2 The conceptualization of path dependence by Paul Pierson
3 The institutional inertia of the World Bank
Next year, in July 2014, the World Bank will celebrate its seventieth anniversary. At first glance, one could be pleased with its development. Within seven decades, the International Bank for Reconstruction and Development has evolved from a single organization lending money for the rebuilding needs of the beaten and destroyed states of Europe to a key player within the international system supported by 188 members around the globe, maintaining five organizations under the umbrella of the World Bank Group and providing $ 58.8 billion of loans, grants and guarantees to developing countries in 2009 (cf. Tetzlaff, 2012: 261). However, within 70 years, the World Bank has also faced sharp criticism from scholars, politicians, students and social movements. In recent years, with a changing global economy and the rise of states like Brazil, India and China, the bulk of criticism targeted towards the governance of the institution, which is considered to be both, undemocratic and illegitimate. They claim that this especially counts for the voting system, which does not reflect the fundamental economic and political changes, e.g. the rise of the named states. While the fast- evolving economies Brazil, India and China (hereinafter also called ‘BIC states’) equally produce strong economic growth rates and their role within the financial system became more and more important during the last decades, the voting power within the executive bodies has hardly increased. Therefore, the BIC states had placed a lot of hope in the ‘voice reforms’ of 2010, the main objectives of which was to realign their voting power with their economic weight (measured by their contribution to the GDP). To put it short, there has been a slight increase in voting power for the BIC states. Nevertheless, also after the ‘reform’ of 2010 the ratio of voting shares to the economic weight is still imbalanced. For this reason the questions arises: Why does this discrepancy exist and what are the reasons for the Bank’s inertia? Why has the distribution of votes within the IBRD been relatively persistent over time although the economic strength of fast-evolving economies like Brazil, India and China has significantly changed? And why has the voice reform of 2010 only led to a marginal increase? This paper tries to answer the two latter questions by drawing on a strong demanded, but still relatively new concept when it comes to questions about institutional change - the concept of path dependence.
The concept of path dependence, especially the conceptualization of Paul Pierson that is strongly entangled with the concept of increasing returns shall be presented in the first part. Increasing returns mechanisms are responsible that once an institutional design is determined, the benefits to stick with this setting as well as the costs to reverse it increase over time.
Moreover, in a path dependent process it is crucial at which point in time events take place.
This has implications for the actual outcome, which then maybe not the most efficient in the long-run but the best solution in the short-run. Therefore, it shall be shown in the second part that increasing returns mechanisms are prevalent in the development of the World Bank. Moreover, the voting power realignment of 2010 does not constitute a breach with this path dependent development. In contrast, this paper argues that the voice reform has even hardened the institutional inertia of the World Bank because it was much more modest than it was presented to be and has been eroded by high-income states within two years after the reform. This analysis is relevant for two reasons. One, this paper contributes to the existing path dependence literature by applying the concept of path dependence to the case of the World Bank to explain why the voting system has been relatively persistent despite the environment has changed. Second, the application is also of practical relevance as many people do not understand the resilience of the World Bank’s executive bodies. This paper does not want to approve the Bank’s hardiness but tries to offer an explanation for it. Finally, the terms ‘IBRD’ and ‘World Bank’ as well as ‘increasing returns’ and ‘self-reinforcing’ are used synonymously.
2 The conceptualization of path dependence by Paul Pierson
Although being discussed for a comparatively short time within the socio-scientific discourse “[p]ath dependence is one of the most widely used concepts in contemporary social science” (Viola/Rixen, 2009: 5). However, with the strong usage in economics, sociology and political science, there have been several modifications to adapt to the different surroundings as well as to extend the scope of possible applications (cf. Viola/Rixen, 2009: 6). Thus, there are quite different meanings operating under the name of path dependence, ranging from perceptions of institutional inertia to gradual change. Therefore, being conscious about this wide range of understandings, it is important to declare that this paper will follow the interpretation of Paul Pierson in his award-winning essay “Increasing Returns, Path Dependence and the Study of Politics”.
Many conceptualizations of path dependence simply claim that history matters, i.e. the past influences the present. By referring to Margaret Levi, Pierson shows that in his opinion path dependence goes far beyond: “Path Dependence has to mean, if it is to mean anything, that once a country or region has started down a track, the costs of reversal are very high. There will be other choice points, but the entrenchments of certain institutional arrangements obstruct an easy reversal of the initial choice.
Perhaps the better metaphor is a tree, rather than a path. From the same trunk, there are many different branches and smaller branches. Although it is possible to turn around or to clamber from one to the other - and essential if the chosen branch dies - the branch on which a climber begins is the one she tends to follow” (Pierson, 2004: 252).
Thus, in Pierson’s conceptualization, path dependence is strongly entangled with increasing returns arguments. Even more, path dependence is “[…] a social process grounded in a dynamic of increasing returns” (ibid: 251). For this reason, Pierson refers very much to the ideas of Arthur who has developed the concept of path dependence in economics to challenge the basic conviction of neoclassical approaches, namely the idea that always the most efficient alternative comes out on the top in the end. The condition under this kind of inefficiency takes place is called increasing returns. Applied to technologies, this means, that the more people use a certain technology, the more they will get used to it and the less likely they want to switch to another technology over time, albeit there were technologies which would have been much more efficient in the long run. The common known example for this phenomenon is the success of the QWERTY typewriter keyboard, which is still used although there have been alternatives which would have been much more ergonomic (ibid: 254).
From Arthur’s perspective, whether increasing returns or self-reinforcing processes take place or not is highly dependent on the existence of four circumstances, which will be shortly explained in the following. First of all, there have to be high start-up or fixed costs. If many resources are needed to establish a product, then actors are likely to further invest in this product. Secondly, learning effects can lead to an improvement of the product or the way people are dealing with it. Moreover, coordination effects are important. They take place if the benefits of actions rise as different actors make the same decisions, which may lead to future cooperation. Finally, if people think it is decisive for prospective coordination to use a product in the present, the fourth feature can be called adaptive expectation effects (ibid.)
Pierson states that features effecting increasing returns in economics are ever-present in the political arena, especially when it comes to political institutions. Institutions usually require high start-up costs, and after their implementation individuals as organizations learn how to deal with the institution. In particular, individuals as well as organizations do not only learn which skills and expertise are needed to deal with the institution’s staff but also what is necessary interacting with other organizations. Moreover, institutions create an environment of legal and political reliability and therefore reduce transaction costs between different individuals/organizations as well as generate adaptive expectations (cf. Viola/Rixen 2009: 10). Once they are established, “institutions generate powerful inducements that reinforce their own stability and further development” (Pierson, 2004: 255). In addition, the political arena distinguishes itself by some conditions that differ from economics and create self- reinforcing dynamics that make a reversal from a way that has been chosen even less likely.
First of all, in political contexts, the benefits of an actor’s decisions are not independent from the decisions of other actors like in economics. This collective action ‘dilemma’ is a big obstacle to institutional change, especially on the international level. If one member-state seeks to change e.g. the voting rules or the design of the existing institution, this directly affects the interests of the other members who primarily have to agree on this attempt before it can be realized. Moreover, institutions are often embedded in institutional matrixes and complement each other, which is another cause of increasing returns. Besides, political power asymmetries enforce positive feedback mechanisms for institutions. When political leaders are capable of imposing rules on other actors that weaken their ability to become powerful within the institution in the future, this also may lead to institutional inertia as others do not have the chance to realize their intent any more. This may also count for customs that develop over time, e.g. the appointment of a president from a certain country or continent without an election. As it becomes ritualized over time, it often becomes widely accepted and unquestioned.
Furthermore, there is no market exercising pressure towards existing institutions. Therefore, without any competition and the possibility to deal with an alternative institution, there is only barely necessity for existing institutions to react to a changing environment. In addition, the difficulty to determine the real reasons behind the unsatisfactory development of the institution is the reason why learning processes happen relatively seldom in politics. Consequently, it is much harder to decide which efforts should be made and how an institutional reform should look like. Besides the cloudiness of politics, Pierson thinks that short time horizons and the status quo bias of institutions are additional factors making increasing returns mechanisms in politics even stronger than in economics. Because the benefits of institutional reforms often are usually only apparent some years after the implementation, politicians tend to seek short-run success rather than solutions in the long-run although they might be the better ones. Moreover, Pierson claims that institutions “[…] are generally designed to be difficult to overturn” (Pierson, 2004: 262).