Political Obstacles to Growth

Question 1

Acemoglu 2005

Answer 1

Political Coase Theorem

A non-pareto system of institutions is chosen because it maximises the payoff of those in power (rather than irrationality of belief about what is pareto).

NK/SK differences represent this; similar culture and endowments, different policies and different outcomes (10x income difference in 2001). Also explains difference in colonial institutions: elite goals were different with extraction and settlement.

The government cannot enter into a contract with the people, as there is no one else to enforce it. They also wish to avoid empowering others who could threaten them (eg a merchant class).

Question 2

Acemoglu and Robinson 2000

Answer 2

Political Losers as Barriers to Development

Those who stand to lose political power will inevitably block technological developments. If they only lost economic but not political power, they could transfer to themselves (Coase). Those with only economic power cannot block new technology.

Culminates in stubborn elites falling to revolution (Russia - serfdom (elites lose power without this) no railways, little industry, rigid monarchy with narrow support), and savvy ones retaining power (Britain and Germany, landed classes did not resist industrialisation as much due to security of power, eg House of Lords). Explains massive railway discrepancies in Russia, UK, US, Germany, Austria-H by 1850.

Question 3

Olson 1993

Answer 3

Dictatorship, Democracy, and Development

Anarchy results in underinvestment and development. A stationary, territorial bandit is better than multiple roving ones. Stabilises expectations and enables development; dependent on the extractive preferences (ie, time horizon) of the ruler.

Dictators run the economy (and tax it) at the rate that maximises their rent, not that which maximises growth. Hence it remains inferior to democracy.

Democracy maximises stability and the time horizon (beyond the single ruler’s life), generating expectations of property rights that encourage investment.

Democracy emerges when conditions for dictatorship do not emerge - multiple powerful agents cannot rule at one, and prefer power sharing when state division is not an option. Post-Glorious Revolution this was the case between competing protestants- best outcome was the ascendancy of Parliament (and insure protection with a Bill of Rights and independent judiciary, etc)

Question 4

North 1991

Answer 4

Institutions

Institutions are the set of devised constraints structuring political, economic, and social interaction. Most important consequence is facilitating cooperation (institutions of trust, public goods, enforceability, long-distance trade).

Institutions develop based on context. Urbanisation and specialisation creates EoS and demands development of strong markets (enforceability, meaningful property rights). In under-development societies, exchange is facilitated by dense social networks (sometimes contextually best option, but also hard to organise switch).

Key institutional developments: mobile capital, capital markets, property rights, enforceable contracts (long distance trade), insurance. State has the role of being the enforcer as well as the constrained.

Question 5

North and Weingast 1989

Answer 5

Constitutions and Commitment

Covers the significance of the Glorious Revolution. The sovereign needs to credibly commit themselves to being bound by law (precedent, or obligation).

After the Civil War, the sovereign was restricted in ability to interfere with property and courts. But encroachment came back. GR in 1688. Key influence was capital markets: the Crown credibly committed itself to repayments (through the BoE), and was able access far more debt at better rates (rather than coercive). Previously just refused to pay. Public debt market lead to a private one too, creating banks and enabling development.

Institutional change had to be forced upon the Crown. Key reforms: changed the unstable fiscal system. Limited the Crown’s legislative and judicial powers (it became bound to the law). Parliament asserted dominance over setting and collecting tax, and allocating funds. Parliament itself was limited by power-sharing with the monarchy. Multiple veto points.

GB and FR were on equal footing though despite the GB changes. Institutions became apparent in later consequences.