Portal de Periódicos da CAPES

Institutions and the fortunes of territories

2020; Elsevier BV; Volume: 12; Issue: 3 Linguagem: Inglês

10.1111/rsp3.12277

1757-7802

Andrés Rodríguez‐Pose,

Economic Growth and Productivity

Regions and cities face unceasing pressures to adapt in response to processes of globalization, changes in industrial production, and new patterns of migration and trade. At the same time, the dominant development policies are proving less than capable of providing answers to these challenges. Strategies based on a mix of physical and human capital and technology have not succeeded in dealing with growing territorial inequality and its treacherous economic, social and political consequences. There is thus an urgent need to understand why territorial divergence occurs and why there is what seems to be a growing decline in the returns of public intervention targeting economic development. In the search for answers, scholars have turned to the examination of institutions. But despite progress in our grasp of how institutions affect development, crucial knowledge gaps remain. This paper reviews recent progress in our understanding of the role of institutions for development, unveils the most important gaps, and proposes a series of avenues to improve how a better understanding of how institutions shape regional and urban development can lead to more efficient development policies. Las regiones y las ciudades se enfrentan a presiones continuas de adaptación en respuesta a los procesos de globalización, cambios en la producción industrial y las nuevas pautas de migración y comercio. Al mismo tiempo, las políticas de desarrollo dominantes están demostrando ser menos capaces de dar respuestas a estos desafíos. Las estrategias basadas en una mezcla de capital físico y humano y tecnología no han logrado hacer frente a la creciente desigualdad territorial y sus peligrosas consecuencias económicas, sociales y políticas. Por consiguiente, es urgente comprender por qué se producen divergencias territoriales y por qué se produce lo que parece ser una disminución creciente de los beneficios de la intervención pública orientada al desarrollo económico. En la búsqueda de respuestas, la investigación ha recurrido al examen de las instituciones. Pero a pesar de los avances en la comprensión de cómo las instituciones afectan al desarrollo, siguen existiendo lagunas de conocimiento cruciales. En este artículo se examinan los progresos recientes en nuestra comprensión de la función de las instituciones para el desarrollo, se revelan las lagunas más importantes y se propone una serie de vías para mejorar la forma en que una mejor comprensión de la manera en que las instituciones configuran el desarrollo regional y urbano puede conducir a políticas de desarrollo más eficientes. 地域や都市は、グローバル化の過程、工業生産の変化、移住や商取引の新しいパターンに対応して適応させられる圧力に絶え間なく直面している。それと同時に、支配的開発政策は、これらの課題に対処する能力がないことが明らかになってきている。物理的資本と人的資本と技術の組み合わせを基にした戦略では、拡大する地域格差と、その危険性を孕む経済的、社会的、政治的影響には対処することができない。そのため、なぜ地域格差が生じているのか、なぜ経済発展を目的とした公的介入のリターンが減少しているようにみられるのかを解明することが急務である。答えを探すために、研究者たちは機関を調査することを始めた。しかし、制度が開発にどのように影響するか理解が進んでいるにもかかわらず、知識の大きなギャップが今なお存在している。本稿では、開発のための機関の役割に関する我々の理解の最近の進展を概観し、最も大きなギャップを明らかする。そして、機関が地域/都市開発をどのように形成しているかをよりよく理解することが、より効率的な開発政策につながる方法を改善するための一連の方法を提案する。 Regions and cities have been receiving ever-greater attention as the locus of socio-economic research and, increasingly, as the focus of development practice. Facing unceasing pressures to adapt and change in response to new and uncertain circumstances—including the onset of strong globalization forces, the spatial re-shifting of industrial production, and new patterns of international migration and trade—territories the world over, as well as the countries and supranational organizations they belong to, have sought to set up development strategies to restructure their economic bases in order to remain both competitive and sustainable. Most development strategies have been firmly anchored in traditional economic growth theory. According to the dominant theories in economics, economic growth and changes in employment and productivity are the result of a combination of three factors: physical capital, human capital or labour, and innovation. In addition, there is a residual factor or error term, which represents the part behind economic performance that we do not know or cannot explain using the traditional components of physical capital, human capital and innovation. Depending on the chosen approach to economic performance, the weight attributed to each of the components varies. The neoclassical growth strand (Solow, 1956; Swan, 1956) put the emphasis on physical capital. The endogenous growth approach (Romer, 1986: Lucas, 1988) focused on human capital and innovation. In turn, the new economic geography (Fujita, Krugman, & Venables, 1999; Krugman, 1991, 2011) and urban economics (Glaeser, 2011) stressed the role of agglomeration economies, externalities and density. These three factors—plus agglomeration and density—continue to be the fundamental elements informing theoretical and empirical thinking about economic development policies and, consequently, development strategies across the world often remain anchored in these theoretical frameworks. The European Union's (EU) Cohesion policy—the largest development policy in the world—has been no exception. The bulk of cohesion investments have been channelled towards improving infrastructure endowment and accessibility, as well as increasing the availability and quality of human resources, and developing the innovative capacity of individuals and firms across the less developed areas of Europe. The impact of this type of intervention has been, however, controversial. For some (e.g., Becker, Egger, & von Ehrlich, 2010, 2018; Cappelen, Castellacci, Fagerberg, & Verspagen, 2003; Cerqua & Pellegrini, 2018; Crescenzi & Giua, 2020; Ferrara, McCann, Pellegrini, Stelder, & Terribile, 2017; ; Pellegrini, Terribile, Tarola, Muccigrosso, & Busillo, 2013), European-wide investment focusing on these three areas of intervention has delivered greater prosperity to those regions that have benefited the most from the policy. For others, in contrast, the returns of European investment on cohesion have been below expectations (Boldrin & Canova, 2001; Dall'erba & Le Gallo, 2008; Mohl & Hagen, 2010) and often conditional on the type of intervention and the characteristics of the receiving region (e.g., Dall'erba & Le Gallo, 2007, 2008; Ederveen, Groot, & Nahuis, 2006; Falk & Sinabell, 2008; Mohl & Hagen, 2010). The stark reality is that while some regions and cities have thrived—frequently becoming highly networked, technology-intensive and creative—some have endured far bumpier rides, while others have fared much worse and are, in some extreme cases, grappling with strong decline. The presence of highly dynamic winning cities and regions alongside areas that have seen long-term economic decay and are increasingly regarded as places with scarce economic opportunities is creating a "geography of discontent" (Dijkstra, Poelman, & Rodríguez-Pose, 2019; Los, McCann, Springford, & Thissen, 2017; McCann, 2020; Rodríguez-Pose, 2018). This "geography of discontent" is currently having significant economic, social and political implications. As indicated by The Economist on 17 December 2016, rising subnational inequality "is proving too politically dangerous to ignore." Hence, understanding why these divergences occur is one of the principal dilemmas confronting the social sciences today: why do seemingly identical or very similar regions and cities sometimes perform so differently? Or, put in another way, what are the key factors that affect the economic fortunes of territories? This paper will look at why our theoretical toolbox is increasingly failing when trying to explain the economic trajectories of regions and cities and how a greater focus on how institutions, governance and government quality shape economic activity may not only allow us to explain better the differences in the economic performances of territories, but also provide the basis for a sounder and more efficient development policy at subnational level. In order to do that, I will first look at the "problem," namely why are we struggling to adequately comprehend the diverse economic trajectories of cities and regions. Then I will identify what I consider to be a number of critical gaps in our knowledge, before turning to the analysis of institutions as a potential solution to the "problem." The penultimate section of the paper will outline potential ways forward in order to improve both our understanding of what triggers economic development as well as the design, delivery and implementation of development policies. The conclusions are presented in final section. If scientific research has struggled to properly understand why some territories fail while others thrive, the answer may lay in the deficiencies in our theoretical toolbox and how they have affected development policy interventions in cities and regions. In recent years it has become increasingly clear that we are witnessing a decline in the returns of intervention in the three traditional main growth axes. There is, for example, concern about a potential exhaustion of additional investments in transport infrastructure and of improvements in accessibility as drivers of growth (Crescenzi, Di Cataldo, & Rodríguez-Pose, 2016; Crescenzi & Rodríguez-Pose, 2012). There is also growing scepticism about the viability and returns of investing in technology and innovation in areas that are far away from the technological frontier (Acemoglu, Aghion, & Zilibotti, 2006; Farole et al., 2011; Filippetti & Peyrache, 2015). Furthermore, distance to the technological frontier may also affect the economic impact of investment in human capital (Rodríguez-Pose & Ketterer, 2019; Sterlacchini, 20082008; Vandenbussche, Aghion, & Meghir, 2006). Overall, the combination of physical capital, human capital, and technology explains a waning share of the variation in territorial—regional and urban—development. Economic theories that accounted for differences in development performance relatively well two decades ago are becoming less capable of doing so (Rodríguez-Pose, 2013). The residual factor is growing, meaning that, in spite of substantial improvements in growth theory, methods and data availability, we tend to be able to explain less about what determines the fortunes of territories. This declining explanatory capacity signals that a key ingredient in the growth and development equation has been missing. Especially at the empirical level, "stubbornly high—and often growing—residuals in growth regressions have encouraged many scholars to look for additional factors that impinge on economic development and growth beyond traditional growth theories" (Rodríguez-Pose, 2013, p. 1036). Most eyes have turned to the role of institutions, in general, and government quality, in particular, for answers (Charron, Dijkstra, & Lapuente, 2014, 2015). Indeed, according to Rodrik, Subramanian, and Trebbi (2004), institutions trump traditional factors such as trade, resource endowments, and geography in their significance and influence on economic development. However, although the literature concerning the role of institutions for development is becoming more voluminous and transcends numerous academic disciplines, scholarly research is labouring to go beyond the idea that "institutions matter." Hence, how institutions shape economic progress still remains the "dark matter" of economic development (Storper, 2010). There are several areas where the literature on the links between institutions and development has faced considerable stumbling blocks. First and most importantly, work trying to link institutional quality to economic development has been confronted with the issue that defining institutions is difficult and remains fraught with controversy. Concepts about institutions are subjective when not outright contentious (Rodríguez-Pose, 2013). Second, measuring and operationalizing the institutional dimension is problematic for several reasons: (i) many different types of institutions are context and geography specific and what is an efficient institutional arrangement in one place may not necessarily work in another (Chang, 2003); (ii) time also affects the returns of specific institutional arrangements (Storper, 2005); (iii) institutions and development also tend to be endogenous: good institutions promote development and development, in turn, promotes institutional improvements (Chang, 2011; Rodrik, 2004); and (iv) institutions are also closely connected to the three other determinants of growth and with innovation and education, in particular (Glaeser, La Porta, López-de-Silanes, & Shleifer, 2004). These difficulties make measuring and operationalizing institutions, especially at the regional and urban level, particularly problematic. Despite these notable barriers, considerable progress has been made of late in terms of measuring institutions and their impact at subnational level in different parts of the world (e.g., Beer & Lester, 2015, for Australia; Rodríguez-Pose & Zhang, 2019, 2020 and Wang, 2019, for China), but particularly in Europe. The Quality of Government Institute of the University of Gothenburg has made the largest contribution in this respect. The Quality of Government Institute generated, at the request of the European Commission, a comprehensive subjective quality of government (QoG) index for virtually all regions of Europe (Charron, Lapuente, & Rothstein, 2011; Charron et al., 2014). This index has now been produced in three waves: 2010, 2013 and 2017. It became an instant hit since its release, with several researchers resorting to it as the main indicator of institutional quality across regions of Europe. The common the nominator of most of the studies using this index is that institutional quality is a fundamental factor in explaining not only the economic growth trajectories, but also innovation, productivity or employment across regions of Europe. The consensus is that institutional quality matters, and that it matters a lot (e.g., Ketterer & Rodríguez-Pose, 2018), as an explanation of the divergent economic paths of subnational territories in virtually all economic realms. Public institutions are, according to Morgan (2017, p. 571), "needed to broker connections and nurture novelty." More specifically, institutional quality determines the capacity of regions and cities to compete in a more economically integrated world (Annoni & Dijkstra, 2013; Huggins, Izushi, Prokop, & Thompson, 2014). It drives differences in employment growth and social inclusion (Di Cataldo and Rodríguez-Pose, 2017), as well as in entrepreneurship (Audretsch & Belitski, 2017; Fritsch & Wyrwich, 2018; Huggins & Thompson, 2016; Nistotskaya, Charron, & Lapuente, 2015; Wyrwich, Stuetzer, & Sternberg, 2016) and innovation capacity (Rodríguez-Pose & Di Cataldo, 2015; Sleuwaegen & Boiardi, 2014). Local institutional conditions also determine environmental responses to climate challenges (Halkos, Sundström, & Tzeremes, 2015) and shape the participation of individuals in politics and policy (Sundström & Wängnerud, 2014). As importantly, on top of the above-mentioned direct effects, differences in institutional quality across subnational territories have weighty indirect implications on the effectiveness of other policies. They, for example, shape the returns of development and/or cohesion intervention (Glückler & Lenz, 2016; Rodríguez-Pose & Garcilazo, 2015), influence the choice of public goods—as, for example, the different types of transport infrastructure investments pursued in different places (Crescenzi et al., 2016). They also condition the economic impact of political processes, such as decentralization (Muringani, Fitjar, & Rodríguez-Pose, 2019) and determine, to a large extent, how attractive a territory is for potential migrants (Ketterer & Rodríguez-Pose, 2015). Overall, differences in institutional quality across territories can be considered today as important as—if not more important than—variations in physical and human capital endowments and innovation capacity for the economic development of cities and regions (Rodríguez-Pose & Ketterer, 2019). All this recent work on how institutions and government quality affect development strategies and, consequently, the economic performance of territories represents a substantial progress in our understanding of the role of institutions as shapers of economic development at subnational level and, especially, in lagging areas. However—and in spite of the progress made—this research continues to be highly divided (see, for example, the contrasts in Acemoglu and Johnson's (2005) approach vs. that of Chang (2011)—and remains limited on a number of counts. First, recent work has generally regarded institutional conditions as a static factor. The quality of local institutions is considered to be fundamentally a result of history (Charron & Lapuente, 2013). Institutions are built on decades, if not centuries of history, and, therefore, for many they can hardly be changed through policy intervention. They are path dependent and generally assumed to be a permanent feature of a territory. If the South of Italy has underperformed the rest of the country for now several centuries, it is because of the institutional divergence that took place between the North and the South of Italy in the Middle Ages (Putnam, 1993). Hence, institutions are often regarded as permanent features of a territory that facilitate or impede the adequate development of economic activity. Yet, institutional quality does not always remain still. It can change and, under specific circumstances, the transformation can take place swiftly (Rodríguez-Pose & Storper, 2006), often through processes linked to agency (Grillitsch & Sotarauta, 2019). Many Central and Eastern European countries, cities and regions improved their institutional quality rather rapidly after the fall of communism. Others, by contrast, did not. Despite some exceptions (e.g., Rodríguez-Pose & Ketterer, 2019), the capacity for institutions to change and, accordingly, transform the economic potential of a place has been generally neglected by research to date. Second, most analyses of the role of institutions on economic development have tended to put the emphasis on formal institutions often at the expense of informal institutions. The rule of law or property rights, for example, have featured prominently in most seminal empirical institutional studies (e.g., Acemoglu & Johnson, 2005; Rodrik et al., 2004), while the interest on informal institutions—such as values, culture, trust, openness, networks, tolerance, diversity, creativity or social capital—has considerably lagged behind. This is something that is difficult to understand, especially as the quality of data on values and social capital has kept on improving in recent decades. The few exceptions in this respect (e.g., Beugelsdijk & Klasing, 2016; Beugelsdijk, Klasing, & Milionis, 2019; Cortinovis, Xiao, Boschma, & van Oort, 2017) provide interesting insights, but still fall far short of the attention that the role of informal institutions for economic development deserves. Third, most subnational research has limited itself to establishing whether institutions matter or not for economic development. However, limited attention has been paid to the exact transmission mechanisms through which institutions affect economic outcomes. Hence, we know relatively little about the ways in which different types of formal and informal institutions affect the economic development of cities and regions. Last but not least, there is still a long way to go in order to transform research on the impact of institutions on economic development at subnational level into effective, evidence-based policies. While there is an increasing recognition of the institutional dimension in development policies and of the importance of mitigating and minimizing the potential for institutionally-related failures, there is still considerable scope to both incorporate place-sensitive institutional reforms and capacity-building initiatives into the development strategies themselves, based on more detailed research of the dynamics and mechanisms at play between institutional factors and development outcomes. Institutions are fundamental for the development of economic activities: they are the rules that govern (North, 1990) and promote (Nelson & Nelson, 2002) human interaction and economic change. Recent research has tended to highlight the fact that institutions matter for economic development, but, most of this research has paid more attention to institutional stability 1 and less to the processes of change (Scott, 2013). Indeed, according to Chang (2011) the dominant views on the link between institutions and development have overlooked the importance of institutional change. Hence, whether institutional change affects the economic performance of cities and regions in Europe and elsewhere remains, to a large extent, underexplored. Do institutional improvements affect economic development at subnational level in any significant way? Do poor institutional endowments represent an unsurmountable barrier for economic development, especially in less developed regions and cities as hinted by past research (e.g., Putnam, 1993)? Dealing with these questions at subnational level implies far more research than the limited analyses conducted to date (e.g., Rodríguez-Pose & Ketterer, 2019). There is a need to assess whether both the initial levels and the degree of institutional change affect regional and urban economic performance in the same way within countries and across different geographies (e.g., Grillitsch, 2015). Particular emphasis is required to determine how institutions co-evolve (Gong & Hassink, 2019) and how institutional change determines economic performance in lagging regions, those that traditionally have a weaker institutional ecosystem. In this respect it is essential to discriminate between the role played by traditional areas in development policy intervention, such as infrastructure, human capital and innovation, relative to that of different formal and informal institutional aspects, such as corruption, openness, social capital, tolerance, the rule of law, government effectiveness and government accountability. The focus has to fall squarely on changes in all these factors. Moreover, the analysis of the dynamics of institutional change needs to rise above considering regions and cities as uniform. It has to start differentiating between territories, using the whole spectrum of cities and regions, in a way that takes into account their unique characteristics (e.g., European Commission, 2014). We need to know more about whether improving institutional quality by either increasing social capital and tolerance, reducing widespread corruption, cultivating human capital and fostering absorptive capacity, or introducing measures aimed at making government decisions more efficient and transparent represents as important a requisite for territorial development at subnational level as conducting more traditional "hard" types of regional development investments (Malecki, 2012). We also need to know more about what determines the emergence of able and effective local leaders (Beer & Clower, 2014). Future research, therefore, will have to dig deeper into whether measures aimed at reducing the monopoly power of bureaucrats (Bardhan, 1997; Rose-Ackerman, 1978) or creating a more adequate incentive pay structure for public administration (Bardhan, 1997; Tanzi, 1998) pay off; into whether e-government initiatives and a wider use of ICTs in government can also deliver improvements in government efficiency and transparency (Pina, Torres, & Royo, 2007); whether cutting red-tape (Håkanson, 2013), as well as measures aimed at increasing the education levels of civil servants can further redress public sector inefficiencies and promote economic growth (Afonso, Schuknecht, & Tanzi, 2010); or whether increasing tolerance and openness triggers economic development (Florida, Mellander, & Stolarick, 2008). We also need to know more about how can different places break out of current practices and improve their institutional conditions. There is often the perception that local institutional conditions are sticky and take a very long time—often centuries—to change, (e.g., Putnam, 1993). This generates an institutional path dependency, resulting in lock-in in a large number of places. However, changes can also take place in relatively short periods. In the European context, for example, the rapid recent improvements of institutions in a country like Estonia strongly contrast with stasis, rigidity, and reluctance to change in Italy. Hence, there is a need to better comprehend the dynamics of change, taking both into account the starting institutional—both formal and informal—conditions as well as the dynamic of different groups within a society and the balance between bonding and bridging relationships. As indicated by Rodríguez-Pose and Storper (2006, p. 15), "places with strong groups and strong societies will be characterized by institutional arrangements with problem-solving mechanisms that help to resolve tensions and agency problems." Yet, there is a need to know more and the division between institutional environment, which refers to higher levels institutions such as identity or culture, and institutional arrangements, touching place-specific customs and habits (Martin, 2000; Rodríguez-Pose, 2013). Likewise, appraising whether institutional progress, such as the enactment of public legislation and implementing policy measures aimed at improving the efficiency of government, enhancing voice and accountability, and/or reducing corruption can lead to better public interventions, characterized by a more efficient use of public expenditure, in general, and public investment, in particular (Afonso & Fernandes, 2006), represents a vital avenue for future research. However, this implies acknowledging that institutional bottlenecks are at the heart of development problems and adequately recognizing the role played by institutional quality in development (Tanzi, 1998). Institutional quality must then be raised to the rank of a fundamental factor in growth equations, on a par with transport infrastructure, education and training, and technology and innovation. However, as Persson, Rothstein, and Teorell (2013) stress, awareness of the problem alone is not sufficient and an in-depth knowledge of the mechanisms behind institutional change and how it affects urban and regional economic performance is required as an initial step to be able to formulate solid, evidence-based policies. Formal institutions generally refer to institutions that are defined by "transparent and codified rules" (Rodríguez-Pose & Storper, 2006, p. 2). As such, they are universal, transferable, and determine human interaction (North, 1990; Rodríguez-Pose, 2013). The quality of formal institutions therefore has the potential to significantly affect economic development (Acemoglu & Johnson; 2005; Charron, Dijkstra, & Lapuente, 2014; Rodríguez-Pose, 2013). Informal institutions generally refer "to features of group life, such as norms, traditions and social conventions, interpersonal contacts, relationships, and informal networks" (Rodríguez-Pose & Storper, 2006, p. 1). In the same way as formal institutions, informal institutions can play a central role in determining economic development (e.g., Duranton, Rodríguez-Pose, & Sandall, 2009; Florida et al., 2008; Putnam, 1993; Rodríguez-Pose, 2013; Tabellini, 2010). However, due to difficulties in defining and operationalizing informal institutions (Lee, 2017), the research focusing on how informal institutions influence economic performance at subnational level is much more limited than that dealing with formal institutions. While there is no shortage of academic work on issues such as how differences in the power awarded to subnational governments (e.g., Marks, Hooghe, & Schakel, 2008; Rodríguez-Pose & Ezcurra, 2011) or in government quality (e.g., Annoni & Dijkstra, 2013; Charron et al., 2014; Nistotskaya et al., 2015; Rodríguez-Pose & Di Cataldo, 2015; Rodríguez-Pose & Garcilazo, 2015) shape different aspects of subnational competitiveness in Europe, the focus on the role of informal institutions is still mostly absent. Hence, examining how informal institutions impinge on urban and regional performance at a subnational level would address a fundamental gap in our knowledge. Economic interaction and progress is highly dependent on the specific informal institutional conditions of the context in which the economic activity takes place (Cortinovis et al., 2017; Lee, 2017; Rodríguez-Pose, 2013; Tabellini, 2010). Local levels of diversity, openness, trust and tolerance—among other factors—determine to a large extent what type of economic activity occurs in a specific place and affect its innovativeness, creativity, and productivity (Florida et al., 2008; Kemeny & Cooke, 2017). Yet, the empirical studies that have aimed to assess the link between informal institutions—from family structures to culture—and economic development (e.g., Cortinovis et al., 2017; Duranton et al., 2009; Tabellini, 2010) remain scarce. Two types of questions require urgent answers. First of all, to what extent do informal institutions shape urban and regional economic development? Do they do it in a similar way as formal institutions? Or do they follow different paths? Second, it is crucial to understand how do formal and informal institutions interact in specific subnational territories in order to generate economic development, as formal and informal institutions "are mutually influential in shaping a variety of [economic] outcomes" (Storper, 2014, p. 117). Answering these two types of questions requires going well beyond the sor