An Open Letter to World Bank Project Staff

Visibility: Open to anyone

    I am writing an open letter to the Bank regarding the so-called “science of
    delivery” and the role that transaction cost economics (TCE) may or may not
    have in its promulgation. 

    Let us assume that we have the technology pretty much down pat.  For instance, for the issue of urbanization,
    we have ample disciplines such as master and urban planning, urban economics,
    land use management, and building regulations, among others.  What we do not have is the knowledge to
    deliver the technology.  When we come up
    with a poorly rated project, it is usually a case of failure to deliver, than
    it is a failure of the technology.


    Imagine a mental picture where every development project is potentially a research
    agenda for any economist or political scientist in any university, think tank,
    or private firm in the world.  All research and project designs conform to
    an identical analytical framework of positive science including law, economics,
    and organization theory.  Assuming this is true, what are some of the
    possible implications?

     

    1. Global competition sorts the seed from the chaff; and space, time, and complexity

    diminish as constraints and function more as positive supports.

    2. Accountability and transparency go global and corruption goes into a “deep six”.

    3. Relative cultural differences among countries are incorporated by local law-makers

    into their institutional environments, which are defined as domestic laws for contracts, property
    rights, and codes of conduct, to wit, North’s “rules of the game”.

    4. Because investment value depends on fulfillment of the promises of the other party and on

    continuity of the investment, the need for credibly committed contract is created and
    operationalized and holdups are controlled or even blocked.

    5. Economic organization is about unraveling why firms opt to mediate transactions through

    the interfirm interfaces across   an autonomous market exchange; or (ii)
    various autonomous market procured long-term contractual hybrid exchange arrangements,
    or (iii) through the intrafirm interfaces of internal hierarchical organization
    that is consistent with the hierarchical exchange of the firm.

    6. Through experience, the other party begins to see the wisdom that resides behind the

    new institutional economics’ rule that the making and consummating of a transaction involves

    minimization of the sum of production and transaction costs where the world of zero transaction
    costs is no longer valid, and if its invalidity is ignored, policy recommendations are distorted. 

     

    What kinds of change would be required to bring the above about?  A fair to
    middling amount, but doable, and someone has to start.  Modifications of
    current practices would be needed in recruitment, internal policies and
    procedures of technical directives, training, and responses to RFPs.
    Results could be apparent within six months to a year as people get trained and
    the world of economic exchange opens up new vistas for economic mediation and
    risk management.  Once they do, change is self-enforced. 

     

    Are the above implications real outcomes?  Yes, refer to the attached 2004 paper by MIT economist Paul Joskow, distinguished
    econometrician for his work on the US electric power industry using Williamson’s
    analytical framework.