Co-Evolution of the Development of Public Administration, Democracy and Capitalism

Philipp Krause has raised some very interesting issues about the development of public finance institutions in emerging economies (which are equally applicable to wider public administration capacity development in emerging countries).

Krause argues that the prevailing orthodoxy – that it possible to construct effective public finance systems through a series of “steps”: first build credible budgets, then internal accountability, followed by linking policy and planning and finally reaching the pinnacle of performance management. These reforms are apparently meant to be achieved in a period of a decade or less. But as Krause and others have pointed out, in most western countries this took decades if not centuries and, I would add, in some cases the last two platforms are still shaky or partial in their implementation.

Krause goes on to make the point – along with Matt Andrews and others – that it impossible to consider these sorts of developments outside of the wider institutional development of society, and specifically the public sector. There is little evidence, he suggest, that developing capacity in public finance (or public administration more generally) can outstrip capacity in private institutions.

I would go further and suggest that in fact there are three dimensions to this process. They can best be symbolised by three Government actions in Britain in the mid 19th century:

–       the Joint Stock Companies Act of 1856

–       the Representation of the People Act (Great Reform Act) of 1832 and the second Representation of the People Act of 1867 (sometimes called the Second Great Reform Act)

–       Northcote-Trevelyan report of 1854 and creation of the Civil Service Commission in 1856

These three initiatives signified advances on three fronts:

–       the modernisation and contractualisation of property rights and markets

–       the start of the democratisation proper of the British state by the sweeping away of the ‘rotten boroughs’ and the start of the empowerment of the industrial cities and later the working classes

–       the beginning of the modernisation of the British state apparatus and civil service

It is surely no historical accident that these three reform processes proceeded almost in lock-step with one another? It is also interesting that the first – the modernisation of allowed capitalist enterprises to flourish in a way never seen before and outpaced both democratic and administrative reforms, which took another 4-5 decades at least to fully come to fruition.

What is also noticeable is the strong similarities between democratic-administrative reforms on the one hand and corporate reforms on the other:

–       Each created a new, legitimised, system of ‘ownership’ – in the politico-administrative system the creation of a ‘cleaner’ Parliament and more soundly based political executive; in the corporate sphere the creation of joint-stockholders (shareholders) with legitimate and enforceable rights

–       The parallel between the Government (executive) representing parliament and the Board representing shareholders is also quite striking.

–       Probably an even closer parallel is the creation of a ‘professional management’, appointed on merit, paid by salary, and running a managerially and financially accountable hierarchical structure – in one case the civil service and in the other the company.

But it can also be argued that even the initially limited progress of democratisation and administrative reform proved a much more secure platform for the development of commercial and industrial institutions than had existed before.

Markets and corporations did not reform themselves – they had to be reformed by the state. Indeed, without state support and legitimation limited liability joint-stock companies simply could not have been created.

Interestingly, this point is emphasised by the fact that when the Joint Stock Companies Act was passed by Parliament in 1856 it was initially denounced by The Economist newspaper as ‘socialist’ legislation (they later revised their position and accepted it was a huge boost to capitalism).

It is unlikely such legislation would have been passed without the 1832 Reform Act or the start of civil service reform in 1854. I see these as ‘co-evolutionary processes’, each reinforcing, and being reinforced by, the others.

Hernando de Soto’s work on the creation of proper property rights and contracts, underpinned by a properly functioning legal system and public bureaucracy, to some extent also emphasises the co-evolution of public and private institutions.

This all suggests, as Krause indeed does, that careful attention needs to be paid not just to the sequencing of public administration or public finance reforms, but to democratic and corporate reforms at the same time and same level to create a mutually reinforcing co-evolution of development.

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