politically feasible alternatives. Williamson provided more than advice; he gave us tools to test empirically a rich set of hypotheses about the micro impacts of flawed and perverse institutional arrangements. Thanks to his research, we can judge institutional environments and reform efforts not just by the broad characteristics favored by development practitioners such as the World Bank, but by the real world behavior of investors.
Consider, for example, governments run by politicians and bureaucrats with feeble constraints on their discretion who cannot credibly commit not to act opportunistically to confiscate returns or assets. Under such circumstances, some investors are a privileged and protected part of society, but many, probably most, are not thus advantaged. Williamson’s analysis of investment in specific assets implies that such vulnerable investors will try to protect their resources by investing in less durable, more mobile, and less conspicuous assets. They will shy away from the specialized, durable investments required by high technology sectors with their need for enforcement of intellectual property rights. They will rely less on contracts and more on spot markets, or try to incorporate all transactions under their ownership, or in extreme cases, move their funds out of the country entirely.
I was at the World Bank when Williamson (1995)** admonished us to avoid “lapses into ideal but operationally irrelevant reasoning”. Instead we should be “insisting that all of the finalists in an organization-form competition meet the test of feasibility, symmetrically exposing the weaknesses as well as the strengths of all proposed feasible forms, and describing and costing-out the mechanisms of any proposed reorganization.” He also called for respect for politics in determining feasibility. He was swimming against the current, since at that time the Bank’s mode of operation was unhesitating pursuit of “best practice” regardless of country circumstances. Instead of respect for political feasibility, the Bank sought the support of sincere but often politically neutered “reform champions” or admonished governments about an elusive “political will”.
Williamson’s advice was profoundly relevant and unerringly correct. And, like so much wisdom that defies current practice, widely ignored. Ignored not just because it went against the conventional wisdom of the moment, but also because comparative microanalyses are so demanding. Things have changed, and the utility of Williamson’s transaction cost approach to development economics has been abundantly demonstrated. How much that has changed the approach of development economists I leave for others to judge.
Suffice here to say that in the development field, as in the rest of his intellectual life and work, Oliver Williamson demonstrated the relevance of his theories, the depth of his insights into the real workings of the economy, and the steadfastness of his courage in the face of stubborn conventions. He was truly an economist for all seasons.
*Mary Shirley is President of the Ronald Coase Institute. She served as President of SIOE (then called ISNIE) 2003-4.
**Oliver Williamson, “The Institutions and Governance of Economic Development and Reform,” Proceedings of the World Bank Annual Conference on Development Economics 1994, Washington, DC: The World Bank, 1995.