Peripheral Agencies and the Politics of Institutional Change

Institutional change has become increasingly central to the study of comparative political economy and economic development more generally, as scholars recognize that national models are not static and economic growth often requires significant reform. Institutional change was poorly theorized in earlier work on comparative political economy, which focused primarily on crisis-induced, critical junctures in which anything was possible. Recent literature on endogenous institutional change has correctly criticized this earlier scholarship, identifying alternative pathways as actors exploit ambiguities, resolve contradictions or build on the remains of earlier institutions. At the same time, this literature focuses almost exclusively on incremental institutional change and offers little insight into why countries sometimes adopt radically different economic models. We develop a theory of radical institutional change, explaining how policy-makers can facilitate sweeping reform by developing alternative developmental models at the margins of the public and private sector. Once a crisis hits, these field-tested ideas can be rapidly scaled by mainstream political and economic actors, quickly transforming national economies. We illustrate the theory by examining two episodes of radical institutional change in Finland and Israel. The conclusion generalizes the argument to other countries and explores the policy implications for policy-makers seeking to facilitate radical institutional change.