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Transcript L23_GoodGov

Development and Good
Lecture 23
Don J. DeVoretz
Some Questions
• 1. Is Democracy a necessary and sufficient
condition for development ?
– India: One person-One vote
– China: One person-No vote
Which country has greater rent seeking ?
Which country has more efficient markets ?
Which country has greater equity ?
Which has higher GDP or GDP growth ?
Theories of Good Government
• Libertarian: minimal state is most effective
– John Locke: “Social Treatise on Government”
• People have natural rights prior to gov’t
– right to life, liberty and property
• Minimal State is the most extensive state that can be
• Justification: State must prevent the use of force by
citizens against one another.
• Example: Hong Kong
Pareto and tests of Good Gov’t
• Good government is defined as a set of
policies that:
– 1. Improve the welfare of all without reducing
the welfare of at least one individual
– 2. Theory of the second best:
• What if two imperfections in society
– monopoly
– tariffs and quotas on international trade
• Will reducing one bring you closer to perfection ?
Pareto Improving
Gov’t Actions for First Best
• Preconditions:
– 2 goods X and Y
– 2 People
– Pareto Superior Line:
• Move on will improve at least one person and not
harm another
• on this contract curve any further movement along
this line will make one person better off at anothers
Gov’t reduce price controls or
supply restrictions
Initially at M and N
Excess Supply due to controls
Relax controls and move to HERE
– No excess demand or supply
– Both person 1 and 2 are better off
History, Institutions and Growth
• Douglas North:
– Role of government emerged in a Lockean
sense in 15th Century in Europe to reduce
transactions costs of trade.
– Problems:Transactions costs were too high
• International trade was risky;
– Brigands
– insurance
– payment
Government and Externalities
• Externalities Removed by gov’ts creating
Crown Monopolies :reduce uncertainities
Armies: Land transport
Banks and Insurance schemes:finance trade
Navies: Sea transport
Roads: reduce tolls
Property rights: insure investment
Socio cultural Preconditons today
Trust (banks, insurance companies)
Law and order (enforcement of contracts)
Security of Persons and Property
Honest govt
Social mobility
Free flow of Information
Specifics for Market Driven
Property Rights
Commercial Law and Courts
Stable currencies and banking for transfers
Public management of externalities
Stable monetary and fiscal policies
Do we democracy for the above ?
End of Show