What's traffic in Hanoi and St. Petersburg got to do with institutional reform?

A lot, actually.

If you think lack of formal rules (in property rights or contract enforcement) always constrains economic activity, watch this.  And if you think an improvement in formal institutional rules always improves efficiency, watch this.

These are the videos I had embedded in my presentation on institutional reform at the AEA meetings--but alas could not use, due to lack of wireless internet at the New Orleans Hilton. Read on to see the connection.

I argued in my talk that the new "governance agenda" is taking on some of the bad habits of the old Washington Consensus.  Specifically, a lot of thinking about institutions seems to be based on the following presumptions:

• We have a pretty good idea about what to reform and how (and what’s lacking is just political will)
• The requisite reforms are pretty much the same across the world (which gives us license to rely on cross-national benchmarking and on best-practices)
• The more of the reform agenda we do, the better off we are (assuming implicitly that second-best issues are not central)

I argued instead that

• We can get a lot of economic growth in a very poor institutional environment: formal institutions of property rights and contract enforcement are not always a binding constraint (just as lack of traffic lights does not prevent traffic from flowing smoothly in Vietnam)
• Institutional reforms that do not take second-best interactions (such as interactions with informal institutions, labor-market distortions, or learning externalities) can do more harm than good (just as poorly enforced traffic lights in St. Petersburg create more accidents than their absence would result in)
• An approach that focuses on "best practices" and cross-national benchmarking is unlikely to do much good in developing nations
• Appropriate reform strategies are inherently second-best. For example, when relational contracting works decently (as it apparently does in a setting like Vietnam), the focus of institutional reform might be not on improving judicial system, but on improving information gathering and dissemination about “good” and “bad” firms and on improving formal contract enforcement for specific categories of firms that do not have access to relational contracting, such as new entrants and foreign firms

Bill Easterly gave a paper in the same session that was similar in many respects, but a lot more downbeat, and much more pessimistic about the ability of economists to prescribe useful reforms. As I joked in the session, there is no disagreement between the two of us on these issues that would not be resolved with a good dose of Prozac (for Bill!).

Comments

[stedy]

Appropriate reform strategies are inherently second-best.

nod....

for a developing country,the question is whether they can develop, rather than how much.

so, as a chinese, i so much admire Deng Xiaoping.

[Ole]

Dear Mr. Rodrik,

Even though I always like good analogies, there seems to be something that you have omitted: Traffic in Hanoi flows at a maximum of 30 km/h (20 mph), sometimes much slower. Even at times when there is less traffic, intersections without traffic lights in absence of (enforced) rules do not allow anybody to pass faster, as you always have to fear that someone crosses your way in an errant fashion.

Now look at St. Petersburg: From the behavior of the (unlucky) motorists we can deduce that they can normally drive at a much higher speed if they rely on traffic rules (They certainly would not drive that fast if they crashed at every second intersection). You can’t use high speed safely in Hanoi.

We often forget that the aim of traffic rules is not just to prevent accidents, but also to set focal points for traffic and let people use higher speeds.

Really appreciate your blog, keep it up!

From Germany

Ole

[Jorg Meyer-Stamer]

As I have been working in quite a few developing countries, it has often struck me that the first impression you get during the transfer from the airport in terms of how people behave in traffic has a very robust predictive value for the way the society works at large. One could probably build a proper theory around that, based on the work of social theorists who ask why in some societies there is solidarity among strangers (and thus people behave not purely selfishly in traffic). In many developing countries, traffic in cities is a nightmare because most participants try to maximise their individual utility. I’m wondering how far this analogy works. One could probably connect it to the insight that atomistic markets don’t work particularly well in the real world. Scooter drivers in Hanoi usually make good progress because they follow tacit rules rather trying to maximise all the time. Drivers in, say, Colombo, or Jerevan, or Manila move rather slowly since many of them do try to maximise most of the time.
P.S. Ole: I think it’s worth to consider that traffic in Hanoi does in fact flow most of the time, despite its enormous density, whereas other cities with similarly dense traffic tend to suffer from gridlock.

[robertdfeinman]

A very poor use of analogy. In one case you compare a predominately two wheel traffic flow with one with automobiles.

The two wheelers go slower and are more maneuverable, there is, thus, a good chance that they can avoid accidents.

Also not taken into account are the effects of both traffic systems on speed of reaching one's destination (or flow per hour) and of the overall safety of the transport system.

The only lesson to be learned from the Russian example is that motorists know that traffic laws aren't enforced. One could also argue that they see this as an overall pattern of their society for much of the past 100 years where laws were enforced arbitrarily.

To the main point:
There have been many studies which show that the lack of a proper contract system is holding back development in poor countries. For example, the inability of slum dwellers to get title to their land means that they can't get loans for either home improvement or setting up local businesses.

A society is like a web and pulling on one strand doesn't reveal all the interconnections. Too many who give advice seem only to focus on their particular strand.

[Per Kurowski]

I quote from my “Voice and Noise”

Motorbikes (in Vietnam)

• A hoard of motorbikes is coming at me. How on earth am I going to cross the street? At the end—just like marrying—there comes a moment of truth when you just have to close your eyes and walk down that aisle to the altar with faith. I did just that, closed my eyes, and crossed the street. I did great! Just as in my marriage.

• There are too many motorbikes on this road so they should build a bike lane. Forget it! There are so many motorbikes that what we need here is a car lane. Boy, if they just went from bicycles to motorcycles, and last year over 1 million motorcycles were sold, which at only a thousand US dollars each means more than a billion in sales, just think what would happen if they went over to cars! With what would they power those cars? Has anyone considered this in the Country Assistance Strategy (CAS) of this country?

• But these motorbikes must be different from the motorbikes we used to know. We cannot even begin to fathom their significance in the local supply chain before we have witnessed the transport on a motorcycle of … FOUR FULL-GROWN PIGS!

[Per Kurowski]

We have traffic lights in Caracas Venezuela and no one in his sane mind would trust them. This unfortunately means for us that we frequently fail on our drivers tests abroad since we insist stopping on green light to have a look…just in case.

[Mike]

I think the analogy is great, especially as a large part of the issue at hand is that country specific factors may dramatically affect the success/failure of a specific reform agenda.

Jorg, the presence of absence of some sort of path dependence (such as the aforementioned 100 years of alleged arbitrary enforcement) surely reinforces the case made in Professor Rodrik's original post? That a one-size fits all, "we have all the answers" approach to reform is dangerous at best and disastrous at worst?

[Cherkaoui Mouna]

Dear Mr Rodrik,

This is an interesting analogy and I perfectly agree with the message of professor Rodrik that it aims at illustrating. However one has to take into account the fact if one accident occurs in Hanoy it is likely, due to the crowd and absence of lights, to lead to more death and trouble than in ST Petersburg. So the risks and potential impact of an incident have to be taken into account. Also we need to know what is causing the problem in St Petersburg. If it is the lights that are not working (and not the people not taking them into account) then this means that there has been some progress and that the accident are due to lack of coordination of reforms.