Online library entry

Khan M. (2010) Political Settlements and the Governance of Growth-Enhancing Institutions, SOAS

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Khan’s influential work offers a power-based analysis of institutional creation and enforcement. In so doing, it critiques the theoretical foundations of New Institutional Economics while offering an alternative explanation for capitalist transformation and economic development.

The term “political settlement” is increasingly popular in political economy analysis. Khan, however, offers his own, specific definition. He presents a political settlement as “a combination of power and institutions that is mutually compatible and also sustainable in terms of economic and political viability.” He specifies that institutions and the distribution of power have to be compatible because if powerful groups are not getting an acceptable distribution of benefits from an institutional structure, they will strive to change it. The combination also has to be sustainable because institutions, both formal and informal, have to achieve the minimum levels of economic performance and political stability that are required for the reproduction of societies.

At a basic level, Khan’s political settlement approach can help explain the performance of particular institutions in terms of how institutions or institutional changes are likely to be resisted in the context of a specific distribution of power. A number of scholars have used Khan’s work in order to assist with this narrower analytical goal.

At a higher level, however, Khan’s work aims to provide an alternative to the New Economic Institutionalist explanation for economic development (see North 2003). While new institutionalists have begun to pay more attention to the political challenges of institutional reform, Khan argues this still does not go far enough; rather, he presents the political settlements in developed and developing countries as fundamentally different. In developed countries with a ‘capitalist’ political settlement, the productive sector is large enough to sustain formal institutions without jeopardizing the distribution of power. By contrast, in developing countries with a ‘clientelist’ settlement, formal institutions are frequently substituted by informal institutions because they are the only feasible mechanism for sustaining economic benefits for powerful groups. A variety of informal institutions thus predominate, perhaps most notably the organization of informal power through patron-client networks.

Given these differences, Khan argues that the institutionalists’ “good governance” model of achieving economic development through formal institutional reform is not realistic and may even bring conflict by undermining the prevailing distribution of power in a country. Developing countries will eventually have to strengthen their formal institutions, but first, they must build up their productive sectors through other means, notably effective industrial policy. Khan explains the success or failure of industrial policy efforts and ultimately capitalist transformation with reference to the structure of the ruling coalition as well as the existing power and technological sophistication of domestic investors.