May 1996
ON THE PROBLEM OF APPROPRIATION
A contribution to the post-adjustment debate
Bertin Martens[1]
NOTE: In the adjustment debate, the term "ownership" has often been used in the sense of "intellectual property rights" to indicate the extent to which the local managers of an adjustment programme have "appropriated" the principles and measures and are committed to their implementation. In this paper, the term "ownership" will be used in the wider and more traditional sense of "appropriation" of goods and services, of costs and benefits, including intellectual property rights.
Abstract
This paper argues that the poor growth performance of many developing countries and economies in transition can be partially attributed to a lack of clear and enforcable private appropriation rules that imposes heavy transaction costs on private wealth accumulation (clientelism, corruption, fraud, etc.) and constitutes a disincentive for entrepreneurship and investements. Such practices are often dismissed with a negative moral judgement but it is shown here that these are economically rational reactions for low-complexity societies faced with a sudden acceleration in the pace of innovation. The proposed approach differs from the New Institutional (contractual) Economics School to the extent that it considers contractual developments as inherently linked to, and inseparable from, economic development at large.
An analysis of low-complexity gift-based economies explains how the introduction of innovation increases complexity and leads to the emergence of transactions and private accumulation, together with a shift from collective to contractual obligations. When the pace of innovation is suddenly accelerated, retrenchment into collective security obligations may explain the persistence of clientelism, fraud, corruption and other apparently wasteful economic practices.
In the initial stages of evolution, contractual obligations are very poorly specified and/or difficult to enforce because of strong social resistance factors. It is in the economic interest of most citizens of low-complexity societies to impose heavy transaction costs on defectors from the collective obligations system (private entrepreneurs) to discourage them and maintain a credible collective insurance system as long as possible.
Structural adjustment programmes have only partially addressed this issue and some implications for the re-design of transition and development processes are outlined. A major conclusion is that economic development can be not successfully achieved without changes in socio-cultural values. Facilitating access to information may be a crucial factor in this change.
1. Introduction
The development aid experience over the last four decades has been unsatisfactory. There is not much to show for in most parts of the developing world, especially not in Sub-Saharan Africa, in terms of sustainable improvements in living conditions for a majority of the population. Do we have a coherent set of explanations for the poor growth performance of the developing countries and the apparent low efficiency of the donor's aid-dispensing system ?
Like most social phenomena, development aid went through different "fashions" during these four decades. We can identify two "long waves" in development fashion, each accompanied by a series of short-term disturbance.
The 1960s and 1970s could be characterised as the "investment wave". Based on neo-classical growth models (Solow, Harrod-Domar) that became very popular in economics towards the end of the 1950s, underdevelopment was perceived simply as a lack of investment. Whatever level of GDP per capita could be achieved by mobilising the required amount of investment resources. As poor countries had little savings to invest, resource mobilisation should be boosted by transfers of savings from rich to poor countries. Development aid for investment projects was born and became the almost exclusive domain of financial managers and engineers - occasionally disturbed in their tasks by politicians. A number of relatively short-term fashion changes - rural development, appropriate technology, infrastructure, basic needs, human resources, etc. - did not fundamentally alter the investment-based approach.
Towards the end of the 1970s and in the early 1980s, cracks started to appear in this construction. Dissatisfaction with the pace of development and the growing impression that a number of structural rigidities prevented the full realisation of benefits from investment programmes and projects, led to the birth of a new long wave called "structural adjustment". This wave was carried by a widespread return in the Western world of the 1980s to neo-liberal politics and neo-classical economics. Again, short-term fashion changes have been grafted on this wave - trade liberalisation, social dimensions of adjustment, privatisation and deregulation - without fundamentally altering the approach.
In the early 1990s, the spectacular dismantling of the political and economic structures of former communist regimes in Eastern Europe and the FSU has given a strong new impetus to the structural adjustment wave, re-baptising it as "transition economics". At the same time, project financing has been left more and more to private sector initiatives while official aid has focused increasingly on structural issues, creating an enabling and more attractive environment for private investments.
However, there is growing awareness that transition in many of the former communist regimes is going to take much longer than the originally forecasted couple of years. There is also growing dissatisfaction with the poor growth performance of Sub-Saharan Africa. Private investment has not accelerated significantly after fifteen years of structural adjustment (World Bank, 1992, 1994). Question are being raised again about the wisdom of the prevalent adjustment approach. Why does it work in some countries and fail in others?
Many economists claim that they know all the stabilisation and adjustment recipe's for successful economic development. But politicians, often with the support of large parts of the population, stubbornly refuse to implement them. There seems to be no end to populist spending sprees and inefficient economic practices, not to mention indulgence in wasteful corruption, nepotism and clientelism. Several authors have pointed an accusing finger to these practices as the source of Africa's economic woes (Mbembe, Bayart, Kabou). But worst of all, the perpetrators of these "evil" deeds seem to enjoy it. Are economists puritan preachers in a devilish economic world, advocating a joyless economy, as Scitovsky (1976) claims ? If not, why do all these "bad habits" persist if they fly in the face of economic wisdom?
The short answer is that private costs do not necessarily equal social costs and individuals will attempt to drive a wedge between the two to their own advantage, that is privatising benefits and socialising costs. But this answer is not very helpful. A more detailed analysis is required to explain how opportunities emerge to widen the wedge between private and social costs and benefits and what can be done about it.
This paper starts from the assumption that the slow pace of development and transition is not due to faulty economic theories but to the incompleteness of the economic approach. A major incompleteness resides in the fact that we generally ascribe these "social evils" to lack of morals, un-ethic and even downright criminal behaviour. We fail to see that individuals may have good economic reasons to persist in apparently wasteful and socially inefficient behaviour. The purpose of this paper is to discover some of these reasons by putting economic transactions in the wider context of the evolution of social interaction.
To do this, with take a long step backwards in social evolution, into the domain of economic anthropology. An analysis of "primitive" low-complexity economies[2], characterised by gifts and the absence of transactions, helps to explain the almost complete absence of private appropriation rules. We will show how the introduction of innovation and knowledge accumulation increases complexity and differentiation in the economy and leads to the emergence of the profit motive, economic transactions and accumulation of goods. This evolution towards higher complexity is accompanied by a shift away from gift-based personal obligations and towards contractual rights arising from negotiated transactions. When a low-complexity society is suddenly brought in contact with a high-complexity society, retrenchment into collective security and personal obligations is an economically rational reaction for the former. High transaction costs are imposed on defectors from the collective security system, further amplified by strong social resistance factors. This may explain the persistence of clientelism, fraud, corruption and other apparently wasteful economic practices in transition and developing economies, and indeed in high-complexity societies. Some conclusions are drawn for the management of transition and development processes.
The proposed model differs from the contractual approach to institutions and development, promoted by the so-called New Institutional Economics school (Williamson, 1995). The new institutionalists have indeed pointed out that incompletely specified and/or enforced contracts constitutes a strong discentive to economic development. However, they tend to consider contracts as "a job to be done", independent from the stage of economic evolution of society. This paper argues that the evolution of transaction costs attached to negotiating and enforcing contractual rights is strongly linked to and inseparable from economic evolution itself.
2. The economic characteristics of low-complexity societies
We start with an analysis of social interaction in a transaction-less low-complexity "primitive" society. Out of the vast amount of literature on economic anthropology, we have selected two descriptions of the functioning of "primitive" societies. The first, Marcel Mauss' "Essai sur le don" (1929) is one of the earliest attempts in anthropology at a cross-cultural comparison of the key economic characteristic of low-complexity societies, that is the prevalence of gifts over transactions. In the second, "A theory of primitive society", Posner (1980) constructs a descriptive economic model of gift-based social interaction.
Mauss examines the functioning of widespread "gifts" systems in Polynesian societies and the "potlatch" phenomenon among North-American Indians. He also traces the history of "gifts" in Roman, Greek and Hindu society, including they gradual transformation of "gifts" into "transactions".
According to Mauss, gifts are not an expression of "primitive generosity" but a very competitive way of obliging other persons and groups towards the donor. The "spirit" of the owner is supposed to remain in the given object and keeps on pestering the receiver until the latter enables the "spirit" to return to the original owner. This is done when the receiver reciprocates with another gift, which is used by the "spirit" as a vehicle to return. Alternatively, the gift - and the problem of the "spirit" - can be passed on to another person or group. A skilful receiver can also put his obligations to good use by returning a more valuable gift to the original owner, thereby putting the latter under obligation. Under these circumstances, gifts were often received unwillingly in primitive societies, after long negotiations to induce the recipient into accepting them. They could not be refused either, short of creating social tensions and even ostracism. In extreme forms, observed among some North American Indian tribes, gifts could take the form of "potlatch" ceremonies whereby large quantities of valuable goods were destroyed in honour of other persons or groups, so as to oblige them. The "receivers" of this destruction could only get rid of their obligations by destroying even more goods.
Instead of using "spirits" as explanatory variables, there are good economic arguments for such behaviour. In every society, individual behaviour aims at reducing uncertainty and enhancing survival chances. Material goods and insurance policies help achieving this aim. In low-complexity societies, individuals tend not to use goods for bilateral transactions[3], material accumulation and direct enrichment but rather for unilateral gifts. Their purpose is to foster personal ties, which act as an insurance policy, by putting the recipients in an obliging position. In high-complexity modern societies, remnants of this gift behaviour remain, for instance in family parties where ever richer and vaster quantities of food have to be served in ever more expensive settings, to acquire social status. Failure to do so would result in social ostracism, the very opposite of personal ties and status.
Still according to Mauss, Greek and Roman society where among the first to make the transition from gifts to transactions. Persons were separated from their goods: goods did not carry the "spirit" of the previous owner anymore and did not oblige the new owner into returning that spirit through another gift. Moral (inter-personal) obligations were turned into contractual obligations. Contractual rights were attached to goods, including a negotiable exchange value that specified exactly the compensation that was expected from the new owner. Personal ties between individuals were transformed into more contractual ties with a wider range of variability. The introduction of "money" as a way to erase the contractual obligations was a logical step that completed the transition from personal to contractual exchanges.
Posner (1980) was among the first to analyse the economic rationale behind gift-based exchanges in primitive or low-complexity societies. He defines "primitive" as lacking literacy, one of the most important means of communication. His central hypothesis is that the lack of modern communications technology results in high information costs and uncertainty. Other assumptions in his model are: the absence of effective governance structures and thus of fiscal income redistribution mechanisms; limited technical knowledge and no capital or equipment goods; a limited range of perishable consumption goods and no durable goods; and negligible private gains from innovations. The absence of durable consumer goods and capital goods frustrates attempts at accumulation of individual wealth and thus discourages transactions. The only meaningful use of surplus production in such an economic setting is to buy insurance against uncertainty. Mutual insurance is bought through personal alliances, forged by the prestige and obligations that gifts of surplus production earn. Apparent generosity, including the absence of a profit motive and interest charges on "loans", are behavioural characteristics that oblige others towards the generous donor and "buy" him insurance against human misdemeanour, natural calamities, etc.
The logic of Posner's model is that, in low-complexity societies, (a) the high cost and scarcity of information and (b) the absence of possibilities to accumulate wealth, result in high uncertainty for individuals, which they try to overcome by buying collective insurance with their surplus production. It is essentially a static model that explains the existence of gifts but not the transition from gifts to transactions. I have three comments on this model, in ascending order of importance:
First, assuming the absence of effective government and fiscal redistribution mechanisms is unnecessary and even confusing. A collective gift-based insurance system could already be considered as a primitive form of government, even though it may not be based on institutionalised governance structures. The anthropological literature provides ample evidence of the highly formalised nature of gift-systems, operating through very strict rituals and elaborate evaluation rules to determine the extent of the obligations involved. The fact that there is no socially acceptable escape from this system makes it a de-facto effective means of government.
Second, Posner's assumption on high cost and scarcity of information may not be the key issue. Even if primitive societies would have zero-cost access to high-tech weather forecasts, satellite-tracking of migrating herds and sonar-based fishing, food security would still remain subject to stochastic variations in weather conditions and migration trajectories of herds and fish. This season's best information on food availability has no predictive value for next season's food availability. It is the absence of accumulation possibilities, not the absence of information, that drives individuals away from transactions into gift-based collective insurance.
Third, and most importantly, scarcity of information and absence of accumulation and transaction possibilities are strongly and positively correlated phenomena and could be identified as the single cause of uncertainty in low-complexity societies. Low information density results in a more symmetrical and homogenous distribution of available knowledge, less differentiation and specialisation among individuals and thus lower transaction potential. Low information density also implies less technical possibilities - and less pressure - to store information algorithms outside the human brain in capital or equipment goods and thus less potential for accumulation. A gradual increase in information density could help to explain the transition from gift-based to transaction-based economics and produce a more dynamic version of Posner's model. These arguments are further examined and formalised in the next section.
3. A model of a low-complexity society
By definition, low-complexity societies have accumulated only a limited amount of knowledge through learning processes and, above all, have stored comparatively few behavioural algorithms in equipment goods[4] and social institutions. Society's collection of behavioural algorithms is spread homogeneously, with little diversification and specialisation among its members. The available knowledge and technology is generally known.
A formal model of a primitive low-complexity society could be build on the following assumptions. Consider an economy at a very low technology level and without innovation. All knowledge is a pure public good, available at zero cost to all members. It produces only one perishable product (Q), food, of which each citizen needs a fixed amount Q* for survival. The only factor input in production is labour (L), with constant returns to scale. The production function also includes a stochastic variable (E), covering environmental conditions such as weather variations, trajectories of herds and fish, occurrence of diseases, wars, theft, etc. E = 0 is the "normal" state of the environment. The food production equation looks as follows:
(1) Qt = [[lambda]] Lt + d Et
Since the expected value [[epsilon]](Et) = 0, the expected value [[epsilon]](Qt) = f(Lt) only. Absence of innovation and a homogenous distribution of available information and technology implies that for all agents i in society
(2) Qi / Li = [[lambda]] constant across time and agents
The objective function of each agent is to maximise survival probability or to minimise the probability that Qi falls below Q*. For an isolated agent, this depends on the probability distribution of the stochastic environmental variable E only. There are two fundamental insurance options against variance in E: insurance across time or across society, or a combination of both.
Insurance across time is achieved by food stocks. Assuming that Et and Et+1 are independent events (co-variance = 0), food stocks diminish food security risks. The disposable food stock QDt increases with cumulated past surpluses:
(3) QDt = Qt + [[Sigma]]t=0t=t-1 (Qt - Q*)
Producers would have a strong incentive to produce as much as possible to carry over food stocks. However, since we assume that goods are perishable, storage is not possible and this option is, for the time being, ruled out. Qt can only be consumed in period t and not beyond.
The second option, insurance across society, requires the existence of exchange agreements with other agents, preferably a selection of correspondents i,j such that the co-variance of Eti and Etj is minimised (relatively independent events). Two types of exchange agreements are possible: voluntary transactions and enforceable insurance policies.
By definition, voluntary transactions can occur if and only if both agents involved gain an increase in their stock of goods through the exchange. In other words, trade is essentially driven by the profit motive However, there are no gains from trade in a low-complexity economy. The neo-classical Heckser-Ohlin trade model, where gains are due to comparative advantages or differences in relative factor intensity, is not applicable since we consider only one production factor, labour. This forces us to return to the classical Smith and Ricardo trade models which use only labour as production factor. Unfortunately, they do not generate an incentive for trade either as labour productivity is constant and equal among all economic agents and across sub-groups (clans) in society. Potential traders would only exchange identical goods at identical opportunity costs - the cost of labour inputs.
Even if we slightly relax the assumptions of the model and allow for multiple products - say, wheat from agriculture, meat from hunting and fish from fishing - there is still no incentive for trade, as long as production technology is a pure public good and, consequently, labour productivity is the same among all producers[5]. Producers would allocate their time among different activities to produce for self-sufficiency. Only differentiation in personal preferences (subjective opportunity costs) for various production activities can induce the emergence of trade. However, there are no objective gains in terms of disposable amount of goods in such trade[6].
It is the absence of profitable trading opportunities that prevents the emergence of a profit motive in low-complexity societies, not "primitive generosity". It reduces the individual labour effort to the minimum required for survival since surplus supplies have no value. The absence of durable goods and storage possibilities reduces the objective opportunity cost of time to zero. Reducing or increasing consumption in period t has no impact on consumption possibilities in period t+1. The concept of interest rate (the exchange rate between period t and t+1) has no meaning. Again, this is a consequence of the economic setting, not of "primitive generosity".
Absence of storage and gainful trade possibilities leaves only one option to increase food security, that is to use surplus production to buy collective insurance against natural calamities and human hazards. Insurance comes in the form of accumulation of obligations - claims on other persons and groups' food stocks - rather that the useless accumulation of perishable food itself. Claims are accumulated through gifts of surplus production St = (Qt - Qt*), which oblige the recipients to reciprocate by gifts too. In order to enhance credibility, participation in the insurance pool is allowed only for agents who have a consistent track record of dumping their surplus in the gift circuit. Failure to do so automatically results in exclusion. For an individual agent disposable food QDt will be:
(4a) QDt = Q* if St > 0 or
(4b) QDt = Qt + (1/n) [[Sigma]]i (Sit) if St < 0, n = number of agents with St > 0
This insurance system is superior to individual production with no social interaction, because the risk for QDt to fall below Q* is lower, provided that the co-variance between all Si,, and thus co-variance between Ei, is less than perfect. Insurance is meaningless when disaster strikes all policy subscribers at the same time. The collective insurance system requires very little policing as the direct personal benefits are high (increased life insurance) while the costs of paying the insurance premium St are zero (surpluses have no transaction value). There are no incentives to drive a wedge between private and social costs and benefits.
Note that, contrary to Posner, we do not need assumptions on information costs to explain the emergence of gifts.
If we consider only natural environmental calamities, individual survival probability under this insurance system is inversely correlated with co-variance in crop production between the individuals involved. Gifts within groups and among nearby communities will not much reduce food security risks stemming from crop failure because co-variance in crop production is too high. The wider apart donor and receiver are, the lower the risks (co-variance) and the higher the potential insurance return. Survival risk minimisation may explain why the small Polynesian islands (high internal co-variance) spend so much time and resources to develop a long-distance (low co-variance) gift-based exchange system.
For other sources of calamities with low intra-community co-variance, such as fights, fires, and illness, intra-group gift-giving makes sense. Obligations ensure peaceful coexistence. Persons and groups who feel obliged towards you are not in a position to fight you. Besides, in societies with a homogenous distribution of technology, including fighting technology, the outcome of battles is very unpredictable (Skaperdas, 1989). Unless there is clear superiority in numbers, it is safer to exchange goods to oblige others rather than to submit them into obligations through battle.
We can now start to relax assumptions in the model and see at which point the collective insurance system will be transformed in a private transactions system. Let's start by introducing innovation in society.
4. Introducing innovation in society
Monopolisation of knowledge in primitive societies is often the result of deliberate secrecy or exclusion (taboo's): medicine men, witches, ore miners and blacksmiths, etc. However, some innovations may be difficult to monopolise because it is hard to make them excludable. The wheel, for instance, is not an excludable invention: once you show it to other persons, they can easily copy it. In modern societies, patent rights and legal monopolies are the instruments of monopolisation of knowledge. Some societies have invented early versions of patent rights. The elaborate Hindu caste system, for instance, effectively prevented the dispersion of specific sets of knowledge and monopolised them into sub-groups of society, thereby enforcing group-wise specialisation.
In most cases, however, knowledge specialisation in high-complexity societies is not due to secrecy or legal constraints but to the increasing opportunity cost of learning. Spending time on learning subject A prevents you from learning subject B. The sheer amount of knowledge and information available forces individuals into specialisation (Simon, 1979). It is simply not possible anymore to learn all trades equally well. As a result, part of the knowledge stock becomes de-facto privatised. Information asymmetries, specialisation and differences in productivity and comparative advantages emerge. The origin of gainful trade lies in the limits on personal information acquisition, storage and processing capacity. Ricardo's trade model is but a consequence of our inherent bounded rationality.
The introduction of innovation in production processes increases labour productivity [[lambda]]. This is not a sufficient conditions to induce profit motives and trade. A sufficient condition is achieved when the amount of knowledge reaches a critical stage where asymmetry and specialisation among agents occurs. Labour productivity will not be equal anymore for all individuals, opportunity costs of production will vary and possibilities for gainful trade will emerge.
The emergence of asymmetrical knowledge distribution has enormous consequences for social interaction. First of all, surplus production acquires exchange value and gainful trade opportunities emerge. A hunter may exchange his food surplus for a fisherman's surplus, which he is unable to produce (hunter didn't learn fishing) or for which his productivity is much lower (hunter is a bad fisherman). Consider a simple Ricardan trade model, with two goods (meat & fish) and two agents (1 & 2), and differences in labour productivity [[lambda]] such that
(5) ([[lambda]]m1/[[lambda]]f1) > ([[lambda]]m2/[[lambda]]f2)
In that case, agent 1 has a comparative advantage in the production of meat, and 2 in the production of fish. With gainful trading opportunities, both agents can obtain their minimum survival quantities Q*m and Q*f with less labour than under autarchy. Agent 1 will specialise in the production of meat. He will retain Q*m and exchange his surplus with 2 to obtain Q*f . Agent 2 will do the reverse. Assuming that all Q* = 1, each agent's labour input requirements in autarchy are:
(6a) Agent 1: L1 = 1/[[lambda]]m1 + 1/[[lambda]]f1
Agent 2: L2 = 1/[[lambda]]m2 + 1/[[lambda]]f2
With trade, agent 1 specialises in meat production and 2 in fish production. Both trade their production surpluses to obtain the required quantity of the other good. Their labour input requirements change to:
(6b) Agent 1: L1 = 1/[[lambda]]m1 + [ [[lambda]]m1 ([[lambda]]f2 / [[lambda]]m2 ) ]
Agent 2: L1 = [ [[lambda]]f2 ( [[lambda]]f1 / [[lambda]]m1 ) ]+ 1/[[lambda]]f2
Because of (5), both agents save on labour inputs:
(6c) Agent 1: [ [[lambda]]m1 ([[lambda]]f2 / [[lambda]]m2 ) ] < 1/[[lambda]]f1
Agent 2: [ [[lambda]]f2 ( [[lambda]]f1 / [[lambda]]m1 ) ] < 1/[[lambda]]m2
Secondly, a surplus producer now has a choice on what to do with his surplus: to buy collective insurance through gifts or to exchange it for another product at a profit. Asymmetrical knowledge distribution sets the stage for a gradual move away from gifts to transactions, from collective insurance through personal links to private insurance through contractually negotiated exchanges.
The move towards private contractual insurance is further enhanced by the introduction of non-perishable goods[7], thereby allowing for the possibility of storage of surplus production over time. Private stocks of tradable goods reduce individual uncertainty and constitute an alternative for collective insurance. Individuals can now chose between storing surplus for future use or giving it away to generate insurance claims on others. The concept of (personal) subjective opportunity cost of time is born: not consuming and storing part of my surplus this season (saving) buys additional security for next season.
The introduction of productive capital goods (tools, machines, equipment) constitutes the final relaxation of model assumptions. Capital goods embody a behavioural algorithm (a series of actions) that has been designed in a human mind[8]. This algorithm can be applied to a set of material and energy inputs in order to produce the desired output, until physical wear&tear leads to the disintegration of the capital good. Capital goods replace human labour: they produce output without, or with less, human labour input. They offer human beings the possibility to generate additional output, over and above their own labour productivity. This leads to a more objective concept of the opportunity cost of time: not consuming part of my food surplus this season (saving) and exchanging it for a capital good (investing), buys additional food production (output) and thus food security next season. Time now offers an opportunity to produce more output with a positive non-zero exchange value: interest or the rate of return on investments (the exchange rate between t and t+1) is the objective opportunity cost of time.
We now have a fully-fledged economic system including asymmetrical knowledge distribution and diversified production, profitable trade at positive market prices and a positive opportunity cost of time. Individual agents have a choice between collective and private survival insurance policies:
T=t-1
(7) YDti = [ [[lambda]]Lt + d [[Sigma]]T=0 Sti(1 + p,i)t ] + [(1/n) [[Sigma]]i (Stc) ]
with Sti = YDti - Q*ti
with [[lambda]] = labour productivity and d = private capital productivity; p, i = profits and interest rates on surpluses; Si = privately retained surpluses and Sc = surpluses paid into the collective insurance fund.
The fundamental driving force behind the system is the individual's attempt to maximise survival chances through maximisation of his private and collective sources of income and wealth. Both depend on comparative advantages generated through innovation, the accumulation of knowledge in human and physical capital. Competition and learning processes erode gains from trade and fuel the drive for continuous innovation.
5. The transition from low- to high-complexity society
5.1. The transaction costs of enforcing private contractual rights
Adhering to a collective security system, through personal rights and obligations, does not only increase individual security in a low-complexity society but also results in considerable savings on transaction costs. The set of personal rights and obligations is non-negotiable and does not require costly information search, data processing and design and negotiation of specific arrangements. It is a sub-set of the cultural heritage and its information is available to all members of society at zero marginal cost.
In a bounded rational world with positive opportunity costs to information processing in the human brain, the cost savings from collective and non-negotiable rules system should not be underestimated. Life would become a nightmare when every aspect of daily interaction would have to be put on the negotiating table and be formalised in explicit contractual obligations. Transaction costs would be overwhelming and vastly exceed the benefits from social interaction. So there are situations where it is in our own individual interest to simply accept collective obligations.
For example, hardly anybody would consider rejecting the entire set of traffic rules and negotiate rights-of-way at every encounter with another vehicle. Transaction costs would be enormous and turn the shortest trip into a painstakingly long-drawn exercise, without any demonstrable benefits compared to the alternative option of accepting existing traffic rules. However, it is a well-known fact that individual drivers occasionally chose to reject traffic rules and rough it out on their own. Such free-rider situations occur when personal benefits of waving a specific rule in a specific situation exceed the expected costs of that option (angry exchanges with other drivers, detection by police, accidents). These expected costs include the transaction costs of carving out a private and negotiated contractual arrangement (bribing a police officer, hiring a lawyer to talk you out of trouble). Private contractual arrangements require expenditures on transaction costs; adhering to collective rules (default position) comes at zero marginal cost for an individual citizen.
So, the choice between negotiated private contracts and non-negotiable collective obligations is not that simple. Equation (7) above may be rather naive in that respect because it omits transactions costs. Let us examine the origin and nature of these costs.
The credibility and effectiveness of collective insurance systems critically depends on avoiding free-riders who attempt to privatise benefits and socialise costs. If individuals are allowed to build up their own private stock of resources and to step into the collective insurance system only when they are in private trouble, than the collective insurance pool will quickly be depleted.
Society has two means to avoid free-riders: (a) objective transaction costs to reduce the benefits from privatisation and increase the socialisation of costs and (b) subjective social prestige, honour, which further enhances the difficulty of passage from collective to private insurance systems.
Objective transaction costs occur because individual ownership rights are poorly, if at all, defined in low-complexity societies. In the absence of private accumulation incentives (profit motives), there are no reasons to establish individual ownership rights. It is only when accumulation incentives emerge in the course of innovation and knowledge accumulation, that the need arises to establish such rights. However, substantial amounts of time and resources will have to be devoted to negotiation and enforcement of these rights. Especially in the early stages of development, when the institutions that define and enforce ownership rights (parliaments, justice, police, lawyers, auditors, etc.) do not exist yet, transaction costs may be extremely high (private security forces, use of violence in negotiations, etc.).
In fact, low-complexity societies have no reason to facilitate the emergence of individual ownership rights because they reduce the security and credibility of the collective insurance pool. On the contrary, as long as a large majority of citizens continues to rely on the collective insurance pool, it has good reasons to make the transition as difficult as possible. The socio-political balance will only shift in favour of a clear definition of ownership rights when a critical mass of citizens who prefer private insurance has emerged. In hybrid modern high-complexity societies, that tension is still present although its nature has somewhat changed. Most of us are clearly in favour of accumulation of private contractual rights as a source of insurance but we still try to socialise costs. In other words, our willingness to pay for collective insurance has diminished.
Subjective social benefits from prestige and honour further enhance the more objective transaction costs of switching from collective to private insurance systems. We label them as "subjective" because they are difficult to translate into objective terms (time, material and financial resources) and relate more to a person's state of mind rather than the attributes (resources, contracts, claims, etc.) that surround him. According to Berger (1970), "the concept of honour implies that identity is essentially, or at least importantly, linked to institutional roles". To do what society expects you to do brings honour, prestige. To go against this leads to social ostracism and strong feelings of personal insecurity. Consequently, as long as society emphasises reliance on collective insurance systems, attempts at establishing private ownership rights will not only meet stiff resistance in terms of transaction costs but also result in emotionally unsettling dishonour and decline of prestige.
Individuals can gain prestige from private goods accumulation only when society has generally accepted the shift towards private insurance systems. Modern high-complexity societies have, to a certain extent, "privatised" the concept of honour and prestige and attached it to behaviour in private institutional units were security and accumulation is predominantly based on contractual rights rather than personal obligations: companies, bureaucracies, clubs, etc. We also attach more prestige to signs of individual wealth (houses, cars, clothing) than to contributions to collective insurance systems. In low-complexity societies, ostentatious display of individual wealth would meet with strong disapproval, unless balanced by equally ostentatious contributions to collective insurance systems.
We can now modify equation (7) to take into account transaction costs and prestige. Transaction costs TRC have to be deducted from private accumulation benefits. Subjective feelings of (un)certainty could be incorporated by multiplying both terms with an exponential factor [[alpha]], reflecting the prestige attached to collective insurance, with [[alpha]] = 0 being a neutral appreciation. The resulting equation does not merely reflect disposable resources YDt but a broader concept of perceived individual security or survival probability (PSP):
(8) PSPDt = [ private resources - TRC ] e-[[alpha]] + [collective insurance] e[[alpha]]
Let us have a closer look at the transition process in two examples of contemporary real-life societies: developing countries and former communist economies in transition to capitalism.
5.2. Developing countries
Now imagine what happens when a high-complexity society starts to interact with a low-complexity society. In fact, it does not require much imagination; we can find plenty of real-life examples. Take developing countries, relatively low-complexity societies with increasingly intense interaction with high-complexity high-income countries. For the citizens of a low-complexity society, this interaction creates a choice between private contractual rights and collective obligations to improve survival chances.
This is likely to give rise to considerable social tension. Low-complexity society does not adapt to this new choice in block. Individual citizens make the transition at different times, depending on their perceptions of collective and private security and their pace of learning and acquisition of innovations. In short, knowledge acquisition is asymmetrical. Society is likely to strongly resist defection from group solidarity for reasons discussed above: it has a negative impact on the credibility and vulnerability of the group.
Consider the typical situation of a young urban professional in a Sub-Saharan African city. He has successfully completed a Western-type education and intends to put it to good use for the accumulation of personal wealth. However, his social roots still oblige him to share his income with family, friends and even distant relatives, leaving little room for personal accumulation. A relative may have paid for his education, another may have arranged his job, making him a beneficiary of the collective insurance system and amplifying his difficulties to switch to personal wealth accumulation.
Furthermore, his very efforts to earn a personal income through enterprise may be frustrated by society. Low-complexity societies are strongly biased in favour of recognising personal network obligations and against private contractual obligations. The force of tightly-knit personal obligations is enhanced by the poor reliability of contractual obligations. Anybody falling outside the network of personal obligations may be considered fair game to extract surpluses, legally or illegally. Securing private property rights may entail high transaction costs: negotiating with and inducing debtors to settle their debts, repeated security checks, heavy centralisation of decision-making and control, negotiating every single step in bureaucratic processes and transactions, etc. Private property rights may be reasonably well defined in formal laws, but effective law enforcement may be difficult and costly.
As explained by Grossman and Hart (1986), incompletely specified and/or incompletely enforceable contractual obligations are a major source of transaction costs and rent-seeking behaviour. It is in the interest of most of the citizens of low-complexity societies to maintain this situation in order to discourage defectors from the collective insurance system and maintain its credibility as long as possible.
Ault and Rutman (1979) present a telling example of incompletely specified land rights in Sub-Saharan Africa and, indeed, in many other parts of the world. In the early stage of development, as long as population pressure remained low and land productivity fairly homogeneously distributed, land had no significant scarcity value and collective ownership did not create problems. However, with improvements in life expectancy and intensive mechanisation of agriculture, the scarcity value of land sharply increased and conflicting claims occurred. Sticking to collective ownership was not only in line with populist rhetoric but benefited the top of the social hierarchy. Because claims to land were not clearly specified, leaving substantial room for manoeuvre for the allocation of residual rights, decision making finally ended up with the chief (village chief, local politician, minister, president) who became a de-facto land owner, allowing him to extract political and economic rents from this situation. Formalisation of government ownership of land after independence only transferred these right to the post-colonial state and enhanced its power. The lack of clearly specified land rights has led to many conflicts in post-colonial Sub-Saharan Africa, especially in densely populated areas: the civil wars in Rwanda and Burundi, the Mauritanian-Senegalese border conflict, to name but two examples.
The extent and persistence of accumulation-preventing traditional rules may also be illustrated by an example from the psycho-semantics of "acquisition" in African languages. In Wolof, a local language in Senegal, the word "faida" means "opportunism". But contrary to most Western languages, opportunism has a strongly positive psycho-semantic content: it is good to be an opportunist and exploit all the possibilities you get to acquire benefits. This includes corruption, reneging on contracts, even theft. Individuals are expected to try out possibilities to acquire collective benefits, collectivise private costs. From a Western high-complexity society point of view, this is called theft and social profiteering and corruption. For a low-complexity society citizen, it is a traditional and socially acceptable way of extracting benefits from non-associated groups and persons and internalising them in your own group. "Faida" benefits not only yourself but the entire network of personal links to which you belong: once you have acquired a resource, other network members will call on you and claim their share. Residual rights or ownership rights are not situated at individual but at group level. Bayart's (199?) masterpiece on African "belly politics" presents a vivid description of these practices in everyday life and their destructive impact on the politics and the very fabric of African society. He also presents once of the most concise and telling descriptions of low-complexity societies that I have come across: "la chièvre brotte là où elle est attachée" - "a goat feeds where she is attached".
Nobel prize winner D. North (1993) made the point that, in his view, one of the main reason for low levels of economic development is the lack of clearly specified ownership rights in developing countries, which results in a misalignment of incentives and thus acts as a disincentive to innovation. The above analysis supports this argument.
5.3. Economies in transition
The communist regimes of the former Soviet Union and Eastern Europe were no low-complexity societies in the sense of our definition (see Annex). Their level of technological development, differentiation and specialisation, and institutional development was rather high, although probably not as advanced as in most Western societies. They had all the ingredients of a high-complexity modern society, except for one key characteristic: individual citizens were not allowed to switch to private resource accumulation to substitute for collective insurance. Credibility of the collective insurance system was maintained by imposing a prohibitively high transaction cost on the switch to private insurance (life imprisonment, re-education camps, socio-economic ostracism). Private ownership was strictly limited to consumer goods, the private car being the most expensive object an individual could aspire to. Capital goods were explicitly excluded from private ownership under communist regimes. Furthermore, communist rhetoric and propaganda attached strong prestige and honour (the [[alpha]]-factor) to collective systems and strong disapproval of private accumulation.
At the time of the collapse of these communist regimes, private property rights were only very partially defined, in spite of strongly positive scarcity values for knowledge and material resources. Under the old regime, the absence of private property rights was compensated by a tough centralised control system that allowed very little room for manoeuvre for company managers. With the collapse of the old system, the company manager is all of sudden put in a decision-making vacuum concerning his resources and cash-flow. Reference to a Central Planning Office and its very complete specification of rights and obligations, has fallen away and he faces a bewildering array of choices to allocate new decision rights among many claimants: maintaining it as government property, private appropriation by the manager himself, sharing with company workers or with old buddies in the bureaucracy or with private investors... Each of these options entails different transaction costs and patterns of accumulation of private benefits.
Maffiasation is much more prevalent in former communist regimes than in developing countries because far more opportunities exist for private wealth accumulation. Technological complexity, differentiation and specialisation are far more advanced, offering more possibilities for trade. Technology is not a constraint but successfully claiming private benefits, enforcing private property rights, is. Transaction costs to realise such claims can be very high. Property rights remain ill-defined in legal frameworks, courts are not equipped to cope with all the claims, police can not enforce them and many resources simply remain un-claimed. Mafia practices are an (involuntary) form of out-of-court settlements: the best-armed group wins the claim. Investment in weapons, private armies and protection becomes more profitable when the value of the stakes and the costs of enforcing ownership rights rises.
Apart from the high transaction costs due to these institutional problems, individual citizens are torn between the old collective insurance option and the new possibility for private accumulation of wealth. They have been brought up in an environment that strongly emphasised and attached great prestige and honour to collective insurance systems (high [[alpha]]). Their subjective security evaluation prevents them from switching to private wealth accumulation.
6. Implications for the management of transition and adjustment processes
The preceding pages have shown that rational individual choice behaviour in low-complexity societies favours reliance on personal obligations and rights under collective insurance systems, while citizens in high-complexity societies tend to favour private wealth accumulation. I have also shown how societies-in-transition have a tendency to increase the objective and subjective transaction costs of switching from collective to private insurance. High transaction costs reduce defection incentives and act as a social safety net. They also reduce the efficiency of investment projects and structural adjustment programmes and, in general, slow down economic development. We can now look into the means to facilitate transition from low- to high-complexity economic systems and see to what extent these are covered by the present approaches to transition and adjustment economics.
First of all, it should be reiterated that innovation - and the uneven or asymmetric appropriation of innovation - is the driving force behind the evolution from low- to high complexity societies and that this evolution necessarily entail a switch from collective personal obligations to private contractual obligations. The stronger the knowledge or information asymmetries, the stronger the social tensions that occur in the transition phase.
The project approach to development in the 1960s and 1970s has greatly speeded up knowledge differentiation and uneven opportunities for trade and accumulation in developing countries. But apart from occasional concerns for education and human capital development, few systemic efforts have been undertaken to facilitate a more symmetric spread of information throughout society. Posner (1980) was right to underline the high cost of information in low-technology societies. While basic education (literacy and numeracy) helps citizens to decipher symbolic information, it does not guarantee them easy access to the source of such information. Modern communication technology has advanced to the point where access to a virtually unlimited amount of information is available at very low costs. More emphasis in development programmes on affordable access to information (liberalisation of telecoms, reducing transaction costs) would not only speed up innovation, information asymmetries and specialisation but also accelerate catching-up efforts.
From the early 1980s onwards, structural adjustment programmes have aimed at two goals: (a) strict management of domestic and external financial gaps (quantity adjustment) and (b) eliminating constraints on the efficient functioning of markets and the price mechanism (price adjustment). While the first objective (gap management) was merely based on "good bookkeeping" practices, the second objective (an efficient price mechanism) found its roots in the neo-classical competitive equilibrium model that requires a flexible price mechanism only to achieve an efficiently functioning economy. Towards the end of the 1980s, more institutional engineering was put into adjustment programmes, with changes in legal systems, ownership structures, financial markets and monopolistic practices in general.
In general, "classic" adjustment programmes have improved the functioning of the price mechanism and thereby enhanced opportunities for trade and private wealth accumulation. However, few adjustment programmes have explicitly addressed the transaction cost - related to design and enforcement of contractual obligations - that constitute an obstacles for the transition from personal to contractual obligations. Reform programmes in transition economies have put more emphasis on contract costs in the context of the establishment and enforcement of private property rights in domains where they did not exist in the former communist regimes. For developing countries, whose basic legal frameworks are often copied from industrial countries, private ownership rights is often considered to be a non-issue, except for rural land rights. In practice, however, there are wide discrepancies between legal principles and effectively enforceable rights. While legislative frameworks may well approximate those in high-complexity societies, judicial systems and law enforcement officers are unable to cope with the challenges of a society that favours personal rights and obligations.
Concerns about the erosion of the traditional collective insurance system through networks of personal obligations and its inability to cope with the challenges of a rapidly innovating society, led to the rise of the so-called "social dimensions of adjustment" in the mid-1980s. It was pointed out that the transition towards a high-complexity economy, that relied more and more on private accumulation as the principal source of insurance, resulted in increased insecurity for persons who went through the transition process at a slower pace. Adjustment programme designers have tried to alleviate these problems by building in various types of social safety nets on a contractual rather than a personal basis. Still, this remains one of the most hotly debated issues in structural adjustment programmes, precisely because collective security systems constitute the core of low-complexity societies and retrenchment into "old" systems is often perceived as a solution to modern society's problems.
This brings us to the last - but not the least - variable in equation (8), social perceptions or the subjective resistance-parameter to transition ([[alpha]]). Changing perceptions requires a more active social engineering approach to adjustment programmes. Attitudes towards private wealth accumulation may have to be improved, thereby reducing the transaction costs of private ownership. Social, cultural and moral engineering approaches to development have already been advocated by a range of African authors. Manguelle (1991) was among the first to express the need for a cultural adjustment programme in Sub-Saharan Africa. Kabou (1991) questioned the willingness of her fellow citizens to seriously tackle development problems and Ka Mana (1991) suggests a lack of psycho-existential fitness as an obstacle to development. While the issue is probably too sensitive to allow external aid to play a significant role in this domain, the advances of made in communication technology certainly offer a wide range of possibilities to tackle the problem in a more efficient way. Most importantly, local politicians and aid managers should be aware that the transition process from a low- to a high-complexity society can not be successful without changes in the cultural values.
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