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Structural transformation requires raising productivity and achieving competitiveness in increasingly higher-valued activities. This process can be constrained by different types of knowledge gaps. The importance of codified knowledge and practical know-how or skills are well recognized. But another type of knowledge critically affects the value of both. A society must have firms with the organizational capabilities to organize production competitively so that educated and skilled people can be employed profitably. This is a specific type of collective knowledge distinct from the codified knowledge and know-how embodied in individuals. Without appropriate organizational capabilities, investments in other types of knowledge can fail to achieve adequate returns. The required organizational capabilities can range from basic, intermediate to dynamic, depending on whether firms in the sector are catching up or innovating. Effective learning strategies have to identify and target interdependent knowledge gaps and to do this effectively, they also have to recognize distinct institutional and political economy problems of implementation. The general points are illustrated with reference to the emergence of the garments industry in Bangladesh and the challenges facing its upgrading.

The role of institutions in Asian development has been intensely contested since Gunnar Myrdal's Asian Drama, with later contributions from institutional economics and developmental state theory. Despite much progress, the dominant approaches do not agree about the institutions that matter, nor do they explain why similar institutions delivered such different results across countries. Cultural norms and informal institutions clearly matter but the appropriate norms did not already exist in successful countries; they evolved over time. The distribution of holding power across different types of organizations, the 'political settlement', can explain the diversity of experiences better and help to develop more effective policy. This chapter outlines Myrdal's contribution to institutional analysis and how modern institutional analysis has built on his analysis, then, drawing on the experiences of Asian countries, sets out an alternative institutional analysis based on political settlements, and the implications for the analysis of the effectiveness of institutions.

This is an evolving draft of a book on Bangladesh that is based on the application of the Political Settlements Framework to develop an analytical narrative on the evolution of the state in Bangladesh

This book examines key questions, and challenges the widely prevalent view that the Palestinian Authority collapsed because of its internal governance failures, its lack of commitment to democracy, and corruption.

The role of institutions in Asian development has been intensely contested since Myrdal's Asian Drama, with later contributions from institutional economics and developmental state theory. Despite much progress, the dominant approaches do not agree about the institutions that matter nor do they explain why similar institutions delivered such different results across countries. Cultural norms and informal institutions clearly matter but the appropriate norms did not already exist in successful countries; they evolved over time. The distribution of holding power across different types of organizations, the "political settlement", can explain the diversity of experiences and help to develop more effective policy.

Bangladesh and Pakistan had very different experiences with aid after 1971. Politics in Pakistan was less inclusive in terms of opportunities for intermediate (middle- and lower-middle-) class political entrepreneurs, and the dominance of military aid to Pakistan exacerbated the problem by allowing the top leadership to continue to rule without sharing much power with these classes. This not only had negative effects on the evolution of Pakistan's politics but also slowed down the growth of a broad-based manufacturing sector. In contrast, in Bangladesh the less centralized organization of political power and less concentrated forms of aid allowed intermediate-class political entrepreneurs to improve their access to resources and created opportunities for many of them to enter productive manufacturing activities such as the garments industry. Differences in patterns of aid can help to explain significant differences in economic and political outcomes in the two countries. These experiences challenge conventional ideas about the relationship among aid, good governance, and security. Designing aid policies so that aid can assist developing countries in improving their economic and political viability requires a better understanding of the complex relationships between aid and the political economies of recipient countries.

Bangladesh and Pakistan had very divergent experiences with aid after 1971. Politics in Pakistan was less inclusive in terms of opportunities for intermediate class political entrepreneurs. In this context, the significant role of military aid to Pakistan had very negative effects on its political and economic evolution. In contrast in Bangladesh the less centralized organization of political power and less concentrated forms of aid allowed intermediate class political entrepreneurs to access resources and created incentives for productive activities. These experiences challenge conventional ideas about the relationship between aid, good governance and security: better policy requires understanding the relationship between aid and the political economies of recipient countries better.