Ronald Coase Institute President Mary Shirley on Institutions and Economic Development

Scott Wallsten:

Hi, and welcome back to Two Think Minimum, the Technology Policy Institute’s podcast. I’m Scott Wallsten, President and Senior Fellow at TPI, and I’m here with my co-host, TPI Senior Fellow Sarah Oh. Today, we’re delighted to have Dr. Mary Shirley on the show. Mary is President of the Ronald Coase Institute, a nonprofit organization working to improve knowledge of institutions and to build the capacity of young scholars to analyze and overcome institutional problems in their own countries. Mary has a PhD in economics and has worked for over 30 years in development, including over 20 years as a research manager in the World Bank. She’s author of numerous scholarly articles and books on institutional issues and economic development. She’s also written on reform of state owned enterprises, including telecom, water, and more.

And what I’m sure was the highlight of her career, she was my very first boss ever, my first job at the World Bank. Mary, thanks for joining us today.

Dr. Mary Shirley:

Thank you, Scott. It’s my pleasure.

Scott Wallsten:

So, you’ve been working now building the Coase Institute for, is it 10 years now?

Dr. Mary Shirley:

It’s 20 years, if you can believe it. 20 started, we started in 2000.

Scott Wallsten:

Oh, right, and so why did you start it? What need were you trying to fill?

Mary Shirley:

Well I had spent 21 years at the World Bank by then, and I was frustrated with the failure of bank programs to graduate countries. We did a lot of good for beneficiaries, immediate beneficiaries of our loans, but we were less successful in changing the fundamentals in the country so that they no longer needed aid. And as it happened at around that time, I met Ronald Coase and we talked about these things and we agreed that what was really needed were the institutions. One of the big missing ingredients that we could supply was human capital. Ronald Coase was a person who had a great belief in young scholars’ ability to transform the way we think about problems, because he did that very thing. You know, he transformed our view of the firm and of contracts when he was only in his twenties. I think he was 21 when he wrote the theory of the firm. So, talking with Ronald, we agreed that we would start the Ronald Coase Institute to address some of these issues by helping these young scholars often neglected in their own countries get a start, and through mentoring and support, help them to transform their research, and eventually transform the way we think about problems.

Scott Wallsten:

It’s also pretty amazing that Ronald Coase himself was part of this. We sort of think of him as sort of just this foundational… you know, his work with so foundational to so much of our, the way we think that it’s almost like, you know, well, those of us who do weren’t lucky enough to really know him, don’t think of him as a person, but he was involved in this, and the earliest, first students met him, and they have his signature, and he worked with them. That’s pretty amazing.

Mary Shirley:

He read everything that they submitted. He was always extremely interested in what the participants were doing and how they were getting along. Those who took the time and trouble to go to him in Chicago were always received with great joy by Ronald. He loved being around these young people, and we hosted some of them at various luncheons and meetings with him., Even up until he was a hundred years old, he would still meet with some of our alumni. He was very committed to the idea of supporting young researchers, and he saw that as the future of economics and the future of reforms in societies.

Scott Wallsten:

So, how many students have gone through the program now?

Mary Shirley:

We’re up to almost 700. We have about 680 or so, and we had approximately 130 faculty, including you, and of course, Sarah was a participant. So, we’ve covered the waterfront with an awful lot of people now, and we have a thriving network. One of the other things we’re part of, as you know, is the Society for Institutional and Organizational Economics, which was started by a group of us.

Ronald was the first president and Douglas North was the second president and Oliver Williamson followed North. So, we had three Nobel Laureates in Institutional Economics running the show.

Scott Wallsten:

That’s that’s a pretty impressive lineup for any organization, and maybe not everybody who listens knows really what institutional economics is. Can you give a quick overview of how that’s different from… well, I really don’t like to just say and use the phrase “neoclassical economics,” but from the way most people think about economics.

Mary Shirley:

We call it the standard model. new institutional economics believes that the fundamental performance of economies boils down to their institutions, which are the rules, laws, constitutions, as well as norms of behavior, and that includes conventions and even culture broadly defined, and it consists of two branches.

it’s like a tree with a number of core concepts and then two major branches. One is under Douglas North, and you might call the macro side of institutional economics that focuses very much on the fundamental laws of the society and how societies perform, and the main question that preoccupies those scholars that are in this branch is “Why are some countries rich and some countries poor?” I’m sure that’s familiar to you because that comes right out of Adam Smith preoccupation.

The other branch is associated with Oliver Williamson, and that focuses more on the firm level issues. The nature of the kind of firms that end up being created in different markets situations, under different transactions and the kinds of contracts that entrepreneurs will enter into and the sorts of safeguards they’re looking for, all of those issues.

The way it differs from the standard model is first that these are the very things that the standard model assumes away,. There are no frictions. laws are there, but they’re enforced without cost, instantly, fairly, impersonally, and when you enter into a contract, no one is concerned about the possibility of what Williamson called “ex-post opportunism,” which is defined as self-interest seeking with guile..

And then there’s of course the firm itself, which in the standard model, it’s a black box. Inputs come in, outputs go out. What happens inside the firm is not of interest. The fact that you might choose the market with some transactions and a firm in others, that is not part of the standard model. Those kinds of governance choices are not considered, and it all takes place in an environment North called an “institutional environment” in which again, everything functions perfectly. The courts are functioning well, you don’t have huge costs or delays if you go to court and the government is a benevolent dictator who knows all and makes decisions to maximize welfare.

So, none of those things are part of the new institutional economics paradigm. Although we start with the same assumptions that underlie the invisible hand, we assume that people are boundedly rational, which is part of many standard economists’ point of view. But then we ask where do all of these different laws, rules, norms, where do they come in and how do they affect outcome? And that focus on those factors is the main thing that distinguishes us from the standard economic model.

Scott Wallsten:

Do you think that these workshops, and now with this large network of alumni, people come from all over the world and from countries with less than not always well-functioning institutions, and does this approach appeal to them particularly because they see they’re more likely to see firsthand the problems of institutions, or do you still have to sort of start from scratch and say, “Well, you know, this shouldn’t be a black box. We need to unpack it.”

Mary Shirley:

I would say that the former is true. They start with the assumption that these are very important issues for them. They’ve seen it on the ground and they’re attracted to the Coase Institute into new institutional economics, precisely for that reason. They are looking for ways to address issues that are important in their countries, and they really want to make a difference.

Now that said, a lot of them are caught in the same kind of trap that many economists are, which is to get published. And well, nowadays, new institutional economics is more published than it used to be, and there are leading economic scholars who are part of the new institutional economics branch of economics. Earlier, it was really tough to get published if you focused on these issues. So, that’s kind of a disincentive, but at the same time, there was this huge motivation, particularly for scholars from developing countries to try to also do research that was meaningful and would make a difference, and we hope that we can help them combine those two by bringing additional statistical rigor to their research and directing them in avenues where their research question is clear and meaningful.

Scott Wallsten:

How does it… are there ever problems with students coming from places that are not so willing to accept challenging questions? I mean, for example, there’ve been lots and lots of students from China, and lots of workshops that you’ve done in China. I attended one of them and the students, the assistants that I met were always incredibly open and questioning and thoughtful, but has it become more difficult for them over time as sort of relations between the West and China have deteriorated and possibly independent thinking, not quite as easy to do as it once was, I mean, even fairly recently, or are they able to stay separate from all of that?

Mary Shirley:

It’s become more difficult for them to be honest with you.. It’s not that anything has happened to any of our participants, but we’re a little worried about whether they’ll get into trouble for some of the things they’re working on. We find that, and I’m sure you’ve seen this too that you get so caught up in finding answers to things that you may tread on some toes, or you may say things that in your immediate environment are not very good to be saying.

Scott Wallsten:

How would you think about this from an institutional economics perspective? You know, what is the situation that some of these countries were reverting back to the way things were in some cases, are there institutions that have failed or are there institutions that are reasserting themselves, but how do we explain what’s happening now?

Mary Shirley:

Well, it’s as Douglas North once said when he wrote a book that described how institutions evolved into the kind of modern successful institutions that underpin modern states and legal systems, that there was no reason to presume that you couldn’t go the opposite direction, I think what we’re seeing is some deterioration or a reversion.

The things that are going on in China today are disturbing.They’re opening schools of Marxism/ Leninism, and some of the prominent universities next to where the economics faculty is teaching. There’s this suppression of the marketplace for ideas as Ronald Coase called it. In fact, right before he died at 102, he wrote a book with Ning Wang about China, and the conclusion of that book was that the biggest threat to China was the failure to promote a vibrant marketplace for ideas. And if anything, that marketplace for ideas has been more squelched, and that suggests that they were threatening their very progress if they keep going down that route, because one of their strengths has been the huge intellectual capital that they’ve created over the years, by allowing these young people to study abroad and to be engaged in a vibrant academic discourse about the biggest issues and problems facing the country.

Scott Wallsten:

Do you think an explanation for that is, is it just because of the Communist Party worrying about losing influence, or is there something else going on because the benefits of allowing scientific inquiry and allowing people to interact and research and study abroad seems so enormous? You know, what’s the incentive to destroy that?

Mary Shirley:

Well, I’m probably not the best person to answer that question, Scott, because I’m not a China scholar really. So, everything I know I learned from other people telling me what’s going on there. It does seem that influence and connections are becoming more important than they used to be. That there is this suppression of new ideas. You would think that that obviously has huge risks for an economy that’s as open as China, where they’re so dependent on innovation and trade, and all of that depends on new ideas., The Communist Party has always been very strong, but, I remember a period when people were saying that the Communist Party was actually quite competitive and that there was even a sort of democracy going on inside the party as they allowed more and more people in and elections became more important. I don’t think that’s going on anymore.

Scott Wallsten:

So, let’s turn away from China for a minute and go back to your time at the World Bank, and a lot of the work you did on infrastructure reform and state-owned enterprises, it feels like we’re on the verge of repeating a lot of those mistakes again. There is increasing talk of government owned telecommunications networks and with the government being involved in infrastructure in a way that it hasn’t been in a long time. So, for people who don’t remember the privatizations, sort of why countries privatized in the first place, what privatization got right and what it got wrong and what we should have learned from it. Tell us a little bit about your work at the World Bank at the time, and why it was so important.

Mary Shirley:

Well, along with you and other colleagues, we were very involved in studying the state owned enterprises that at that time were heavily involved in a lot of competitive sectors, as well as in natural monopolies and the problems they created for countries were enormous. Of course, one of the fundamental fallacies behind state ownership or state owned enterprises was the idea that you could somehow have all the benefits of a private enterprise, pursue a lot of beneficial social goals, and avoid the politics that you’d get if you use a bureaucracy.

Well, it turns out, and many political scientists could have told people this from the beginning, that you can’t avoid politics. as soon as you get the government involved, that’s part of the game and you have to accept that the rules of the game for politics are different from those in business and in the market.

As we saw in our own research, when we did a policy research report for the World Bank back in 1995 called, “Bureaucrats in Business” there are many different ways that governments are using state owned enterprises to achieve political goals and different, powerful politicians will be using that mechanism to pursue goals that are sometimes self-serving and sometimes very corrupt. So, those problems are problems you might have within the government, but you didn’t escape them with state owned enterprises, and the difficulty was that the state owned enterprises had enough freedom in many countries to borrow a great deal and to oppress through unfair competition their private competitors, and so you ended up bringing down a lot of other sectors of the economy and causing a lot of issues for the government debt and deficit through these state-owned firms.

Mary Shirley:

Following Margaret Thatcher’s privatizations in the UK, there was a lot of interest in privatizing state owned enterprises around the world, and a number of privatizations occurred, but where you had weak institutions in the government to begin with, the privatizations ended up being less than stellar. Frequently we did get a great deal of improvement because competition would open up. Money losing drains on the budget would go out of business. So, a lot of those kinds of benefits were had, but people became disillusioned that privatization didn’t seem to reproduce a vibrant private enterprise out of a state owned enterprise,.

And now, from what I understand, there’s more assets under state control than ever. Some of the largest enterprises in the world are state-owned, and a lot of them are huge financial conglomerates that are a big player in big markets. Many of them are Chinese, I think. So, you know, that problem hasn’t gone away and, if anything, it has become bigger and more difficult to solve.

Sarah Oh:

Do you think there’s a reason why people are forgetting the lessons of the past? Like, is it just because it was 40 or 50 years ago that there was a wave towards, you know, privatization away from public owned infrastructure, and now with the $1.9 trillion stimulus package, there’s more talk of city and state control over infrastructure spending. So, is it like a historical trend to go back and forth? Or is there something different about fiscal policy right now?

Mary Shirley:

It’s hard to answer that. Frequently people don’t learn the lessons of the past, but I wouldn’t be in research if I didn’t think there was some benefit from telling people what we’ve learned and what works and what doesn’t work. I think that what’s going on right now is probably different because there is a crisis, , there is a problem around the world with the pandemic, which calls for government action. So, that may be what’s driving this wish to try to help people out in any way people can. Privatization has become a dirty word, and yet the research I’ve seen on the effects of privatization show that it’s been beneficial, you know, and in some cases, shockingly beneficial. I can give you a very concrete example.

Sebastian Galliani did an inspired piece of work on this privatization of municipal water systems in Argentina that showed that it brought down childhood mortality from waterborne diseases quite dramatically, and yet those systems were deprivatized, nationalized, re-nationalized.

Scott Wallsten:

So, even after this great success, then they were renationalized.

Mary Shirley:

So, you know, that’s kind of discouraging too, and I don’t understand why some of these lessons don’t get taken into account, I try to be optimistic like Steven Pinker, who always sees things getting better over the long run. You just have to look long enough into the long run to see things improve.

Scott Wallsten:

To look long enough into the future where you can’t predict what’s going to happen.

Mary Shirley:

But, you know, he’s shown that over centuries, we have become less violent, and so that’s reassuring. Maybe we’ll be smarter at managing our economies as well.

Scott Wallsten:

But going back to the privatization as a dirty word is that true? Do you think even if it’s coupled with competition or is it a sense that people want more government involvement now rather than just, you know, if you saw privatization as basically creating the Russian oligarchs, moderate Russian oligarchs, then it’s understandable while you might have a somewhat jaundiced view of it, but are they, I mean, they’re opposed even to competition?

Mary Shirley:

The reason for that is partly a disillusionment because of what happened in places like Russia, where oligarchs got a lot of power through privatization. I don’t think that it’s opposition to competition per se,

I think, we kind of lurch around on the whole question of how to treat state owned enterprises. The lessons of the past are pretty clear for anybody who wants to read them, but everyone likes to think that things are different now, and they’ve got a new answer. I don’t tend to think that we’re going to go back. Certainly the United States has never had a lot of state owned enterprises. It’s always been much smaller than anywhere in Europe, and for that matter many European countries that are widely regarded as having larger social safety nets, like Sweden, for instance, did not have a lot of state ownership either. It’s been more of a problem in developing economies.

Scott Wallsten:

Although we do have lots of state ownership of water and electricity in particular.

Mary Shirley:

That’s true, and there it becomes more of a regulatory issue, That’s where new institutional economics is interesting because it treats this as a kind of contract and analyzes it from the standpoint of what kind of contract would give credibility to an investor, at the same time protecting the broader public under private operation of a utility, and that’s something I think we’re also having to learn a lot about. There are a lot of unanswered questions in that area.

Scott Wallsten:

So, I’d like to go back to the World Bank and the IMF for a second. You seem to have kind of mixed feelings about them because some of their advice was good, but you know, you left the bank and you talked about the reasons why at the beginning. How should those institutions work? Should they be restructured? And I don’t mean… that’s the wrong word because they restructure themselves every few years and you know, that never makes any real difference, but what’s their, you know, what should their role be today?

Mary Shirley:

Well, deep question, Scott. I won’t talk about the IMF because it plays a different role in many ways, but when it comes to the bank and the development role, I think that I’d like to see them focusing a lot more on institutional issues and institutional change. They made a huge movement in that direction. I want to give them credit for that. They’ve tried to incorporate that into their standards and ideas, but there’s a fundamental problem with the motivations of an organization like the World Bank, because they’re a lending body, they are a bank, a kind of cooperative really, and so staff are judged on the basis of projects and getting projects done, and that means getting along with the governments that you’re operating with so that you can jointly agree on doing a project. And the problems in the country may boil down to the government, that the people who were the dominant coalition running that country’s government may be the biggest source of the difficulties of promoting economic development. So, you take staff and say, “Make a deal with this government,” and you’re not going to get a project that says, “Okay, well first, we overturn the government.”

So, that’s a kind of quandary or dilemma that’s at the heart of the lending in the World Bank, and so if you’re working with a government that is a serious reformer, and is actually trying to change things, there’s a lot you could get done.

But if you’re working with a government where that’s not the case, you’re stuck. Either, you don’t do anything, in which case you get yelled at by your supervisors and the board, or, you try to come up with projects that you can insulate from the government or from the grasping hand. That help beneficiaries directly, but may not make the kinds of changes that I wanted to see, which were changes that actually would lead a country to become self-sufficient and no longer rely on foreign aid.

Scott Wallsten:

So, there was a report written by somebody at the Swedish Development Agency who was a friend of yours, I think, and wrote about the sort of internal incentives facing development organizations, and it was a pretty damning report.

And I think they know they didn’t suppress it or anything, but they didn’t exactly throw a launch party for it. Is there any reason to think that some of these bad internal incentives would change to have people rewarded for kind of better, more socially productive kinds of behavior?

Mary Shirley:

Let me first say that that friend of mine was Eleanor Ostrom.

Scott Wallsten:

Oh, it was Eleanor! Right.

Mary Shirley:

She got the Nobel Prize in Economics.

Scott Wallsten:

Oh, my God! I can’t believe I forgot that was her. No wonder it was such a great report.

Mary Shirley:

It was a great report. It was a brilliant report, and I was one of the people asked to review the report and I was in Sweden with her when that happened at the agency, and I told them that they should be grateful to have such a brilliant report.

Well, they were not grateful because it was very critical, and she did an amazing job laying out things that they could do to improve. I’d never seen anyone go into so much in depth and detail. It was really extraordinary, but there were obviously a lot of people who would be upset and probably have to change or lose their jobs if her recommendations had been implemented. So, it wasn’t adopted to my knowledge. So yeah, I think there is not a lot of reason to be too optimistic that those things can be changed. The bank did do an awful lot to try to incorporate more institutional ideas into their projects and their programs and the way they evaluate countries.

They’ve made some effort in that regard, but one of the dilemmas for a development agency is it’s not very easy to just reform an institution. You can go in and build a dam or support other advice, technical advice, but to actually change institutions is not something an outsider can easily do, short of taking over the country like the US Army took over Japan. It’s very difficult to restructure the basic institutions of a country.

Scott Wallsten:

It’s generally hard to get a grant to do that also.

Mary Shirley:

Exactly, and remember that Douglas North tells us that formal institutions, the laws, the regulations, the rules are all underpinned by norms of behavior, which are part of culture really. And now there’s been a lot of brilliant research showing how these kinds of norms date back hundreds of years. So, you end up with these persistent informal institutions, over centuries. Now, sometimes they change very quickly. They don’t necessarily take forever to change, but a lot of them are not amenable to change because somebody comes in with foreign aid.

Scott Wallsten:

Well, now, I mean, you’ve got 700 some alumni of the Coase Institute that should be working for change within their own countries. I mean that was part of the motivation, right? People would be studying their own countries and they know the institutions.

Mary Shirley:

Yeah, they are, and some of them have begun to move into positions of advice and importance in their country. Of course, what we’re embarked on is a project that will take a long time to make those changes. One of our alumni who’s also become part of our faculty s for a while, was the Deputy Minister of Finance in his country, and he’s now writing a book about the dilemma of being a researcher giving policy advice. That’s happening across many countries where they become heads of think tanks, , we’ve even got a few in political positions and they’re making a difference, but we can’t expect that things are going to transform overnight. What we hope is that they’ll be there when there’s a window of opportunity when real change is happening.

Scott Wallsten:

Right. I mean, that’s, that’s amazing. That’s the huge difference between now and 20 years ago, these types of people just weren’t there.

Mary Shirley:

That’s right. I mean, we take it for granted in the United States that we have all of these research think tanks and institutes and universities and groups like yours that are analyzing issues and giving advice and telling people, this works, this doesn’t work. You go to many countries where that’s completely absent. So, that’s one gap that I know needs to be addressed, and that’s why we started the Coase Institute to begin with.

Scott Wallsten:

So, that’s probably a good place to wrap up. We’ve gone over time, but that was a really interesting conversation.

Thanks a lot for coming on Mary! We really appreciate it, and look forward to continuing to work with you and the Coase Institute in the future and seeing who the next 700 alumni are.

Mary Shirley:

Thank you, Scott. It’s been a great pleasure, and it was great to see Sarah again.

Sarah Oh:

Thanks, Mary.