The initial inspiration for this research was the need for a critical assessment of approaches to economic development which suggest general recipes for countries to grow. The investment climate approach in particular claims global applicability, stressing the need for “good institutions” with respect to legal enforcement of property rights and commercial contracts and including macro- and micro-economic guidelines for countries seeking to attract investments and grow.
The prescribed elements are certainly important to economic growth. However, they are not enough to generate growth or to explain the varied growth experiences of different countries in the world. The trajectories of nations that have been growing fast in spite of being far from having the so-called good institutions – such as China and India, are well known, and so are the trajectories of those that followed the recipes of international development agencies in the 90s but recorded poor growth – of which there are good examples in Latin America. In sum, there is no straight forward cause-and-effect relationship between “good institutions” and economic growth.
The investment climate approach seems to ignore important elements of the debate on development:
- By assuming that any “environment” can be adapted to particular institutional models, it dismisses the weight and variety of historical contexts
- By defining institutions as formal and abstract entities, it forgets the social networks that sustain it and vary enormously in time and space
- It does not cover the crucial differences between the conditions that start up growth processes and the necessary conditions to its long-term sustainability
- By considering investments and growth as variables that are neutral, it ignores the fact that regions and nations make political choices that do not have simply economic growth as their sole aim.
This project stresses the importance of social context and, more specifically, of the distinct patterns of interaction between public and private actors in creating and sustaining growth dynamics.
The limitations of the investment climate approach are the starting point for this research which raises two critical issues for the discussion about economic development in this research project:
- Processes of economic growth cannot be understood only in quantitative terms, i.e. growth rates; rather, they must be considered in terms of their quality. It is essential to understand how social embeddedness mechanisms confer qualitatively distinct features to growth, which are measurable both for their impact and their ability for long-term sustainability
- Institutions are social constructions that both nourish and are nourished by constellations of social networks in which they are located; they both depend on the preexisting social dynamics to which they must somehow adjust in order to acquire effectiveness and induce new social networks.
In order to explore these issues, this project compares two localities in Brazil and asks
- To what extent and how interactions between public and private actors, in local contexts, influence the construction and change of economic institutions?
- Once the differences between contexts have been identified, which configurations are more favorable to growth processes that are sustainable over time?
In order to (re)establish the connection between social relations and economic development, in analytical terms, this project draws on the ideas of the new economic sociology for inspiration, in particular the work of Granovetter and Swedberg.
This relational approach is used to analyse the quality of growth and its sustainability. As regards the quality of growth this research concentrates in particular on education and knowledge foundation, trained labour force, productive diversity, the extent of value added, entrepreneurship, and the creation of new firms. Growth processes based on the combination of such factors are more likely to become sustainable.
In order to explore the critical points mentioned above, this study compares the growth trajectories of two Brazilian municipalities: Santa Rita do Sapucaí, in the state of Minas Gerais, and Ilhéus, in the state of Bahia. Both are small-to-medium size cities which are not in metropolitan regions. Both used to be oriented towards agriculture, but after the 1980s both developed important productive systems in the electrical-electronic and computer industries. Subject to the same macro-regulatory national structure, the substantial growth of the two industrial clusters was nevertheless driven by different combinations of municipal and state public policies and diverse local socio-institutional environments. The study’s main concern is to examine the implications for the growth processes in these two cities.
With the purpose to capture the qualitative differences between the two growth trajectories, our research methodology was primarily based on personal interviews of actors from government (executive and legislative), firms (businesspeople and consultants), educational institutions (faculty and researchers), business incubators and business associations.
In combination with such qualitative material, we used GDP data, number of firms, number of employed personnel, and wages in order to measure the growth of the cities and their industrial hubs in quantitative terms.
In order to distil empirical findings and make an analytical comparison, we created an interaction typology that distinguishes between public-private and private-private interactions. This allows us to identify substantial differences in both cases as to how relations influence core dimensions of the growth.
Finally, we examine the qualitative material in order to answer key research questions: Who are the actors involved in the growth process of each city? How are social networks built between them? What roles are played by the distinct interactions among the agents? How do different combinations of qualitative factors influence the sustainability of growth process?
Alvaro Comin and Carlos Torres Freire, ‘Beyond the investment climate: Why social interactions matter for growth’; Working Paper, June, 2008.
Structure of the Paper:
Section 1: Discusses the limitations of the investment climate approach and introduces the ideas of quality and sustainability in order to foster a debate on economic growth beyond indicators of GDP variation.
Section 2: Briefly reviews the principles of new economic sociology in order to show our preference for the relational approach, and then explains the reasons for focussing on public-private and private-private interaction.
Section 3: Methodology (explanations about case selection and the techniques used).
Section 4: Historical background and evidence for Santa Rita’s and Ilhéus’s economic growth.
Section 5: Divided into three items, focuses on the analysis of the material collected in the fieldwork, discussing interactions between agents and the quality of growth in each of the cases studied.
Item 5.1 explains the triggering of industrialisation processes;
Item 5.2 presents the interactions between public and private actors;
Item 5.3 presents the interactions among private actors
Conclusions of this exploratory research study.
Click here to download the English version.
Click here to download the Portuguese version.
Alvaro Comin: Sociologist; CEBRAP President; Associate Professor, Department of Sociology, University of Sao Paulo (USP); Brazil.
Carlos Torres Freire, Sociologist; CEBRAP researcher; MA in Sociology, Department of Sociology, University of Sao Paulo (USP); Brazil.