Transcript The New Comparative Political Economy Peter J. Boettke Mercatus

The New Comparative Political Economy
Peter J. Boettke
Hayek Visiting Fellow
London School of Economics
18 October 2004
The Failure of Foreign Aid:
The Case of Zambia
20000
15000
GDP per capita if aid
for investment for
growth worked
Actual income
10000
5000
0
60 964 968 972 976 980 984 988 992
9
1
1
1
1
1
1
1
1
1
• If the 2 billion of aid had worked as the investment gap theory predicted,
the per capita income would be $20,000, not the $600 it actually is
Source: Easterly, “The Five Myths of Third World Development”
Per capita growth
3.0%
2.5%
Growth
(left axis)
Loans (right
axis)
2.0%
1.5%
1.0%
0.5%
0.0%
-0.5%
60s
70s
80s
60
55
50
45
40
35
30
25
20
15
IMF/World Bank Adjustment
Loans per Year
IMF/World Bank Adjustment with Growth did not work
out as the theory would predict…
90s
Source: Easterly, “The Five Myths of Third World Development”
Comparative Political Economy in the Literature

Old Comparative

Focus on the theory of optimal planning and the empirics of growth

Bridge

Focus on property rights

Austrians, Barzel, Kornai

Shleifer

Focus on legal origins, political regimes, regulatory enforcement mechanisms and
entrepreneurship

Strength: Focus on given institutional possibilities and the trade-offs that exist in policing
predation at the public and private level

Weakness: forces us to limit our analysis to within institutional choice, rather than between
institutional choice
The Transition Experience

Three distinct moments:

Getting the Prices right

Getting the Institutions right

Getting the Culture right

If sequentially timed, rather than simultaneous, policies will fight against each other

The entire intellectual tool-kit, not just policy advice, that was developed to fit the
Keynesian-Market socialist approach must be jettisoned from the development aid agenda
Empirics & Assessment

Ineffectiveness of traditional techniques

de facto vs. de jure

Importance of the unofficial economy


Shortcomings of standard data analysis


See Besançon
“It is not that we have to stop asking so many questions about economic
growth. We just have to stop expecting the international data to give us all
the answers.” (Mankiw, 1995, 307)
Ethnography unbound

Participant observer

Personal Interviews

Surveys
Importance of the Unofficial Economy…
‘The Soviet economy is the subject of a considerable volume of scholarly work which
occupies numerous study centers in Europe and the United States and which provides
material for a vast literature and various academic journals. But those born in the Soviet
Union or those who approach Soviet society through history, literature, travel or
through listening to what the émigrés have to say, find that they cannot recognize what
the economists describe. There seems to be an unbridgeable gap between this system,
conceived through measurements and figures, and the other system, without
measurements or figures, which they have come to know through intuition and their
own actual experience. It is an astonishing feature of the world of Soviet affairs that a
certain kind of economic approach to Soviet reality, no matter how well-informed,
honest and sophisticated, is met with such absolute skepticism and total disbelief by
those who have a different approach that they do not even want to offer any criticism –
it being impossible to know where to begin’ (Alain Besançon, 1980, 143).
Empirics & Assessment (cont’d)

Assessment of economic activities within an economy focuses not on the macroeconomic
data, but on the microeconomic structure of investment and enterprise

Increased capital investment is the key

Credible institutions in the realms of politics, law, economics, finance, and society are
necessary

Development assistance will not be effective if it crowds out indigenous efforts to
provide social services

The development aid project is one of building an institutional infrastructure that allows the
human mind to flourish
Policy Implications

The focus of our efforts in development assistance should be at the level of
the institutional infrastructure



An understanding of indigenous institutions and their ‘stickiness’


Engineering mentality has to be abandoned completely
Focus on cultivating economic development by aiding the establishment of the
institutional conditions conducive to growth
Regression theorem generalized
Long-run policies


General: Privatization, price liberalization, low inflation, fiscal responsibility, low
levels of taxation and regulations, and open international trade
Entrepreneurship: micro-environment and its impact

Providing theoretical content to de Soto, and empirical content to Kirzner