Transcript Slide 1

The Political Economy of Growth and
Development: What do We Know?
What do We Need to Know?
Kunal Sen
IDPM and Joint Research Director, Effective States and
Inclusive Development Research Centre (ESID), University of
Manchester
www.effective-states.org
www.ippg.org.uk
www.kunalsen.org
My presentation draws from ESID WP no. 5 (also published in World Development,
May 2013).
Background
“Is there some action a government of India could take that would lead
the Indian economy to grow like Indonesia’s or Egypt’s? If so, what,
exactly? If not, what is it about the “nature of India” that makes it
so? The consequences for human welfare involved in questions like
these are simply staggering: Once one starts to think about them, it
is hard to think about anything else”.
Robert E. Lucas 1988,Nobel Laureate in Economics.
• Why are there such significant and persistent differences in living
standards across countries?
• Why have so few developing countries ‘caught up’ with the living
standards of Western European countries?
• One of the most important and challenging areas of the social
sciences.
• In spite of a voluminous literature on the causes of economic
growth: it is still “hard to think about anything else”
Outline of My Lecture
• Where are we now in understanding the causes
of the persistent differences in living standards
across the world?
• How much have we progressed and what remains
to be explained?
• What have been the main theoretical
developments in the social sciences that has
taken us closer to an understanding of the causes
of growth and development?
• What are the unanswered questions?
Development Thinking, 1960s to 1980s
• Among economists, early interest in
determinants of growth such as capital
accumulation and technological advance.
• Such proximate determinants or correlates of
economic growth “are not causes of growth; they
are growth” (Douglas North).
• Rise of the Washington Consensus: liberalisation
of markets + good governance reforms
(promotion of democracy, and civil service
reforms)
Critiques of the Washington
Consensus
• Structural adjustment programmes implemented by
the IMF-WB not successful in Africa and Latin America.
• Developmental states in East Asia – strong and
effective states that were interventionists and
disciplined capitalists. Not free market economies.
• International efforts to fix governance problems
through good governance reforms and new modalities
of aid have largely failed, both in terms of outcomes
and in terms of addressing the root causes of the
problem.
• But if not policies, what exactly?
Institutions as the Cause of Growth
and Development
• The formal and informal ‘rules of the game’ that
shape human behaviour in economic, social and
political life.
• The idea that institutions are crucial
determinants of growth and development has
been there for a long time in the social sciences.
• The great French sociologist Émile Durkheim
famously described institutions as the ‘scaffolding
of society’.
The Resurgence of Interest in
Institutions
• It has been only with the seminal work of
Douglass North, Oliver Williamson, Elinor
Ostrom and others that there was real
progress in our understanding of why
institutions matter.
• At the same time, there was steady
accumulation of empirical knowledge on how
and in what conditions institutions play a
causal role in economic development.
What are economic institutions?
Security of Property Rights:
- Without this, individuals will lack the incentive to save and
invest as they will fear others will deprive them of the fruits of
their activities.
Enforcement of Contracts:
- Economic transactions promise gains to all voluntary
participants. But each may lose if the other fails to play its
promised role in the transaction and acts opportunistically.
Collective Action:
• - Provision of public goods and control of public ‘bads’. Can be
provided by state or community.
What are political and social institutions?
• Political institutions: rules that steer political
behaviour in different directions –
federal/unitary systems, proportional
representation vs first past the post,
presidential/parliamentary systems.
• Social/cultural institutions: language –rules
governing the use of sounds for meaning and
communication, systems of marriage and
burial, caste/kinship.
Formal and Informal Institutions
• Formal institutions are understood as being expressed in laws,
regulations, decrees or ‘parchment’ institutions which can be
officially sanctioned and enforced by third parties.
• Informal institutions are best understood as socially shared
customs, conventions, norms and practices which are usually
unwritten and not officially enforceable though there may be
non-official modes of enforcement
• Individual titles to land that can be enforced by a court is a
formal institution.
• Customary land tenure: embodying rules established by
custom and convention, and may not allow private ownership,
purchase or sale.
Why do institutions matter?
• Stable property rights provide a conducive
environment for investment and growth.
• These stable property rights can be provided
by both formal and informal institutions.
• Formal institutions: written contracts, well
functioning of courts.
• Informal institutions: customary land tenure in
many developing countries.
Some cross-country evidence
Formal or Informal Institutions?
• In the early policy thinking on institutions, the
view was that formal ‘best practice’ institutions
as in Western societies should be transplanted to
developing countries for development to occur.
• ‘Institutional mono-cropping’ (Peter Evans).
• But this was a naïve view of how institutions
matter.
• When formal institutions were not there or not
functioning well, informal institutions could be
equally effective.
The Mafia in Sicily
• After the feudal system collapsed in Sicily and before the
emergence of the modern state, banditry was rife.
• Landlords started hiring the toughest of the bandits as guards.
• These protectors got together to form the mafia.
• “When the butcher comes to me to buy an animal, he knows
that I want to cheat him (by supplying a low quality animal).
But I know that he wants to cheat me (by reneging on the
payment). Thus we need Pepe, the mafioso, to make both of
us agree. And we both pay Pepe a commission”.
The Colonial Origins of Comparative
Development (Acemoglu, Johnson and
Robinson)
• There were different types of colonization policies which
created different sets of institutions. In some of the colonies,
Europeans set up “extractive institutions” (Belgian conquest
of Congo).
• These institutions did not introduce much protection for
private property; nor did they provide much in the way of
checks and balances against government expropriation.
• The main purpose of these extractive institutions was to
transfer as much of the resources from the colony to the
coloniser. These institutions were detrimental to investment
and development.
Colonial Origins of Development
• At the other extreme, many Europeans migrated and
settled in a number of colonies, where they tried to
replicate European institutions, with strong emphasis
on private property and checks against government
power.
• These institutions enforced the rule of law and
encouraged investment.
• Primary examples include Australia, Canada, New
Zealand and the United States. In other colonies,
Europeans migrated and settled, and set up “Europeanlike” institutions (Australia, Canada, New Zealand,
USA).
Economic development now can be related
to Institutions introduced by Colonial
Powers
• The colonization strategy was influenced by the feasibility of settlements.
In places where the disease environment was not favourable to
settlement, extractive institutions were more likely to be set up.
• The colonial state and institutions persisted even after independence.
• This is because the political elite that came to power at independence in
the previously colonised countries had a strong self-interest in maintaining
the extractive institutions established during colonial times and the access
to revenues obtained from the control of these institutions.
• Past Institutions -> Present Institutions -> Present Economic Development
Limitations of the Institutions
Literature
• If weak or poor institutions were the cause of growth and
development, surely we could change these institutions?
• Why do we then observe the survival of apparently inefficient or
extractive institutions?
• How and why do institutions persist once established?
• Not enough to purely focus on institutions as the cause of
development.
• We need to understand the political conditions under which
growth-impeding institutions persist, and why we very rarely see
such institutions being replaced by growth-enhancing institutions.
• Power and politics are central in understanding institutional
change and persistence.
Acemoglu-Robinson (AR)
North, Wallis, Weingast (NWW)
New Concepts in Political Economy: The
Political Settlement/ Political Equilibrum
• “A political settlement emerges when institutions
generate a distribution of benefits that is compatible
with and sustains the distribution of power, subject
to economic viability” (Mushtaq Khan)
• Political equilibrium: the set of political and
economic institutions compatible with de facto
political power, which depend on the ability of
groups to solve their collective action problems and
the distribution of economic resources, source:
Acemoglu-Robinson (AR).
Power and Elites
• Elites make bargains between themselves and
establish institutions that align the distribution of
benefits with the underlying distribution of power.
• Elite bargains give rise to institutions that shape
social, political and economic change.
• Rent-seeking & -sharing/patronage becomes the
norm
– Between elites: incentivises powerful groups to
remain onside; build credibility with economic
elites (e.g. property rights, expropriation)
– With middle/lower groups: public sector jobs; club
goods to particular localities/groups; petty
benefits through vote-buying etc.
Who are the elites and how do they
behave?
• Elites are people with partial or total control on policy and
economy.
• E.g. Large landowners, business owners, bureaucrats,
politicians in authoritarian regimes, unions, religious leaders,
ruling castes, etc..
• Elites tend to choose institutions that maximise their payoff.
• Guided by both self-interest and ideology.
• Elites are not necessarily monolithic and may comprise of
different groups with partly divergent interests.
A Summary of AR’s Main Arguments
• Economic institutions and political institutions are
determined by the political equilibrium, as the prevalent
power relations will determine which set of economic
and political institutions are more likely to emerge.
• Political power can be both de jure and de facto.
• De jure political institutions determine the constraints on
and the incentives of key actors in the political sphere
and could be both formal (that is, whether the political
system is democratic or autocratic) or informal (that is,
the set of informal constraints on politicians and political
elites).
De facto Political Institutions
• De facto political institutions originate from the
possibility that important social and political
groups which hold political power may not find
the distributions of benefits allocated by de jure
political institutions and by economic institutions
acceptable to them.
• They may use both legal and extra-legal means to
impose their wishes on society and try to change
these institutions (for example, they may revolt,
use arms, co-opt the military or undertake
protests).
The Evolution of Political and Economic Institutions in AR
Inclusive Institutions
• Broadbased economic growth due to inclusive economic
and political institutions.
• Inclusive economic institutions: Secure property rights for
the majority of the population, law and order, markets
and state support (public services and regulation) for
markets; open to relatively free entry of new businesses;
uphold contracts; access to education and opportunity for
the great majority of citizens.
• Inclusive political institutions: Political institutions
allowing broad participation, pluralism, and placing
constraints and checks on politicians.
• But also some degree of political centralization for the
states to be able to effectively enforce law and order.
Path Dependence
• Bad political equilibria that lead to poor economic performance may
persist over time, and economic growth may stagnate in a country for
many years as a consequence.
• Since the distribution of political power determines the evolution of
economic and political institutions, political elites who hold power will
always have an incentive to maintain the political institutions that give
them political power, and the economic institutions that distribute
resources to them.
• The initial distribution of resources allow elites who have access to these
resources to increase their de facto political power, allowing them to push
for economic and political institutions favourable to their interests,
reproducing the initial disparity in political power.
• There will be a persistence of extractive economic and political institutions
in societies with such institutions, since the elites who benefit from these
institutions would not be an incentive to change them.
Will Institutional or Policy Reforms
Work?
• Making or imposing specific institutional or policy
reforms may have little impact on the general structure
of economic institutions or performance if they leave
untouched the underlying political equilibrium.
• E.g economic reforms that try to bring in competition
will not succeed if elites have no interest in reducing
the market power or the control of rents they derive
from extractive institutions (e.g India now).
• Elections in themselves will not lead to
democratisation (e.g. Egypt now).
An Example: Civil War in Sub-Saharan
Africa
• Attempts by the IFIs to induce downsizing of the public sector, for example
by closing down loss-making parastatals may have played an important
role in creating civil war in Sierra Leone and Liberia.
• Political elites used public sector employment as a means to redistribute
rents to opponents or potential opponents as a way of obtaining political
support.
• With the decline in the possibility of using public sector employment as a
means to redistribute rents following structural adjustment, opposition to
the political regime in power emerged, leading to civil war in some
contexts.
• While the underlying political equilibrium that was built in part around
patronage relations and rent distribution via public sector employment in
many African countries in the 1980s may have been inefficient, changes in
this equilibrium brought through institutional change by exogenous
actors such as the World Bank and the IMF may have led a more
inefficient (and socially undesirable) outcome.
The dynamics of institutional change in AR
Limitations of AR (and also of NWW)
• Autocracies or semi-authoritarian regimes seem to
have the highest rates of economic growth. E.g Korea
and Singapore in the 1960s to 1980s, China and
Vietnam now.
• Conversely, democracies do not seem to do well in
growth – India historically.
• Crucial limitation: why we move from bad political
equilibria to good political equilibria (and sometimes
back again) is exogenous to AR.
• But this is the most important question that any
theory of growth and development needs to address!
What Do We Need to Know?
• Do we really need inclusive institutions at the start of the growth
process?
• How long can growth last with extractive institutions? Is there a
limit to growth in countries with extractive institutions?
• Is the growth in an extractive institutions regime likely to be biased
towards the rich and not inclusive?
• What are the drivers of institutional change and the move from
extractive to inclusive institutions? And why do so many developing
countries shift back from inclusive to extractive institutions?
• Are these exogenous as argued by AR or endogenous? If
endogenous, what are its drivers?
• Is it related to the structure of the economy (e.g elites in resource
rich countries with high rent extraction will be less likely to press
for institutional change)?
• Or is it related to elite commitment to long term development
goals? And what determines this commitment?
• We have come a long way in addressing the ultimate cause
of the wealth and poverty of nations, but there is some
distance to go.