State Building: Governance and World Order in the Twenty‐first Century
Francis Fukuyama
London, Profile Books, 2005, xvi + 186 pp., UK£6.99,
ISBN 186‐197‐704‐2 pbk1
Introduction
Francis Fukuyama is always worth reading. Whether one agrees with his ideas or not, Fukuyama is a discourse setter: what he says helps to shape the academic and political agenda. Fukuyama’s succinct book, State Building: Governance and World Order in the Twenty‐first Century, is no exception: it is worth reading, and it openly tries to set a political‐cum‐academic agenda. Does it fully succeed? Maybe not. However, Fukuyama’s symbolic power to state the order of things—to set the boundaries of the questions we ask, to tell us where to look for our answers, and to direct political decision making—makes it all the more important to indicate how and why that is the case.
Tersely put, Fukuyama wants to tell us that states are important, and that many of today’s problems, from AIDS treatment to terrorism, can in fact be driven back to failed state building and inefficient governance. This is a clear departure from the all‐too‐simplistic notion of ‘minimal states’ that ruled the development debate until about the middle of the 1990s. Hence we must find out how to build states and how to spread efficient governance: that is Fukuyama’s road to World Order.
Below, we will summarize Fukuyama’s contribution and explore the limits of his arguments. However, a traditional summary is challenging: Fukuyama tries to bring together research traditions in political science, political/historical sociology, International Relations, and, perhaps most importantly, ‘New Institutional Economics’ (NIE). Moreover, Fukuyama also links his theoretical lessons to a wide range of case studies and real‐world political scenarios, from (failed) state‐building in Eastern Europe to the when and how of military intervention in sovereign states (e.g. Bosnia, Iraq). To put it mildly, State Building is a book with a very wide scope—and, to borrow Fukuyama’s own vocabulary, too much scope may limit the strength. Fukuyama essentially tries to ‘ground’ and expand political science and International Relations with insights from the NIE. As we will see, doubts remain concerning the theoretical framework proposed. Many links between theory and a series of substantive claims are left unarticulated, raising the possibility that the book’s policy recommendations are unwarranted.
Fukuyama’s Argument
As we learn in the Preface of the 2004 hardcover edition, State Building is an outgrowth of a series of lectures delivered by Fukuyama at various institutions. The main body of the text is divided into three chapters, while a very short fourth chapter presents the book’s concluding message.
Chapter 1, ‘The Missing Dimensions of Stateness’, takes its cue from the debate about the role of the state in economic development. It introduces an important distinction between the scope and strength of states. On the one hand, scope relates to the extent of functions that the state carries out. These are located on a spectrum that ranges from minimal scope (e.g. public good supply, property right definition and enforcement, and macroeconomic stabilization) to intermediate scope (e.g. internalization of externalities, environmental policy, and education) to more far‐reaching functions (e.g. industrial policy and the redistribution of wealth). On the other hand, strength relates to the power that states have to implement functions that fall within the scope of their activities: it reflects the institutional capacity to act in specific ways. Fukuyama’s thesis is that conflating these two dimensions causes confusion and muddled policy prescriptions. For Fukuyama (p. 30), the question is ‘how do we get to Denmark?’, where Denmark represents a developed country with well‐functioning state institutions.2
Building on the distinction between the scope and strength of a state, Fukuyama says that to understand state capacity we should also address the question of the supply and demand of institutions. The supply question is composed of four aspects: ‘(1) organizational design and management, (2) political system design, (3) basis of legitimization, and (4) cultural and structural factors’ (p. 31). Fukuyama argues that, of the four aspects, the first (organizational design and management) is the easiest to transfer, because it comprises knowledge that can be expressed formally.3 The respective transferability of the second, third and fourth aspects are ‘medium’, ‘medium to low’, and ‘low’; they are embedded in ways of knowing that are difficult to formalize, and hence to transfer.
The question of demand for institutions, succinctly put, refers to the ‘fact’ that if there is not sufficient domestic demand for a well‐organized state (that is to say, for a state that comes to combine low‐scope with high‐strength) then it is unlikely that there will be successful state‐building (pp. 47–8). But in ‘the absence of strong domestic demand, demand for institutions must be generated externally. This can come from one of two sources. The first consists of the various conditions attached to structural adjustment programs, and project lending by external aid agencies or donors. The second is the direct exercise of political power by outside authorities that have claimed the mantle of sovereignty in failed, collapsed, or occupied states’ (p. 48). Therefore, it is not impossible, says Fukuyama, to successfully build states through power politics—at least to some extent. As we shall see, Fukuyama tries to make such a claim more precise in Chapter 3, albeit in a way that might fail to convince.
Chapter 2, ‘Weak States and the Black Hole of Public Administration’, contains, in our view, Fukuyama’s most interesting contribution. In this chapter Fukuyama points out that, even though formal knowledge about administration and organizational design can be transferred, this does not mean that it is possible to engineer a perfect organization—either in private or public contexts. On this account, he is critical of most dominant economic approaches to the study of organization, because they often overlook informal institutions, such as organizational culture, that enable delegated judgment to make a difference. Indeed, Fukuyama complains that economics has a tendency to frame most problems of organization in optimization terms. To make his case, he proceeds by reviewing two of the dominant approaches in the economics of organization, namely, principal‐agent and transaction‐cost theories. Since he perceives delegated discretion as the central organizational problem, his primary focus is on principal‐agent issues, and in particular with incentive alignment or shirking obviation. This does not mean that Fukuyama entirely ignores transaction cost considerations, however.
In a dynamic environment, that is, one characterized by the emergence of new problems and hence in need of continuous organizational adjustment, there are three, essentially cognitive, reasons that render the design of an optimal organization impossible: (1) many organizational goals cannot always be well‐defined; (2) monitoring is not a panacea; and (3) there is no fixed rule of thumb for the extent of delegation. Let us briefly take each in turn.
(1) If individuals have limited rationality in Herbert Simon’s well‐known sense,4 then it is not plausible to assume that goals are unambiguous, and hence can be put in the form of an optimal control problem. Organizational problems are not as mechanical as price theory implies. In fact, rather than flowing down from the top, most organizational knowledge is distributed, specialized and sticky. As such, it is not necessarily amenable to formalization. Many organizational problems are solved by organizationally embedded knowledge that is revealed in the reflexive process of adapting to changing circumstances—for example, in the face of innovation or exogenous competitive pressures.
(2) The incentive problem is not just typical of private organizations but also of public ones. Incentive‐alignment, as known, is ‘solved’ by monitoring output since it is impossible to monitor input—i.e. work effort—at every point in time. Therefore, incentive schemes—‘optimal wage contracts’—are functions of observable and quantifiable output.
But it may also be difficult, Fukuyama specifies, to monitor output. Modifying the working paper version of what eventually became Pritchett and Woolcock5 with the categories introduced by Israel,6 he accordingly qualifies that public sector services can be distinguished according to transaction intensity and specificity. Transaction intensity ‘refers to the number of decisions that need to be made by organizations, which range from very small (e.g. decisions to change interest rates at a central bank) to very large (taking deposits in a retail banking system, or delivering primary education)’ (pp. 75–6). Specificity is instead ‘the ability to monitor a service output’. A ‘highly specific service is jet aircraft maintenance, a complex skill that is hard to fake. If a mechanic is incompetent, there will be immediate consequences. By contrast, high school guidance counseling is a service with very low specificity. The counselor may advise a student to change career directions; the advice may not be taken immediately, and, even if it is, its impact on the student’s later life may not be known for years (if at all, since measurement requires a counterfactual comparison)’ (p. 76). In short, a low specificity output is difficult to measure; a high specificity output is less so.7 Does this mean that for developing countries informal institutions are the solution to the poor performing formal ones when it comes to activities with low specificity and high transaction volume? Unfortunately, the answer is not so simple, because the matter hinges on the maturity of the social capital, not on social capital as such.8
(3) The problem of the extent of discretion to be delegated to organizational constituents is the last cognitive problem that constrains our ability to engineer optimal organizations. Such a problem exists not only in private but also in public organizational contexts, e.g. fiscal federalism (p. 97 ff.).9 Theoretically, here Fukuyama refers especially to the path‐breaking contribution of Friedrich A. von Hayek.10 Extending some of the insights of his mentor Ludwig von Mises about bureaucracy and socialism, Hayek argued that central control of an economy is impossible: no individual possesses all the relevant knowledge. Indeed, to be solved, many problems require ‘the knowledge of the particular circumstances of time and place’.11 So, knowledge is not only dispersed, but also idiosyncratic or, following Michael Polanyi,12 tacit. This necessarily implies that even though in some cases centralized governance may have advantages (e.g. managing radical technological innovation), some tasks must be delegated through some level of decentralization. And this leads, of course, to the problem of optimal amount of discretion. The optimal amount of discretion, moreover, is itself particular to time and place (pp. 99–101).
In Chapter 3, ‘Weak States and International Legitimacy’, Fukuyama relates the problem of weak states to the international level, asserting that ‘weak governance undermines the principle of sovereignty on which the post‐Westphalian international order was built’ (p. 129). Yet, the answers given by this chapter to the weak governance question at the international level move outside the preceding discussions. Fukuyama tries to link the normative debate concerning military intervention (when should states intervene, when is it legitimate to violate state sovereignty, what is to be considered a ‘threat’, who decides, and is the US right to go it alone in the absence of adequate international institutions?) to the very different question concerning the building‐up of efficient institutions. The conclusions reached as to the questions of international legitimacy, democracy, and sovereignty (and the different approaches to state building held by the US and Europe) must therefore be seen as considerations not having much bearing on the theoretical discussions laid out in the first two chapters.
What we think Fukuyama wants to offer in this chapter, which to some extent does follow from the previous discussion, is actually a word of caution. He indeed distinguishes between different phases of state building, and suggests that it is only within the first phase—post‐conflict reconstruction—that we can reasonably expect to achieve something. He is in fact rather skeptical as concerns the task of creating self‐sustaining public institutions from the outside. Rather than proposing new solutions for endogenizing institutional demand, Fukuyama basically proposes that we should lower our expectations because ‘we do not … know how to transfer institutional capacity in a hurry’ (p. 141).
Discussion of Fukuyama’s Approach
Overall, we find interesting Fukuyama’s attempt to introduce contemporary institutional and organizational economic theory into the realpolitik discourse. At the same time, we feel that there are some empirical and theoretical issues that need elaboration. Let us mention three of those issues. The first two must be regarded as missing links, whereas the third regards the expansion of theoretical horizons.
First, Fukuyama is certainly correct that we need to think constructively about how to build states and how to export suitable institutions. Both are pertinent issues on the political scene. Forms of state building are of general concern because state/governance problems spill over into the international community. Moreover, as Fukuyama also makes clear, we still need better recipes concerning the different forms of international intervention in ‘sovereign states’ like Serbia and Afghanistan. Evidently, individual state governance and ‘world order’ are interconnected.
Yet there is less recognition of the more embedded ways in which state institutions originated, from the very outset, not just in a national but also in an international context. Fukuyama addresses this link from a perspective reminiscent of popular political discourse. In other words, Fukuyama links the national and international levels thematically (failed state building in one corner of the world affects the rest of the world) and normatively (trying to set up some guidelines for when the international community can and should intervene in state affairs), but does not do so theoretically. This prevents us from recognizing that states formed and reformed within an interstate system of political and economic competition as well.13 This national and international notion of power politics ties in not just with institution building per se, but with the dynamics of institution building. If states developed also as responses to their position within an interstate system of competition one may equally look at this very concretively in the world today. For instance, it is often not a serious option for political leaders in developing countries to mobilize their citizenry in order to strengthen the state, as happened historically in France and England. Weak states find other ways of adapting to the situation: they remain weak, but channel a portion of the resources they may carve out to ruling families or other elites (or, in the extreme, to one individual: the dictator). These elites have little or no incentive to create so‐called modern states, for that would just destabilize their own power position.14 The only ‘efficiency’ criterion they will abide—if rational—is to assure that the degree of institutional stability offered matches the amount of rent extraction requested.15
Fukuyama is certainly right that state governance does play an important role in guiding political and economic development. But in his eagerness to ‘bring the state back in’, he conceptualizes states as closed analytical units that interact with the international level only when they mismanage their internal affairs. This leads Fukuyama to diagnose a series of problems as if their solution were to be found in better management programs of the single polities. However, to bring back in the state does not mean to return to a Hobbesian notion of the state. Whatever the merits, the globalization debate has served to alert social scientists to the many ways in which states are constrained by exogenous forces, and to the variety of non‐state actors, local and transnational, that also shape governance.16 Surprisingly, Fukuyama manages to bypass the whole globalization debate, even if he sees his own work as a contribution to that debate.
Second, one further—and arguably even more pertinent—question has to be raised, for Fukuyama surprisingly does not do it: what is the relationship between so‐called enforcement and legitimate rule? Or, alternatively posed, what is the relationship between state enforcement and democracy? This is a crucial problem, especially because Fukuyama is clearly trying to offer ‘intervention guidelines’: when should we intervene, and what do we do once we are ‘in’. Whereas the current Bush‐doctrine wishes to establish international security by spreading democracy, Fukuyama wants to do it by spreading efficient governance. Does that amount to saying the same thing with different words? Fukuyama never really provides an answer. In Chapter 2, for instance, Fukuyama indicates that the two levels of efficiency and legitimacy work together. Legitimate forms of state governance, in the long run, are also the most fruitful ones. That is a very optimistic way to think about it. But, more substantively, it is also a very questionable way to think about it, for again it does not follow automatically from the empirical data: which kind of developing countries have done well economically over the past 50 years, the more or the less democratic ones? And is there a relationship at all? No matter which definition of democracy one follows, a state like Saudi Arabia would probably score high on the enforcement scale, but low on the democracy one. The simple fact is not only that it is genuinely possible to create high levels of enforcement through non‐democratic methods, but also that it might in fact be cheaper. Relatedly, the success stories of South‐East Asian countries do not seem to support Fukuyama’s thesis either: so‐called miraculous growth was established without much attention paid to ‘democracy’.
Third, and referring now to the more theoretical foundations of State Building, it should be underlined that some of Fukuyama’s theoretical points are not, as he claims, entirely forgotten in economics. As we saw, he basically turns to the NIE for the theoretical foundations of his argument. However, much of the NIE sources that he refers to are, at their analytical hard core, actually not too different from the (neoclassical) economic theories that he tries to criticize. The NIE is a useful portmanteau that contains a lot of hidden information: not all NIE theories are the same. The NIE contains approaches that are not only (more) neoclassical but also better known.17 Yet the NIE also contains (arguably less‐known) approaches that, much like Fukuyama, explicitly see cognitive limitations as central.18
Fundamentally, the cognitive limitation approach of the NIE sees learning rather than allocation as central. As a result, it entails a more informed type of comparative institutional analysis. In the evaluations of (known) feasible governance alternatives we should keep in mind two criteria. The first is the ability of alternative governance structures to limit deadweight losses from rent seeking, soft budget constraints, indivisibilities in team production, asset specificity and the like. This is the criterion that has also predominantly filtered into other disciplines and that Fukuyama obliquely takes issue with but by to a large extent drawing on the same NIE sources that use it. The second criterion regards the other side of the coin: the ability of alternative governance structures to generate benefits impossible to achieve otherwise (such as quasirents and technological innovation in the case of private contexts and economic growth and development in public ones). The cognitive NIE approach is theoretically trying to assert the crucial role played by both criteria: the ability to internalize negative externalities as well as the ability to create positive externalities.19 Had Fukuyama looked into this other literature, his analytical model of institution building and institution transferability would have been more convincing.
From Philosophy of History to Efficient State‐management?
Having reported and discussed the distilled essence of Fukuyama’s approach, let us finally contextualize the argument by reading it against Fukuyama’s authorship, for indeed it seems to us that Fukuyama has walked an interesting trail in his approach to political issues. This trail can be spelled out. It also seems to us that Fukuyama’s argument would force him to reconsider the philosophical framework contained in his earlier work. At root, we feel that Fukuyama will have to tackle more openly the tension that exists between universality and embeddedness.
In a certain sense, State Building should be seen as a continuation of Fukuyama’s controversial ‘The End of History?’,20 and this despite the fact that the two works stand apart in both style and content. On the wave of the fall of the Eastern bloc, Fukuyama claimed in this article—and reasserted more fully in a derived, bestselling book, the End of History and the Last Man 21—that the final universal structure for the governance of human affairs had been achieved: the market economy and (Western) liberal democracy. Following Hegel’s footsteps, Fukuyama made a universal claim: the final governance structure concerned the human race as such. And if the final governance structure had not yet been achieved everywhere, it was only a question of time until it did, for the entire world was subject to the same forces of history.
In State Building Fukuyama is motivated by a far more pragmatic question: how do countries actually reach the final governance structure? That is, how do we in fact build states that allow for both liberal values and economic prosperity? This motivational question is, in the final analysis, the corridor within which Fukuyama constrains his new, nonphilosophical journey. And the itinerary followed within the corridor is ‘whether the institutions and values of the liberal West are indeed universal’—and hence, if not yet achieved in all countries, can actually be transferred to all countries—‘or whether they represent, as Samuel Huntington (1996) would argue, merely the outgrowth of cultural habits of a certain part of the Northern European world’ (p. 3).22 The answer to this question, we have learned, is tantamount to answering the following two others at the level of economic organization theory: (1) what is a well‐organized state?, and (2) how do we build one? And the answers to these two questions, Fukuyama underscores, have important implications for both development and world order.
So, in State Building Fukuyama tries to paint a much more complex picture than in ‘The End of History?’. In this picture, informal institutions (cultural values, customs, mores, norms, etc.) can alter the way in which formal institutions (most notably the legal order) and organizations (most notably the state) function (or not). Because of the non‐negligible role played by informal institutions, there are, Fukuyama now implies, serious obstacles to exporting institutions and organizations. This is so because, crudely put, embeddedness limits universality. Furthermore, Fukuyama points out that we are taxed by severe cognitive limitations that constrain our capacity to achieve the best institutional and organizational solutions.23
Whereas Fukuyama earlier postulated that we had reached the final governance structure, he is now asking how such a structure is reached (and can be created and maintained) at efficient cost. Contrary to the previous philosophical perspective this involves, it seems, an implicit recognition that there are no Hegelian forces or world Geist that automatically push the world in this or that direction: it is up to us to shape the world in ways that we deem to be superior. In this way, Fukuyama’s trail is indeed indicative of the general development we have seen over the last 15 years: from a renewed Wilsonian Liberal optimism that characterized the early 1990s, to the much more realist and pragmatic approach that dominates today. It is evident to everyone by now that a ‘New World Order’ did not emerge by some hidden force of history, just because Communism collapsed. Nor did Liberal institutions simply settle everywhere. Suddenly, there is a realization that we know very little about how to build and spread ‘institutions for good governance’. Fukuyama’s contribution renders our knowledge on the matter somewhat less limited.
Hence, despite a series of shortcomings, Fukuyama has inspired a fascinating debate, especially in the field of development theory and foreign policy. And the debate should be especially informed by contemporary theories of economic organization—which owe much to the New Institutional Economics.
We welcome this debate as we welcome the coalition of interdisciplinary scholarship. Everybody talks about it, but Fukuyama has tried to do something about it. While Fukuyama’s conception of state building, as the only conduit of power in a new World Order, might be contested, he has charted the contours of fresh conceptual thinking; at the very least, there is something robust to contest. Supporters and critics are afforded scope to forge a new agenda. We hope that they will meet the challenge.