3. Dual Intergovernmental Transformation for Market Development

Harold Demsetz (2002: 154), for instance, remarks: “Yes, because private owners claim much of the reward and bear much of the cost that accompanies actions they take with their resources, but agents of the state bear only a small fraction of the rewards and costs that accompany the actions they take with state assets; the ultimate bearers of these are not the agents but the country’s citizens. Representatives and administrators in the government may be discharged by voters if they are disappointed with what has been done with the state’s assets, but the costs thus imposed on the state’s agents in the usual case will be quite small relative to those borne collectively by the nation’s citizens if the state’s agents have used state assets poorly. Similarly, the representative who retains his post because citizens like the way he has used state resources receives a reward that is quite small relative to the benefits he has conferred on the country.”

But, in the same article, Majone (2001: 103) also articulates that, if the main reason is to reduce decision-making costs, “principals should appoint agents who share their policy preferences.” I am only concerned of market incentives (or “credibility” in Majone’s term) here.

Olivier Blanchard and Michael Kremer (1997) label such a process of transformation as “disorganization.”

Jonathan A. Rodden (2006: 5) has a similar comment: “In fact, the accountability advantages of decentralization require that the central government’s authority be substantially limited. Industrial organization theorists have shown that in order to strengthen incentives and promote initiative in a decentralized organization, the center must credibly limit its own information and authority. The flip side, however, is a loss of strategic control by the center. In decentralized federations, politically fragmented central governments may find it difficult to solve coordination problems and provide federation-wide collective goods.”

From this perspective, students of the state-market relationship usually distinguish two roles of the state in markets, namely, a player vs. a referee. For instance, the World Bank (1997: 30–31) remarks: “What does the state do? For one thing, it sets the formal rules – laws and regulations – that are part and parcel of a country’s institutional environment…These formal rules, along with the informal rules of the broader society, are the institutions that mediate human behavior. But the state is not merely a referee, making and enforcing the rules from the sidelines; it is also a player, indeed often a dominant player, in the economic game. Every day, state agencies invest resources, direct credit, procure goods and services, and negotiate contracts; these actions have profound effects on transaction costs and on economic activity and economic outcomes, especially in developing economies…The state, then, is in a unique position: not only must it establish, through a social and political process, the formal rules by which all other organization must abide; as an organization itself, it, too, must abide by those rules (emphasis added).” In this analysis, I separate the role of the state in sponsoring market activities from the broader category of the role of state that has been traditionally regarded as a referee.