Transcript L23_GoodGov

Development and Good
Government
Lecture 23
Don J. DeVoretz
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Some Questions
• 1. Is Democracy a necessary and sufficient
condition for development ?
– India: One person-One vote
– China: One person-No vote
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Which country has greater rent seeking ?
Which country has more efficient markets ?
Which country has greater equity ?
Which has higher GDP or GDP growth ?
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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
justified
• Justification: State must prevent the use of force by
citizens against one another.
• Example: Hong Kong
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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 ?
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Pareto Improving
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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
expense
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Gov’t reduce price controls or
supply restrictions
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Initially at M and N
Excess Supply due to controls
Relax controls and move to HERE
Miracle:
– No excess demand or supply
– Both person 1 and 2 are better off
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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
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Government and Externalities
• Externalities Removed by gov’ts creating
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Crown Monopolies :reduce uncertainities
Armies: Land transport
Banks and Insurance schemes:finance trade
Navies: Sea transport
Roads: reduce tolls
Property rights: insure investment
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Socio cultural Preconditons today
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Trust (banks, insurance companies)
Law and order (enforcement of contracts)
Security of Persons and Property
Honest govt
Social mobility
Free flow of Information
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Specifics for Market Driven
Development
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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 ?
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End of Show
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