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StateandDevelopment:TheNeedfora

ReappraisaloftheCurrentLiterature1

PranabBardhan

[forthcomingintheJournalofEconomicLiterature]

Abstract:

Thisessaytriestobringoutsomeofthecomplexitiesthatare

overlookedintheusualtreatmentofthestateintheinstitutional

economicsliteratureandsupplementthelatterwithadiscussion

ofsomealternativeapproachestolookingatthepossible

developmentalroleofthestate.Itreferstoabroaderrangeof

developmentgoals(includingthestructuraltransformationof

theeconomy)andfocusesonproblemsliketheresolutionof

coordinationfailuresandcollectiveactionproblems,the

conflictingissuesofcommitmentandaccountabilityandthe

needforbalancingthetrade‐offstheygenerate,some                                                            1 I am grateful to the Editor and four referees, and to Masahiko Aoki, Vijay Joshi, Kalle Moene, Dilip Mookherjee, and Gerard Roland for comments on an earlier draft. 

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ingredientsofstatecapacityandpoliticalcoalition‐building

usuallymissedintheliterature,thepossibleimportanceofrent‐

sharinginapoliticalequilibrium,theadvantagesandproblems

ofpoliticalcentralizationanddecentralization,andthemulti‐

dimensionalityofstatefunctionswhichmaynotbeaddressedby

marketsorprivatefirms.(JEL,H11,O10,O25,O43)

IIntroduction

Sincetheflourishingofinstitutionaleconomicsinthe1990’s,

someideasontheroleofthestatehavecometodominatethe

developmentliterature.Althoughdifferentwriters—say,North

andWeingast(1989,2000),BesleyandPersson(2011),

AcemogluandRobinson(2012)‐‐havedifferentpointsof

emphasis,thereissomecommonalityinthisliteratureonthe

roleofthestate.Thestatehastobestrongenoughtoprovidea

solidminimumframeworkoflawandorder,enforcementof

contractsandotherbasicinstitutionsunderpinningthemarket,

whileatthesametimethestateexecutivehastobeconstrained

nottointerferewithsecurityofpropertyrights.Thereisno

doubtthatthispointstosomeimportantfeaturesofthestate

thatareconducivetotheincentiveframeworkofinvestment,

enterpriseanddevelopment.Weshalltrytocapturesomeof

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thenuancesofthisapproachasdiscussedinthemorerecent

literature,butwe’llalsoconsidercaseswhereitmayactually

limitourperspectiveinunderstandingthediversityof

developmentexperienceindifferentpartsoftheworldand

pointtoaspectsofstate‐relateddevelopmentthatare

overlookedorunder‐emphasizedinthisnow‐dominant

tradition.Inparticularweshallrefertoabroaderrangeof

developmentgoals(includingthestructuraltransformationof

aneconomy)andmulti‐dimensionalityofstatefunctions

comparedtothosethathavebeenusuallyconsideredinthe

institutionaleconomicsliterature.

Astrongstatemayhelpeconomicgrowth,butwhatdoesone

meanbyastrongstate?Inthedifferentstrandsoftheliterature

onecandecipherdefiningissueslikeacertaincommitment

abilityofthestatetotranscendnarrowsectarianinterestsand

thatofpoliticalcentralizationthatallowsthestatetotranscend

diffuselocalinterests.Buttheabilitytotranscendnarrow

interestsmaynotnecessarilybeaccompaniedbywillingnessto

doso,andthusconstraintsonexecutivepowerareconsidered

necessarytorestrainpanderingtonarrowinterestsorself‐

aggrandizementonthepartoftheleadership(hencethe

frequentcallforstrongbut‘limited’government).

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Butifthesocialgoalisbroad‐baseddevelopment,such

essentiallynegativebarsrestraininggovernmentarenot

enough.Inmanycasesitmaybeimperativeforthestatetoplay

amorepositiverole.Pluralisticinstitutions,inthesenseof

beingrespectfulofdiversityofinterestsandgoals,may

facilitatesuchapositiveroleofthestate.Butinstitutional

economistswhoseetheneedforpluralism,donotalwayspay

attentiontothepossibletensionbetweenpluralismandthe

abilitytocarryoutcollectiveactiontowarddevelopmentgoals

oreventosecurepropertyrights;similarlythosewhoadvocate

politicalcentralizationdonotgiveenoughweighttoitstrade‐

offwithlocalaccountability,orthetrade‐offbetween

commitmentandflexibility.Democraticaccountability

mechanismsinthisliteraturemainlytaketheformof

constraintsontheexecutiveorchecksandbalances;butthere

areotheraspectsofthedemocraticprocesswhichformintegral

partsofthedevelopmentprocess—forexample,popular

participationanddemocraticdeliberationlendlegitimacyand

sustainabilitytodevelopment.Ontheotherhand,thepolitical

competitionofdemocracycanoccasionallyleadtoa‘racetothe

bottom’and,insteadoffocusingtheleadership’sattentionto

broad‐basedinterests,mayinsomecasesencouragepolitical

clientelismtowinelections.Incontrastwiththegeneral

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impressionintheliteraturethat‘allgoodthingsgotogether’,

we’llpointtothesekindsofantinomiesandtrade‐offsthatare

largelymissinginthediscussion.

Thereisnowaburgeoningliteratureonstatecapacity

contributingtotheaforementionedstate‘strength’,spellingout

thevariousingredients,particularlyfiscal,legalandmilitary

aspectsofcapacity.Forexample,theroleofwarsinforging

suchcapacity,andthatofaWeberianbureaucracy,its

autonomyfromthepoliticalprocess,itscareerpathsand

incentivepaymentshavebeendiscussedinthiscontext.Less

oftendiscussedisthenatureofpoliticalcoaltionamong

differentinterestoridentitygroupsand‘socialpacts’andinter‐

temporalbargainsthatmakethekeydifferenceandthe

underlyingproblemsofcollectiveactionthathavetobe

overcomeinbuildingtheall‐importantpoliticalcapacityofthe

state.

Thefocusonsecurityofpropertyrightsandmarketinstitutions

hasalsodivertedattentionfromtheimportantissueof

developingstatecapacityinresolvingcoordinationfailures.

Thisissueusedtobeattheforefrontofdiscussionintheearly

developmentliterature,particularlywhenstructural

transformationusedtoberegardedasthecoreofdevelopment.

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Inthemorerecentliteraturetherehasbeensomeparallel

discussionofstatepromotionofindustrialpolicy,andthe

lessonsonecanlearnfromitsexperienceinseveralEastAsian

countries.Inpoliticalsociologytherehasbeenactive

discussionontheso‐calleddevelopmentalstateinthiscontext.

Muchofthishasbeensidelinedintheinstitutionaleconomics

discussiononpropertyrightsandstatecapacity,mainly

drawingexamplesfrompre‐modernEuropeanandAtlantic

economy,andmorerecentlyfrominstitutionalfailuresinLatin

AmericaandAfrica,largelyoverlookingtheanalyticallessons

fromtheexperienceofEastandSouthAsia.Itistimetojointhe

streamoftheliteratureonindustrialpolicywiththe

mainstreamonstatecapacityformarket‐supporting

institutions,anddiscusstheproblemsandprospectsof

industrialpolicyinthislargercontext,particularlyifitcanbe

movedawayfromitsoldprotectionistassociationandoriented

toimprovingproductivityratherthandistortingprices.Of

course,targetingofsectorsandfirmswillgeneraterental

opportunities,butincontrastwiththestricturesonrent‐

seekingintheearlierliteratureonthestate,thenewliterature

hasemphasizedhowinsecond‐bestsituations,particularlyin

earlystagesofdevelopmentwhenentrepreneurshipand

capitalarethebindingconstraints,someamountofrent

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generationwithinbroadlimitsofmarketdisciplinecanprovide

dynamicincentivesfornewinvestmentsandlearning

processes.Rent‐sharingmayalsobeimportantinforging

politicalcoalitionsbehindstructuralchange.

Ingeneralthepurposeofthisessaywillbetoopenuptherole

ofthestateinthedevelopmentcontextbeyondthenarrow

confinestowhichmuchoftheinstitutionaleconomics

literaturehaslimitedit,apartfrompointingtothevarious

trade‐offsamongthetypesofrolealreadyenvisaged.Beyond

beinga‘nightwatchman’ofpropertyrightsandmarkets,the

stateoftenneedstobeaguide,coordinator,stimulator,anda

catalyticagentforeconomicactivitiesinsituationswherefor

varioushistoricalandstructuralreasonsthedevelopment

processhasbeenatrophiedandthepathforwardisdarkened

byallkindsofmissinginformationandincompletemarkets.

Thetrade‐offsbetweendifferentaspectsdiscussedherealso

suggesttheneedforsomebalanceinworkingtowardmulti‐

faceteddevelopmentgoals,andapre‐fixedone‐sidedformulae

maynotbedesirable.Themultiplefunctionsofthestateand

themulti‐dimensionalityofitsagenda(comparedtothoseof

privatefirmsormarkets)alsoimply,aswe’lldiscuss,thateven

whenastateenterpriseisinefficientincarryingoutits

functionsprivatizationneednotalwaysbeabettersolution,

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particularlywhencontractsarenecessarilyincomplete.Our

focusonabroaderroleofthestate,multi‐dimensionalityofits

functionsandthattooatdifferentlevelsofthepoliticalsystem,

andthetrade‐offsanddissonancesbetweenobjectivesor

mechanismdesignsdoesnotmakeiteasyforaunifiedtheory

ortidyunambiguousconclusions.ButasWilliamson(2000)

saidinaJELsurveyofinstitutionaleconomics,“therebeing

manyinstructivelensesforstudyingcomplexinstitutions,

pluralismiswhatholdspromiseforovercomingour

ignorance”.

Theroadmapinthisessayisasfollows.InSectionIIwestart

withtheideaofa‘strongbutlimited’governmentandits

variousramifications.WeconcentrateinSectionIIAontwo

relatedaspectsofstatestrengthsuggestedintheliterature,one

oncommitmentabilityandtheotherispoliticalcentralization.

InthecontextofstatestrengthweshallcommentinSectionIIB

onthedifferentingredientsofstatecapacitydiscussedina

growingliterature.Inconnectionwithlimitedgovernmentwe

discussinSectionIICtheconstraintsontheexecutiveandthe

roleofotheraccountabilitymechanisms.InsectionIIIweshall

startourcritiqueoftheviewdiscussedinthepreviousSection,

bypointingtotensionsandtrade‐offsbetweendifferent

aspectsofgovernancerecommendedintheliterature.In

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sectionIVwewadeintoasmallpartofthelargeliteratureon

democracyanddevelopment,keepingourattentiononhowthe

democraticaccountabilitymechanismsdiscussedearlierhelp

inthedevelopmentprocessandatthesametimepointto

featuresofpoliticalcompetitioninademocracythatmay

actuallyhinderdevelopment.InSectionVweshalldrawupon

thegrowingliteratureondecentralizationandaccountability

downwardandshowhowthelattermayprovidea

counterweighttotheadvantagesofpoliticalcentralization

discussedinSectionII,whileatthesametimedrawattentionto

trade‐offsintermsofspecialproblemsthatafflictdecentralized

governanceinpursuitofdevelopmentgoals.Inthiscontextwe

shalldiscusstheuniquecombinationofpoliticalcentralization

andeconomicdecentralizationthattherecentlysuccessfulcase

oftheChinesestaterepresents,andalsothepitfallsofthe

Chinesestatemodel.InSectionVIwediscussthebroaderrole

ofthestateincoordinatinginvestmentactivitiesandlearning

processes,andhowthepotentialdynamicroleofrental

opportunitiesthatsectoraltargetinginindustrialpolicy

generatesneedstobetamedbymarketdiscipline.InSection

VIIwediscussthespecial,oftenmulti‐dimensional,functionsof

publicenterprisesandtheuncertaintyoftheirroleinfostering

necessaryinnovationsoncethedevelopmentalcatch‐up

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processintechnologyisover.InthefinalSectionVIIIwehave

someconcludingcommentsandbriefsuggestionsonunder‐

researchedareas.

Muchoftheanalysisinthisessay,asintheliterature

discussed,iscomparativeandhistorical‐institutional.Although

weshalloftenrefertothequantitative‐empiricalliterature

available,thelatterisasyetrelativelyscanty,scattered,and

notalwayssatisfactoryintermsoftheidentificationstrategies

applied.Forexample,asthegrowtheconometricsliterature2

makesitamplyclear,thecross‐countryregressionsofthe

literatureonthestateareriddledwithproblemsincausal

interpretation3.Inaddition,unlikeinthecaseofsomemacro‐

economicpolicies,itmattersagreatdealmoreinthisliterature

thattheeffectivenessofthestatevariesenormouslyacross

localitiesandadministrativelevelswithinthesamecountryin

theireffectonthedevelopmentprocess,notatallcapturedin

datathattakeawholecountryaverageasthepointof

observation,whichisparticularlyproblematicforcountries

withamediumtolarge‐sizedpopulation.Ontopofallthisthere

                                                            2 See, for example, Durlauf et al (2005). 3 In this essay, while we have not refrained from referring to some cross‐country empirical exercises, the purpose is mainly to illustrate findings suggestive of interesting correlation, not causation. 

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areinherentdifficultiesofmeasuringqualityofpublicgoods

andservices.Thereareafewmicroexperimentalstudiesnow

available,butasusualtherelevanceoftheconclusionsfaces

problemsinscalinguporin‘externalvalidity’.Therehave,

however,beensomehopefulbeginningsofcollaboration

betweenthepolicy‐makingandresearchcommunityin

carryingoutquasi‐experimentalevaluationofmicroaspectsof

statepoliciescoveringlargesegmentsofthepopulation.

Sincethisessayisnotprimarilyontheprocessofstate

formationassuch,weshalllargelyconfineourselvestostates

thathavesomeminimumcoherenceinstrivingfor

development,andthusleaveoutmanyimportantcaseswhere

internecineviolenceandextremesocialfragmentationhave

notyetallowedtheminimumconditionsforstatebuilding.

Whilekeepinginmindthatthedifferencesintherelevantstate

capacityareoftenamatterofdegreeratherthankind,weshall

bypassthelargeandgrowingliteratureon‘failedstates’and

civilconflicts.ForarelativelyrecentoverviewpieceinJELon

civilconflicts4,whichareoftenassociatedwithfragilestates,

seeBlattmanandMiguel(2010).

                                                            4 For my own take on civil conflicts, see Bardhan (2005), chapter 9. 

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IITheCallforaStrongbutLimitedGovernment

Theideaofastrongbutlimitedgovernmentintheinstitutional

economicsliteraturefollowsalongtraditionofAnglo‐American

politicalphilosophydatingbackatleasttoHobbesandLocke

(theformeremphasizingastrongstatetoprevent‘warofall

againstall’,andthelatteremphasizinglimitstogovernmentat

leastforsecuringpropertyrights)5.Thisisactuallyakinto

mucholderideasfamiliarfromtheclassicaltextsofsome

ancientcivilizations6.

Amajorpropositionintherecentinstitutionaleconomics

literatureassociatedwithNorthandWeingast(1989,2000),

andothersisthatforthepurposeofeconomicdevelopmentthe

                                                            5 Alexander Hamilton in Federalist Papers expressed it this way: “In framing a government….you must first enable the government to control the governed; and in the next place oblige it to control itself.” 6  For example, much more than a millennium before Hobbes, the theory of the state as enunciated in ancient Indian texts spelled out a variant of the social contract theory of the origin of the state, where the coercive authority (dandaniti) has to be combined with rajadharma (good governance). The relevant texts are the Buddhist text of Digha Nikaya (1st century BCE to 1st century CE), Arthashastra of Kautilya (4th century BCE) and Chapter 67 of Shanti‐parva of the epic Mahabharata (1st century CE). For a discussion of these theories of the state, see Sharma (1996) and Thapar (1984). 

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statehastobestrongenoughtoprotectpropertyrightsand

otherinstitutionsunderpinningmarketsandcontracts,butnot

toostrongtobeconfiscatory,hencetheneedfordemocratic

checksandbalances7.Theyhavecitedthelandmarkhistorical

caseoftheGloriousRevolutioninEnglandin1688,whichby

strengtheningpoliticalinstitutionsthatconstrainedtheking

enhancedhiscommitmenttosecuringprivatepropertyrights

andthusfosteredeconomicgrowth(amajormechanismhas

beenthroughloweringthecostofcapital).Acemogluand

Robinson(2012)intheirrecentremarkablebook8alsocitethe

caseoftheGloriousRevolution,resultinginapolitical

pluralism,whichalongwithcentralizationinEnglandhelpedto

secureprivatepropertyrightsagainststatepredationand

allowedprivateenterpriseandcapitalmarketstoflourish.

                                                            7 A referee has rightly pointed out that there is a distinction between a ‘limited’ government and a ‘constrained’ one. North and Weingast do talk about a limited government, that has strict limits on interfering with private property rights and markets. Scholars in the Public Choice tradition also explicitly talk about limited government.  Acemoglu and Robinson also emphasize security of property rights, but I presume they are more open to a more active role of the government.  8 Even though the book is meant primarily for a non‐specialist readership and their various technical articles at the background provide the theoretical and empirical underpinnings, we pay more attention to the book in this essay as it provides in one place a coherent framework for their understanding of institutions and development. 

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BesleyandPersson(2011)takeacloselyrelatedapproach,

citingAdamSmiththat“peace,easytaxes9,andatolerable

administrationofjustice”arethepillarsofthewealthof

nations.

IIAStateStrength

The‘strength’ofastateinthedevelopmentcontexthas,of

course,tobedefinedinanon‐circularway(withoutreference

tothedevelopmentoutcome).Asearchoftheliterature

suggeststwo(somewhatoverlapping)componentsofa

definitionofstrength,withoutbeingjustareflectionofthe

successoftheeconomy:(a)politicalcentralization,and(b)

capacitytocommit.

AcemogluandRobinson(2012)arethemostemphaticin

stressingtheimportanceofpoliticalcentralization.Intheir

viewnationssucceedorfailindevelopmentaccordingtohow

“inclusive”10theirpoliticalandeconomicinstitutionsare,and

                                                            9 The idea of ‘easy taxes’ was explicit in the Indian epic Mahabharata, where it was suggested that taxes should be gathered in the manner of ‘ the bee  taking honey from the flower’. 10 Acemoglu and Robinson keep the definition of ‘inclusive’ somewhat vague. One presumes an inclusive political institution is one where large numbers (possibly a majority) of people are included in the 

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politicalcentralization(awell‐functioningstateestablishinga

cohesiveorderacrosslocaljurisdictions)isoneoftheir

essentialinclusivepoliticalinstitutions.Itcaninternalize

externalitiesgeneratedbypolicyactionsofdifferentlocal

authorities,enablinganencompassingorganizationtooverride

variouspressuresoflocalclientelism.Thisalsoprovides

incentivesforincumbentpoliticalleaderstoinvestinthe

creationoffiscalandlegalcapacity,assuggestedbyBesleyand

Persson(2011)11.Empirically,Osafo‐KwaakoandRobinson

(2013)citeevidencefromacross‐culturalsampleforastrong

positivecorrelationbetweenpoliticalcentralization(inthe

senseof‘jurisdictionalhierarchybeyondlocalcommunity’)and

differentmeasuresofpublicgoodsanddevelopmentoutcomes.

FordifferentAfricanpolitiesBandyopadhayandGreen(2012)

andMichalopoulosandPapaioannon(2013)providedirect

econometricevidenceofpositiveimpactofhistoricalmeasures

                                                                                                                                                                                                

process of governance. Similarly, an inclusive economic institution expands economic rights to large numbers of people. 11 The theoretical model of Besley and Persson is that of a contest between an incumbent ruler and a challenger. Aoki (forthcoming) has a model of a more complex 3‐person game, played by the ruler, the challenger and the opportunist (say, the local gentry) who chooses a strategic position between them, applied to interpret the transition out of the pre‐modern states of Tokugawa Japan and Qing China. 

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ofpoliticalcentralizationoncontemporaryeconomic

development.

Whilepoliticalcentralizationreferstoencompassingthe

divergentlocalinterestsanddecisions,amoregeneral

characteristicofastrongandeffectivestateisthecapacityto

makecrediblecommitmentsinthefaceofpressuresfrom

diverseinterestgroups12.Onecandepicttherelationship

betweentherulerandtheruledinsuchastrongstateinterms

ofasimpleprincipal‐agentmodel.

SupposetherulerprovidesapublicinputG(say,some

infrastructuralfacility),whichalongwithL,thelaborputinby

theruledorthecitizens,producesthenationaloutput.The

rulermaximizeshisnetrevenue[τF(G,L)‐G]whereτisalinear

taxrateandFisaproductionfunctionwithusualproperties.

Buttheprincipal/rulercannotobserveorcontrolthelabor

effortputinbytheagent/ruled.ThelatterdecidesonL,taking

τandGasgiven,tomaximize[(1‐τ)F(G,L)+W(1‐L)],where

letussupposetheagenthastheopportunitytousepartofhis

orherlaboreffort(thetotalisfixedatunity)inthe

undergroundorinformaleconomy(whichthelongarmofthe

                                                            12 For expositions of the strong state in these terms, see Rodrik (1992), Bardhan (1990), and Bardhan and Udry (1999), Chapter 17. 

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rulerdoesnotreach)atagivencompensationrateofW.Ifmis

themarginalproductoflaborintheFfunction,thefirst‐order

maximizingconditionfortheagentisthengivenby

(1‐τ)m(G,L)‐W=0,

whichdefinesanimplicitfunction,L*(τ,G).Thisequation

suggeststheusualdistortiononlaborsupplyasaresultofthe

taximposition:themarginalproductoflaborislargerthanits

opportunitycost.

Wecannowwritetheprincipal/ruler’sobjectiveas

maximizing[τF(G,L)‐G]withrespecttoτandG,

subjecttoL=L*(τ,G)

Fromthefirst‐orderconditionofmaximizationwithrespectto

τandwithdiminishingmarginalproductivity,itcanbeeasily

seenthatδL*/δτisnegative.Onecanalsoseethatsincethe

rulertakesintoaccountthedistortionaryeffectofthetaxrate

onlaborsupplyhischosentaxrateislessthanthemaximum

possiblerate.

IfthemarginalproductoflaborincreasesinG,whichis

reasonable,thenδL*/δGispositive.Thismeanstherulerwill

inthiscaseprovidemoreofthepublicinputGthanifhewere

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totakeLasaparameteranddidnottakeintoaccountthe

complementaritybetweenGandL.

Thusinthissimplemodeltherulerofastrongstatemaximizes

hisownobjectivefunctionsubjecttothereactionfunctionof

theruledandsointheprocesstherulerinternalizesthe

economiccostsandbenefitsofhisactionsinaccordancewith

thatreactionfunction.Inotherwordstheruleristakentobea

Stackelbergleader.Incontrast,onecansaythattheweakor

the'soft'stateisaStackelbergfollower;itcannotcommittoa

particularpolicyandmerelyreactstotheindependentactions

oftheprivateactorslikespecial‐interestgroups.Thuswecan

nowsaythatcomparedtothe'strong'state,the'soft'statewill

havetoomuchofundesirableintervention(creatingdistortions

intheprocessofgeneratingrentforthelobbyinggroups),as

theinstitutionaleconomists(aswellastheearlierpublicchoice

theoristsonrent‐seeking)usuallyemphasize.Buttheydonot

usuallynotethatbythesamelogic,the‘soft’statewillhavetoo

littleofdesirableintervention(asinthecaseofprovisionof

publicinputsintheexampleabove),sincethestatedoesnot

takeintoaccountorinternalizetheeffectsofitsownpolicies.

Sothedistinctionbetweena'strong'state(say,inmuchofEast

Asia)anda'soft'state(say,inmuchofAfricaorSouthAsia)is

notnecessarilyintheextentofintervention,butinitsquality

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(i.e.itdependsinthismodelonifitisthroughdistortionof

laborsupplyorenablingapositivecomplementarityeffectof

publicinput).

Animportantexampleofthestrongstate'sabilitytopre‐

commitliketheStackelbergleaderarisesinthecaseofthe

popularinfant‐industryargumentforprotection.Inthelasttwo

hundredyearsthisargumenthasbeenappliedbythestatein

manycountriesintheearlystagesofindustrialization,witha

fewsuccessesandnumerousfailures,whichhaspartlytodo

withthestrengthofthestateorlackofit.Atthetimewhensuch

protectionisinitiated,bytheverynatureofthisargumentfor

temporaryprotection,itisgrantedforashortperioduntilthe

industrialinfantstandsuponitsfeet.Butinmostcountries

infantindustryprotectioninevitablyfacesthe‘time

inconsistency’problem:whentheinitialperiodofprotection

nearsitscompletionthepoliticalpressuresforitsrenewal

fromthevestedinterestsbecomeinexorable,andinthisway

theinfantindustryinaweakstatecandegenerateintoa

geriatricprotectionlobby(thehistoryofimport‐substituting

industrializationindevelopingcountriesislitteredwith

examplesofthis).

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IntherecenthistoryofthestrongstatesofEastAsia,however,

therehavebeensomeremarkableinstancesofthegovernment

keepingitscommitment,withdrawingprotectionfroman

industryifitdoesnotshapeupafterthelapseofa

preannouncedduration,lettingtheindustrysinkorswimin

internationalcompetition13.Intermsofpoliticalpre‐conditions

forcommitmentElster(1994)hasarguedthattobecredible

andeffective,commitmentrequiresdemocracy.Thepromises

ofarulerareconsideredmuchmorecredibleifwell‐

establishedproceduresexistforthrowingtheruleroutofoffice

forfailuretokeepthosepromises;thisisacentralthemeof

muchoftheliteratureonconstitutionalpoliticaleconomy.But

someofthosestrongregimesinEastAsiawerenotatthattime

democratic,butovertimetheyhadestablishedreputational

alternativestoformalcommitmentdevices.Ontheotherhand,

indemocracieswhentheso‐calledinfant‐industryprotectionis

prolongedviolatingearliercommitments,thereislittlepopular

pressureorganizedagainstit.Noconnivingleaderfaces

dismissalonthisground,makingconstitutionalprovisionsfor

throwingouttherulerlargelyirrelevanthere.

                                                            13 For some examples of this, see Wade (1990). 

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Acloselyrelatedcommitmentissueisthatofenforcingahard

budgetconstraintinpublic‐sectorrunorfundedprojects.A

strongstateshouldbebetteratresistingtheinevitablebail‐out

pressuresfrominterestsinvolvedinfailingprojects.Aweak

stateisunabletomakeacrediblecommitmenttoterminatea

badpublicproject,sincesunkcostsinearlierperiodsof

investmentmakeitsequentiallyrationaltorefinanceprojects

evenwhenonerealizesdownthelinethattheyhadnegative

netpresentvalueinitially14.

Anotherimportantaspectofthequalityofstateinterventionin

EastAsianrecenthistoryhadtodowiththeuse,byandlarge,of

clear,well‐defined,pre‐announcedrulesofperformance

criteria.InSouthKorea,forexample,theheavyinvolvementof

thestateindirectinginvestmentthroughsubsidizedcredit

allocationhasbeenlargelysuccessfulbecauseofitsstrict

adherencetothecriterionofexportperformance.Throughthis

pre‐commitmentdevicethestrongKoreanstatehasusedthe

vitaldiscipliningfunctionofforeigncompetitionin

encouragingquicklearningandcostandqualityconsciousness

amongdomesticenterprises,somethingthathasbeen

conspicuouslyabsentinmanyotherinterventionistregimes                                                            14 For the micro‐foundations of such ‘soft’ financing problems, see Dewatripont and Maskin (1995). 

22  

(eventhoughtheKoreanstateatleastuntilthe1980’sshared

withthelatterregimesmanyoftherestrictivepolicieson

importsandforeigninvestment).We’llcomebacktothisissue

ofcombiningsectoralcommitmentwithcompetitioninSection

VIonindustrialpolicy.

Somewhatparadoxically,theideaofthe‘weak’statebuffeted

bypressuresfrominterestgroups,whichisastapleofPublic

Choicetheoryandtheliteratureon‘rent‐seeking’bylobbying

groups,hasfamilyresemblancetotheolderMarxisttheoryof

thestateontheotherendofthepoliticalspectrum.But

mainstreameconomistsareoftenunawarethatquitesome

decadesbackthelattertheorywentbeyondthisandadopteda

theorythatemphasizedstatestrength.OrthodoxMarxistsused

toconsiderthestateasatoolof,ordancingtothetuneof,the

dominantinterestgroup,i.e.thecapitalistclass15.Theninthe

1960’sand70’sagroupofneo‐Marxistpoliticalwriters

developedtheideaofwhattheycalledthe‘relativeautonomy’

ofthestate,wherebythestatesupersedesthenarrowor

particularisticinterestsofthecapitalistsandtakes

independentdecisionsandpolicies,eventhoughitbyandlarge

safeguardstheirlong‐termsystemicinterests.(Innon‐Marxist                                                            15 There is clear evidence that Marx himself essentially abandoned this view after 1850. For an elaboration on this see Elster (1985). 

23  

literatureduringDepressionorfinancialcrisesthissometimes

appearsintheformofacallforthestateto‘savecapitalism

fromcapitalists’)16.Latermanypoliticalsociologistsinand

outsidethisgroupwentevenbeyondthis,andrecognized

severalhistoricalinstancesoftheclearlyvitalroleofthestrong

state.Forexample,Skocpol(1982)refersto‘theexplanatory

centralityofstatesaspotentandautonomousorganizational

actors’.Thereare,ofcourse,seriousconstraintsposedbythe

imperativesofthedominantproprietaryclasses(afterallthey

providethemainsourceofpublicrevenue),butthesewriters

recognizedthattofocusexclusivelyonthoseconstraintsis

oftentoignorethelargerangeofchoicesingoalformulation,

agendasettingandpolicyexecutionthatthestateleadership

usuallyhas.Thestrongstatethusactsneitheratthebehestof,

noronbehalfof,thedominantclasses.

Ofcourseinmostactualsituationsthestateisneithera

StackelbergleadernoraStackelbergfollower;neitherthestate

actorsnortheprivateinterestgroupsusuallyhavethepower

todefineunilaterallytheparametersoftheiraction.Bothmay

                                                            16 Marx in Capital vol I, when discussing the English Factory Acts, deduces the necessity of the state as a particular form ‘alongside and outside bourgeois society’, protecting capital from its own ‘unrestrainable passion, its werewolf hunger for surplus labor’. 

24  

bestrategicactorswithsomepowertoinfluencetheterms,and

theoutcomeofthebargaininggamewilldependontheir

varyingbargainingstrengthsindifferentsituations.Thispoints

toamajorinadequacyoftheprincipal‐agentruler‐ruledmodel

ofearlierinthisSection.Inthatmodel,forexample,thepower

oftherulertocollecttaxesorrentsisinvariantwithrespectto

policiestopromoteproductivity.Butsomeofthelatterpolicies

maychangethedisagreementpayoffsoftheruledifonethinks

ofitasabargaininggame:anincreaseinGmayendup

weakeningthepoweroftherulertoimposeτ—thisisthe

standardstoryoftherulerintroducingroadsorrailways

enablingthepeasantsfromthecountrysidetoeasilycometo

thecityandaggregatetheirprotestagainsttheruler’srent

extractions.

IIBIngredientsofStateCapacity

BesleyandPersson(2011)associateaweakstatewithalackof

statecapacity,particularlyfiscal,legalandmilitarycapacity,to

beabletoprovidepublicgoodsandservices(includinglawand

order).Intheburgeoningliteratureonstatecapacitydifferent

writershaveemphasizeddifferentaspects.Awell‐knownline

ofthinkingassociatedwithTilly(1985)linksthehistorical

25  

makingofthefiscal‐militarystateinearlymodernEuropewith

inter‐statewars.Levi(1988)associatedstate‐makingwith

inducingcitizencomplianceinprovidingrevenueand

conscriptsforwar.Others17,however,havesuggestedthatin

morerecenttimesandoutsideEurope,stateshavebeenformed

withoutwars,andtherehavebeencaseswherewarshave

unraveledpre‐existingstates.

InexaminingtheingredientsofstatecapacityEvansandRauch

(1999)stressedtheimportanceofcertainWeberian

characteristicsofthestatebureaucracylikemeritocratic

recruitmentandlong‐termcareerrewardsforofficials.Thereis

alsoacumulativelogicofbureaucraticfunctioning.Along

historyofcontinuousbureaucraticstructureinplacemay

fosterahelpfulbureaucraticculture18orespritdecorpsthat

cancontributetostateeffectiveness.Bockstette,Chandaand

Putterman(2002)havecomputedanindexofstateantiquity

(continuousterritory‐widestatestructureabovethetribal

domainsoverthelasttwomillennia).Itshowsthatamong

developingcountriesthisindexismuchlowerforsub‐Saharan                                                            17 See, for example, Leander (2004), and Taylor and Botea (2008). 18 Analogous to the term ‘democratic capital’ that Persson and Tabellini (2009) have used, one may call this historical experience of bureaucracy a kind of ‘bureaucratic capital’, though one should be careful in not stretching the definition of capital too far. 

26  

AfricaandLatinAmericathanforAsia,andeveninAsiathe

indexforKoreaisseveraltimesthatforthePhilippines(a

countrythatlackedanencompassingstatebeforethe16th

centurycolonizationbySpain).Across‐countrystatistical

exercise19showsasignificantpositiveassociationbetweenthis

stateantiquityindexandthatfortheruleoflawcurrentlyin

thecountry.

Theeffectivenessofabureaucracy,ofcourse,dependsonthe

compensationstructureandincentives.DalBoetal(2013)

provideexperimentalevidencefromMexicothatnotmerely

higherwagesattracthigher‐qualityrecruitstothegovernment

(evenindifficultlocations),buttheyalsodonot‘crowdout’the

intrinsicnon‐pecuniarymotivations20thatareimportantin

publicservice.

Cornick(2013)hasclassifiedthedifferenttypesofstate

capacityintotechnical,organizationalandpolitical.Technical

capacityisparticularlyrelevant,forexample,inthecontextof

screeningworthwhilepublicprojectsormonitoringthe

deliverytointendedbeneficiariesinsocialprograms.

                                                            19  See Bardhan (2005), Chapter 1. 20  Ashraf et al (forthcoming) find experimental evidence in Zambia that financial incentives augment, rather than crowd out, public service motivation. 

27  

Informationtechnologyhasexpandedtherealmofpossibilities

here.Muralidharanetal(2014)evaluatetheimpactofa

biometrically‐authenticatedpaymentsinfrastructureonpublic

employmentandpensionprogramsinIndia,usingalarge‐scale

experimentthatrandomizedtherolloutofthenewsystemover

158sub‐districtsand19millionpeople.Theyfindthatthenew

systemdeliveredafaster,morepredictable,andlesscorrupt

paymentsprocesswithoutadverselyaffectingprogramaccess.

Theseresultssuggestthatinvestinginsecureauthentication

andpaymentsinfrastructurecansignificantlyaddtostate

capacityineffectiveimplementationofsocialprogramsin

developingcountries.Similarissuesariseinthecontextof

buildingcapacitiesinjudicial,auditingandregulatorybodies.

Organizationalcapacityofastateisoftencrudelymeasuredin

theempiricalliteratureintermsoftax‐GDPratio.But,asis

usuallyrecognized,thisratiomayberelativelyhighinanatural

resourceabundantcountryonaccountoftheresourcerents,

notnecessarilyorganizationalcapacity,orlowinapoor

countrywhereforindependentreasons(say,thenatureof

factormarketimperfections)theinformalsectorislarge.

Organizationalcapacityisalsorelatedtomodesofgovernance.

Forexample,Bandieraetal(2009)show(fromapolicy

experimentassociatedwithanationalprocurementagencyin

28  

Italy)thatmuchofthesheerwastageinpublicprocurement

arisesfromsomeorganizationalmodes(‘top‐down’governance

modesinpublicbodiesperformtheworst).Organizational

capacity,ofcourse,variesbetweendifferenttypesofstate

functions.TheIndianstateshowsextraordinarycapacityin

somelargeepisodicmatters,likeorganizingthecomplex

logisticsoftheworld’slargestelectionsortheworld’ssecond

largestCensus.Butitdisplayspoorcapacityin,forexample,

someregularessentialactivitieslikecost‐effectivepricingand

distributionofelectricity.Thisispartlybecauselocalpolitical

considerationsinterfereinmatterslikeunder‐recoveryofcosts

fromalargeandpoliticallysensitivecustomerbase.

Politicalcapacityisoftenlargelyanissueofcommitmentand

resistingpressuresforshort‐termismandsoftbudget

constraints,aswehavediscussedabove.InmanypartsofIndia

andAfricathepoliceandbureaucracyarehighlypoliticized

anddeliberatelyincapacitatedtoserveshort‐termpolitical

goalsofleaders.Insuchcontextsmeasurestoimprove

bureaucraticautonomymayenhanceperformance.Inastudy

of4700publicsectorprojectsimplementedbytheNigerian

civilservice,RasulandRogger(2013)findthatonestandard

deviationincreaseinautonomyforbureaucratscorrespondsto

significantlyhigherprojectcompletionratesof18percent.In

29  

general,asAghionandTirole(1997)havepointedoutinthe

contextofallocationofauthorityinevenprivatefirms,in

complexprojectsautonomyforanagent(thebureaucrat)who

maybebetterinformedthantheprincipal(thepolitician)is

calledfor.

IICLimitstogovernment

Aswehavementionedbefore,theinstitutionaleconomics

literatureemphasizesthatthestatehastobestrongbutlimited

forhelpingdevelopment,i.e.notmerelyitshouldbeinsulated

fromthepoliticalpressuresfromspecialinterestgroups,butit

shouldhaveenoughconstraintsonitspowerssothatprivate

propertyrightsaresecurefromits‘grabbinghand’21,andthe

state‐providedinstitutionsforsupportingmarketsand

contractscanoperateunhindered.Forthisvariouskindsof

checksandbalances,includingconstitutionalconstraintson

executivepower,separationofpowers,electoralrules,

independentjudiciary,freemedia,andothersuch

accountabilitymechanismsforthestateleadershiphavebeen

regardedasnecessary.Apartfromsecuringpropertyrights

fromunduestateencroachment,thesechecksandbalances

mayalsolimittheruler’sattemptsatpushingfornarrow‐based

                                                            21 This is the title of the book by Shleifer and Vishny (2002). 

30  

orparticulargroup‐favoringprograms.InBesleyandPersson

(2011)stateswithweakconstraintsaredescribedashaving

ratherweakcompulsionsontherulinggroupstosupply

common‐interestservices.Weshallcomebacktothe

accountabilitymechanismswhenwediscussdemocracyand

developmentinSectionIV.

IIIAcritiqueofthedominantinstitutionalview

Afterourdiscussionofthedifferentelementsofstrengthand

limitstogovernment,bothofwhichareclearlyimportantinthe

processofdevelopment,weshallnowprovideacritiqueof

someofthebasicideasinthisliterature.Letusstartwith

politicalcentralization.AcemogluandRobinson(2012)regard

thisasakey‘inclusive’politicalinstitutionalongwitha

pluralisticdistributionofpoliticalpower.Buttheideathat

politicalcentralizationisanelementofpoliticalinclusiveness

isratherpuzzling.Mosthistoricalinstancesofpolitical

centralization,eitherintheempirestatesofthepastorinthe

modernnationstates(suchasMeijiJapan,Ataturk’sTurkey,

andMao’sChina),havebeenassociatedwithlesspolitical

inclusivenessinimportantrespects.Secondly,andasarelated

point,thereisactuallyadegreeofpotentialconflictbetween

31  

thosetwokeypoliticalinstitutionsstressedbyAcemogluand

Robinson.Tobesure,acertaindegreeofpoliticalunificationis

necessarytobuildacoherentinstitutionalframeworkforlong‐

termdevelopmentpolicies.Butcentralizationandpluralism

maynotbealwayscompatible.Pluralisminthesenseofa

socialideathatencouragesdiversityofgoalsandinterestsofa

varietyofsocialgroupscaninhibitcentralizationandsociety’s

collectiveactiononlong‐rundecisionsandprojects.Indiahas

beenamajorexampleofintensivepluralismandpolitical

competitionresulting,aswehavesuggestedabove,ingeneral

inweakpoliticalcentralizationorcollectiveaction.This

suggeststheneedformoreattentiontobepaidinthis

literaturetothetheoryofthedeterminantsofcollectiveaction.

Thirdly,economicinclusionintheworldofAcemogluand

Robinsonrequiressecurepropertyrights.Butpolitical

inclusion,withitspluralisticdistributionofpoliticalpowerand

broadpopularparticipation,maynotalwayssecurethe

propertyrightsofthefewagainstthenumerousencroachers

andsquattersoragainsthightaxes.Similarly,intheworldof

BesleyandPerssonallgoodthingsgotogether(likepluralism

andsecurityofpropertyrights),andthustheyignorethe

possibletensionbetweenthosefactors.Or,totakeanother

example,theruleoflaw—partofpoliticalinclusion—isoftenan

32  

instrumentusedtoprotectthepropertiedfromthe

propertyless,thusenforcingeconomicexclusion22.English

enclosurelawsfamouslyturnedthepoorusersofthevillage

commonsintopoachers.Ofcourse,theruleoflawmaybe,on

balance,averygoodthing,evenifitissometimesatoddswith

economicinclusion.23

Thereisalsoadefinitionalproblem.AcemogluandRobinson

saytheywill“refertopoliticalinstitutionsthataresufficiently

centralizedandpluralisticasinclusivepoliticalinstitutions”

                                                            22 “Civil government, so far as it is instituted for the security of property, is in reality instituted for the defense of the rich against the poor, or of those who have some property against those who have none at all”—this is a quote not from Marx, but from Adam Smith in the Wealth of Nations.   23 The nature of the tension involved in the rule of law is captured well in the nuanced conclusion of Whigs and Hunters (1975), by the Marxist historian E. P. Thompson: “We reach, then, not a simple conclusion (law = class power) but a complex and contradictory one. On the one hand, it is true that the law did mediate existent class relations to the advantage of the rulers . . . . On the other hand, the law mediated these class relations through legal forms, which imposed, again and again, inhibitions upon the actions of the rulers. . . . In a context of gross class inequalities, the equity of the law must always be in some part sham. . . . We ought to expose the shams and inequities which may be concealed beneath this law. But the rule of law itself, the imposing of effective inhibitions upon power and the defense of the citizen from power’s all‐intrusive claims, seems to me to be an unqualified human good.” 

33  

(italicsadded).Thisisunsatisfactorywithoutanindependent

measureofsufficiency,since“sufficiently”leavesthedooropen

forcircularity.Clearlywedonotwanttocallinstitutions

‘politicallyinclusive’whentheyareinclusiveenoughtoyield

development,andstillclaimthatinclusiveinstitutionsfoster

development.

Historically,however,Englandhasindeedbeenasuccessful

casewherepoliticalcentralizationandpluralismhavefitted

together.But,contrarytoNorth,Weingast,Acemogluand

Robinson,economichistorianslikeEpstein(2000),Clark

(2007)andAllen(2009)haveexpresseddoubtsiftheeconomic

successofEnglandcanbemostlyattributedtothe

constitutionalchangesthatcamewiththeGloriousRevolution.

EvensomeofthemorerecentdefendersofNorthandWeingast,

likeCox(2012)andPincusandRobinson(2011),agreethat

neithercostofcapitalnorenforcementofpropertyrights

improvedsignificantlyafterthatRevolution,eventhoughit

representsanimportantconstitutionalwatershed(Cox)oran

institutionalchangeshiftingthebalanceofpowerfromtheking

tothenewmanufacturingclasses(PincusandRobinson).Nor

34  

diditleadtoaparticularlylimitedgovernment:infacttaxes

andpublicdebtincreasedsharplyaftertheRevolution24.

Onthestate’sabilitytocommit,itisimportanttokeepinmind

thatinsomecasesofstateeffectivenesscommitmenthasnot

beennecessary;aswehaveindicatedbefore,reputational

substitutesforformalcommitmentdevicesestablishedovera

periodhaveworked.Moreimportantly,therearecostsof

commitment,sayintermsofsacrificeofflexibilityindealing

withchangingtechnicalandmarketconditionsandin

correctingwrongdecisions.Aspartoftheflexibility,some

politicalsociologists,likeEvans(1995),haveemphasizedthe

needforaWeberianbureaucraticstructurewithmeritocratic

recruitmenttobecombinedwithchannelsofdeliberative

processesinvolvingtheimportantpoliticalstakeholdersinthe

developmentprocess—whathecalls‘embeddedautonomy’

prominentinhisaccountofSouthKorea.Butweknowthatnot

allstakeholderswereincluded‐‐theautonomousKoreanstate

                                                            24 Outside England, across early modern Europe  Stasavage (2011) cites evidence how the government’s ability to raise long‐term credit depended on assemblies where merchant representatives looking after lenders’ interests had some political control over fiscal affairs. Dinsecco (2011) show how across countries in Europe in the period 1650‐1913 political centralization combined with parliamentary oversight of the executive helped develop fiscal structures.  

35  

forsomedecadeshadalsoensuredpoliticalsuppressionofthe

labormovementsothattheprofitsofthebusinessstakeholders

werenotthreatenedtoomuch.Inadifferentpoliticalcontext,

theIndianexperiencehasshownhowthepoliticalprocesscan

erodethecommitmentcapacityofameritocraticallyrecruited

bureaucracy,particularlyaspoliticianscanmanipulate

transfersandpromotionofofficers.25

Ingeneralourdiscussionofpoliticalcapacityintheprevious

Sectionneedstobelinkedwiththeabilitytoform‘socialpacts’

amongimportantpoliticalstakeholdersandthenatureof

distributionofpowerandpoliticalcoalitions.TheKorean

politicalcoalitionintheearlydecadesofdevelopmentinvolved

atightintegrationbetweenamilitarybureaucracyand

conglomeratebusiness,whichwasclearlyoutofboundsforthe

elitetoaccomplishindemocraticIndia.Butwithina

democraticframeworktherelativeweaknessofstatecapacity

inIndiahasbeenmoreasymptomoftheunderlyingpolitical

                                                            25 For evidence on manipulative transfers of Indian administrative officers, see Iyer and Mani (2012). A randomized experimental study in the police department in Rajasthan, India by Banerjee et al (2012) showed that a freeze on transfer of police staff increased police effectiveness.  

36  

difficultyoforganizingcollectiveactionforthelongterm26

(evenamongitsdividedelite),notbecausethecountrylacks

administrativelycapablepeople.Consistentwiththetheoryof

collectiveaction27,India’slargeheterogeneouspopulation,

fragmentedpolity,andhighsocialandeconomicinequality

makeithardtoagreeonlong‐termcommongoalsand,even

whenthelatterisachieved,togetitsacttogetherinpursuitof

thosegoals.Moreover,inrecentyearsinmanydeveloping

countries(includingIndia)short‐termconsiderationshave

sometimespredominatedintheinterestconflictsbetween

rentierandentrepreneurialcapitalism‐‐asthepriceofland

(andothernaturalresources)shotupwitheconomicgrowth,a

growingnexusbetweenpoliticiansandrentierinterestslike

realestatemagnates,buildersandcontractorshasoften

workedtounderminestatecapacityforgoodgovernanceand

long‐termproductiveenterprise.Ingeneral,dividedsocieties

andpolitieswillhaveweakercommoninterests,andasBesley

andPersson(2011)havepointedout,insuchcasesthe

                                                            26 For an analysis of the difficulty of collective action in India in terms of the large numbers and heterogeneity of influential socio‐economic groups, see Bardhan (1984). 27 See, for example, Bardhan (2005) chapters 10 and 11 for a general theoretical and empirical analysis of collective action, in particular the impact on it of inequality. 

37  

incentivetoinvestinstatecapacitywillbeless28.Incontrast,in

thepost‐Wardecadesinnorth‐eastAsiaandnorth‐west

(particularlyNordic)Europerelativesocialhomogeneityand

lessunequaldistributionofwealthandhumancapitalmay

havemadeitsomewhatlessdifficulttoenlistthesupportof

mostsocialgroupsinmakingshort‐runsacrificesand

coordinatingongrowth‐promotingpolicies.Thisalsomeans

thatintermsofourearlierdiscussionthe‘strength’ofthestate

isultimatelysustainablebythebreadthofsupportinthe

generalpopulation.

Thesemattersareobviouslyhelpedif,assomecultural

theoristspointout29,thepredominantcultureinsocietyis

‘collectivist’(whenindividualsinternalizegroupinterests),

whichisprominentinsomedescriptionofEastAsiansocieties,

asopposedto‘individualist’.Goingintotheculturalissuesis

beyondthescopeofthispaper,exceptonlytonotethatthe

issueofcultureisawelcomereminderthatsomeinstitutionsof

                                                            28 For some cross‐country evidence on the relation between ethno‐linguistic fragmentation and governance, see Alesina et al (2003). The experimental evidence for Uganda in Habyarimana et al (2007) suggests that ethnic homogeneity facilitates coordination on public goods provision.  29 On this see some references cited in Gorodnichenko and Roland (2013).  

38  

statecapacitymaynotbeeasilytransplantedinanalien

culturalcontext.

Animportantbutcomplicatedquestionrelatingtothe

prevailingpoliticalcoalitionandhencethepoliticalcapacityof

thestate,seldomdiscussedinthiscontext,isitslinkwith

globalization,evenapartfromtheusualconstraintsonstate

powerinaglobaleconomyposedbyvolatilecapitalflowsand

internationalcreditratings.Ontheonehand,international

competitionandintegrationmaystrengthendomesticpolitical

accountabilityprocessesandmakethepoliticalcoalition

somewhatmorebroad‐based–‐historically,Acemoglu,

Johnson,andRobinson(2005)showthattheriseof

internationaltradeintheAtlanticeconomiesduringtheearly

modernperiodpromotedademandforinstitutionalreforms;

inmorerecentperiodstheEuropeaneconomicintegrationhas

beenreportedtohaveimprovedsomegovernanceinstitutions

inEurope’ssouthernandeasternperiphery.Ontheotherhand,

muchdependsontheinitialconditions,thetypeofgoods

internationallytradedandthenatureofpoliticalandeconomic

competition.Inmanyhistoricalcasestradeexpansionin

naturalresource‐intensiveproducts(likeoil,sugar,bananas,

timber,diamonds),forexample,hasstrengthenedthepolitical

powerofplantationelitesandotherlargeexporterswhoraised

39  

domesticbarrierstoentryandpromotedoligarchicdominance

overthestate.30Morerecently,globalizationinthecontextof

asymmetricinternationalmobilityofcapitalrelativetolabor

hasweakenedlabororganizationsandpracticesinmany

countriesandalteredthepoliticalequilibriuminfavorof

capital31.Thefallincustomsrevenueandcapitaltaxesina

moreopeneconomymayalsoaffectstatefiscalcapacity.

IVPoliticalDecentralizationandLocalAccountability

Therearetrade‐offsbetweencommitmentstructuresand

accountabilityprocesses.Politicalcentralization,forexample,

oftenleadstodistantinsulatedbureaucraciesthatare

insensitivetolocalneedsandconcernsandthatfailtotaplocal

information,initiativeandingenuity.Thecentralgovernment,

ofcourse,mayalsocareaboutwinningelectionslocally,but

electoralsanctionsareusuallymoreeffectiveatthelocal

elections,thanatnationalorevenprovincialelections,sinceat

thelatterforumsmultiplicityofelectoralissuesdilutes

responsibilitycomparedtothenarroweragendaoflocal

elections32.Asopposedtotheinter‐jurisdictional

                                                            30 For a recent survey of these issues see Nunn and Trefler (2014), section 5. 31 For a discussion of these issues see, for example, Rodrik (2011).  32 See on this Seabright (1996). 

40  

encompassingadvantageofcentralization,therearemanywho

argueforthelocalaccountabilityandotheradvantagesof

decentralization—theseincludepeer‐monitoring,easeof

citizenparticipationandrelativetransparencyofdecision‐

makingandprogrambenefitsatthelocallevel.Brazilnowhasa

ParticipatoryBudgetary(PB)process(withcitizens’direct

inputinbudgetingandinvestmentpriorities)inasubstantial

fractionofmunicipalities.Fromapaneldatasetfromall

Brazilianmunicipalitiesover1990‐2004,Gonçalvez(2014)

showthatmunicipalitiesadoptingPBincreasedspendingon

healthandsanitationsignificantlymorethanthosethatdidnot,

andthisalreadyhadsizeableeffectsonoutcomeslikeinfant

mortality.

Contrarytotheearlierfiscalfederalismliterature,themore

recentliterature33ondecentralizationanddevelopmenthas

pointedoutthepolitical‐economyandinstitutionalissues(like

                                                            33 We are somewhat cryptic in our discussion here of the growing literature, as we want to confine ourselves only to issues that are directly relevant in the contrast with the earlier discussion of political centralization that is supposed to be associated with better state capacity. The reader interested in more detail may refer to surveys of this literature in Bardhan (2002) and Mookherjee (2014), and to case studies from developing countries in different continents in Bardhan and Mookherjee (2006). 

41  

malfeasance,rent‐seeking,shirkingandabsenteeismandother

agencyproblemsofgovernance)involvedinpolitical

centralization.Decentralizationalsoenablescompetition

amongregionalgovernmentsformobileprivatecapital,which

maykeepthemontheirtoesandoffexcessiverentextraction.

Insomedevelopingcountries—say,Brazil,SouthAfricaand

Indonesia‐‐decentralizationhasbeenanintegralpartofthe

democratictransitionitselfandhassignificantlyaffectedthe

structureofsubsequentdevelopmentpolicy,particularlyinthe

deliveryofsocialservices.

Onthecontrary,decentralizedgovernanceisoftenproneto

localcapturebyacollusiveelite(landedoligarchyinsome

agrariancontexts),proximitymakingcollusioneasier,asJames

Madisonworriedmorethan200yearsbackintheFederalist

Papers.Thewell‐knownsafeguardinthefiscalfederalism

literatureintheformoftheTiebout(1956)mechanism,by

whichfullyinformedandmobilecitizensvotewiththeirfeetin

responsetodifferentialpublicperformance,isoflimited

applicabilityinthecontextofmanypoorsocieties(largelyon

accountofvarioustypesoffactormarketimperfections).The

42  

empiricalliterature34oncapturesuggeststhatthepre‐

conditionsoflocalcapturedependon

(a) initialsocialandeconomicinequalityinthelocalarea

(b) degreeofpoliticalcompetitioninthearea

(c) howregularandwell‐functioningarethedeliberative

processesoflocaldemocracy(publichearings,townhall

meetings,etc.)

(d) howfreeistheflowofinformationaboutthe

functioningofgovernments,andabouttheentitlements

andallocationsatthelocallevel‐‐‐heretheimportance

ofinformationcampaigns(andmediaexposure)about

resourcesallocatedtolocalgovernmentsandhowthey

havebeenspentandaudited(ifthereareprovisionsof

periodicindependentauditsofaccounts)areclear.

Apartfromtryingtoimprovemattersrelatingto(a)‐(d),

attemptsatmitigationoftheeffectsofcapturehaveincluded

politicalreservationofseatsatlocalcouncilsandtheir

headshipsfordisadvantagedsocialgroups—likemandatory

reservationsforlowercastes,tribesandwomeninIndia.There

                                                            34 See, for example, Galasso and Ravallion (2005) for Bangladesh, Araujo et al (2008) for Ecuador, Ferraz and Finan (2009) for Brazil, Bardhan and Mookherjee (2010) for West Bengal, India, Bjorkman and Svensson (2010) for Uganda, and de Janvry et al (2012) for Brazil. 

43  

isnowagrowingempiricalliteratureonitsimpactontargeting

ofbenefits,startingwiththepapersbyChattopadhyayand

Duflo(2004)whichfoundsignificantpositiveeffectsof

reservationofthepositionofvillagecouncilheadforwomen.

Thesubsequentliterature,includingourownwork—see

Bardhan,Mookherjee,andTorrado(2010)andtheliterature

citedthere‐‐hasnotconfirmedthisforthecaseofwomen,

althoughthereisevidenceforpoliticalreservationforsome

ethnicminoritygroupsinimprovingtargetingofsomebenefits.

Ofcourse,evenapartfromimmediatebenefitstargeting,the

moreimportantconsiderationmaybethatpoliticalreservation

mayhaveeffectsinempoweringandconfidence‐buildingin

potentialleadersfromdisadvantagedgroupsoveralonger

period,asshowninthecaseofwomenbyBeamanetal(2009).

Bhavnani(2009)inanexperimentalstudyofthelong‐term

impactofwomen’sreservationsinmunicipalcouncilsin

Mumbaifindsthatwomen’schancesofwinningwardelections

weremorethanquintupledbyreservationseveninelections

whenthereservationswerediscontinued.Thewaytoreconcile

thecontrastingempiricalfindingsinthisliteraturemaybeto

recognizetheinitialhandicapstheleadersfromdisadvantaged

groupsinreservedpositionssufferfrom,particularlyinterms

ofinformation,networks,contactswithhigher‐upauthorities

44  

andadministrativeexperience,inallofwhichthoseleaders

maygainovertimeandgenerateinthemselves(andothers)

confidenceintheirleadership.

Apartfromcapturedistortinglocalgovernancewithina

community,decentralizationcanalsohavemorewidespread

adverseeffects,if(a)regionalcompetitionleadstoa‘raceto

thebottom’35,provincialprotectionismcorrodingthefederal

state,ashasbeenthecaseinRussiaimmediatelybeforePutin’s

centralizationofpower36‐‐broadlysimilaraccountsofrent

extractionbyprovincialpoliticiansinArgentinaareavailable

inGervasoni(2010);or(b)ifitaccentuatesregionalinequality

onaccountofvaryinglocalendowmentsandinstitutionsand

richerareashavingmorecloutwithauthoritiesabovewho

allocateresources37.InBoliviaandSouthAfrica,however,

                                                            35  A different example of adverse effects of jurisdictional competition is given by Burgess et al (2012), who show evidence of how an increase in the number of political jurisdictions in Indonesian decentralization has been associated with increased deforestation. 36 See, for example, Cai and Treisman (2004) and Slinko et al (2005).  37  Galiani, Gertler, and Schargrodsky (2008) study the distributional effects of decentralization across municipalities on educational quality in Argentine secondary schools, and find that schools in poorer municipalities fell further behind, while those in better‐off areas improved. 

45  

decentralizationimprovedregionalequalitybyimprovingthe

criteriaofallocationoffederaltransferstoregions38.

Inmanyareasthereisalsoaconsiderablegapbetweendejure

anddefactodecentralization.Higherlevelgovernmentsoften

devolveresponsibilitiesforsocialservicestothelowerlevel,

withoutcorrespondingdevolutionoffundsorpersonnel—the

notoriousbutfrequentcaseof‘unfundedmandates’.Ingeneral

thepoliticalandinstitutionalcontextandthedesignand

implementationofdecentralizationvarywidelyacrossareas,

anditisnotsurprisingthatthelimitednumberofempirical

studiesontheeffectsofdecentralizationindifferent

developingcountriesshowmixedresults(evenafter

accountingfortheendogeneityofthedecentralization

decision).Itisalsothecasethatwhileinsomematterslocal

knowledgeandinformationworkinginfavorof

decentralizationareimportant(asinfindingappropriate

technologyorintappingindigenousnaturalandhuman

resources),inothermatterssupra‐localexpertiseismore

important(forexample,onissueslikepublichealthand

sanitation,riversystemsorwaterqualityoroncurriculum

developmentforschoolsorapplicationofmethodsof                                                            38 See the chapters on Bolivia and South Africa in Bardhan and Mookherjee (2006). 

46  

monitoringlikeauditing).Agglomerationeconomiesalsowork

sometimesindrainingawaytalentfromlocalgovernmentsto

centralbureaucraciesandprofessions,andsosupra‐local

expertisemaycometoweighmore.Accordingly,comparative

advantageofdecentralizationwillvaryfromcasetocaseand

overtime.

Inthedebatesoncentralizationvs.decentralizationitis

importanttonotethatChina,arecentdramaticallysuccessful

stateinachievinghighgrowth,hasbeeninthisrespecta

uniquehybridinstitutionalcase,withahighdegreeofpolitical

centralization,meritocraticrecruitmentandpersonnelcontrol

underanauthoritarianParty,atthesametimecombinedwitha

greatdealofregionaldecentralization,competitionand

experimentation.Xu(2011)hasdescribedthesystemas

‘regionallydecentralizedauthoritarianism’,incontrastwith

mostauthoritariansystemsthatarehighlycentralized.

Particularlyinthefirsttwodecadesaftereconomicreform

started,decentralizationhashelpedlocalbusiness

developmentinruralChinathroughregionalcompetitionanda

somewhathardbudgetconstraintenforcedonfailinglocal

businessenterprises.Theseweretheessentialsoftheso‐called

market‐preservingfederalism—see,forexample,Qianand

Weingast(1997)andQianandRoland(1998).But,asRodden

47  

andRose‐Ackerman(1997)havepointedoutinageneral

critiqueofmarket‐preservingfederalism,theinstitutional

milieudetermineswhetherpoliticalleadersofalocal

governmentrespondpositivelytohighlymobileinvestorsor

insteadpaymoreattentiontothedemandsofstrong

distributivecoalitionsdominatedbylessmobilefactors.Itis

possiblethatthehighlyegalitariandistributionofland

cultivationrightsfollowingde‐collectivizationofagriculturein

ruralChinameantthatthelocalcapturebyoligarchicownersof

immobilefactorslikeland,familiarinmanydeveloping

countries,wasunimportantforChina,atleastintheinitial

yearsafterreform.

ButtheChineseauthoritariansystemwithoutsufficiently

independentsourcesofcollectinginformationhasfromtimeto

timemadecatastrophicmistakes(GreatLeapForward,Cultural

Revolution,etc.inthepast),andthelackofinstitutionsof

accountabilitymakescoursecorrectioneveninthecaseof

lessermistakesdelayedanddifficult.Similarly,theabsenceof

checksandbalancesinChinaallowsthetightpolitical‐business

relationsbothatthecentralandthelocallevelstoeasily

degenerateintomassivecorruptionandabuseofpower

(resultinginrecentyearsinhighinequality,arbitraryland

grabs,unsafeworkingconditionsandfoodsupplychainsand

48  

toxicpollution).Therearealsofewerchecksonover‐

investmentandexcesscapacityinstate‐controlledorpolitically

connectedfirms.Allthisbringsustothegeneralquestionofthe

relationshipbetweendemocraticgovernanceand

development,anissuethathasbeenprominentinthe

discussiononthecomparativeperformanceofthetwolargest

developingcountries,ChinaandIndia39.Inviewoftheclearly

superiorover‐alleconomicperformanceofChinacomparedto

Indiaoverthelast3decadesorso, ithasbeentheconvictionof

theeliteinChinaaswellassomeoutsideChina(oftentermed

as‘theBeijingConsensus’)thatauthoritarianismisgoodfor

development.AswediscussinthenextSection,thisisafalse

andperniciousgeneralization,butoneshouldbecarefulinnot

jumpingtotheequallyfacilebutoppositegeneralitiesabout

theunambiguouslypositiveeffectsofdemocracyon

development.

VDemocracyandDevelopment

Theliteratureondemocracyanddevelopmentisbynowlarge,

andwewanttowadeintoonlyasmallpartofitthatisrelevant

                                                            39 For a detailed discussion of this relationship in the context of China and India, see Bardhan (2013), Chapter 10. 

49  

toourdiscussionofthetrade‐offbetweenpolitical

centralizationofpowerandaccountability.Iagreewith

AcemogluandRobinsonthateconomicperformancecrucially

dependsonpoliticalstructures,butthepoliticalandthe

economicinstitutionsmaysometimesco‐evolveandtheremay

bestrategicinteractionsbetweenthemwhichmaynotallowus

tounambiguouslyprivilegeoneovertheother.Inparticular,

therelationshipbetweendemocracyorpluralism(politically

‘inclusive’institutionsingeneral)anddevelopmentisactually

rathercomplex,acomplexitynotcapturedintheusualcross‐

countryregressionsintheliteratureonthesubject.AsDurlauf

(2005)andBrockandDurlauf(2001)indicate,thedemocracy‐

growthrelationintheseregressionsisnotrobust,the

identificationstrategiesarenotcredible,anddifferentpapers

intheliteraturehavedifferentresultsbecauseofdifferent

choicesofcontrolvariablesandotherformsofmodel

uncertainty.Forourpresentpurposewhatisimportantisthat

theregressionsdonothelpusinunderstandingthemechanism

inthecomplexprocessinvolved.

Democracyis,ofcourse,slowbutitsdeliberativeandelectoral

processesmanagesocialconflictsbetterandlendsome

stabilizinglegitimacytopolicydecisionsthatgrowoutofthe

50  

‘conditionalconsent’ofcitizens40‐‐‐apartfromenriching

individualautonomyandfreedom,participationand

deliberation,whichsomewouldregardasanimportantpartof

developmentitself41.Democracyalsotendstocurbtheexcesses

ofcapitalismandthusrenderdevelopmentmoresustainable,

by,forexample,encouragingsocialmovementsaswatchdogs

againstenvironmentaldespoliation.Totheautocratpoweris

toovaluabletolose,andhenceviolenceandtheattendant

potentialshatteringofeconomicstabilityandthesocialfabric

areneververyfaroff.Itisalsogenerallythecasethatthe

varianceineconomicperformanceislargeramongautocratic

regimesthanamongdemocraticones,asthechecksand

balancesinthelatterweedoutsomeoftheworstleadersand

outcomes42.

Ontheotherside,therearemanycasesofelectoral

democraciesfunctioningwithoutregularinstitutionalized

proceduresofaccountability,andtherearesomeobviouscases

                                                            40 This is emphasized by Levi (2006). 41 See, for example, Sen (1999). 42 This may not always be the case when weakly institutionalized democracies perform quite badly. On the other hand, even in the case of the best autocrats there is no inherent institutional guarantee that they will continue to be so. 

51  

of‘illiberaldemocracy’43.Eveninliberaldemocracies

accountabilityprocessestothegeneralpublicareseriously

underminedbytheinfluenceofmoneyprotectingand

promotingtheinterestsofthewealthyandpowerful.Besides,

whileinanalogywithmarketcompetitionpoliticalcompetition

isusuallyassumedtobeagoodthing,therearecases,aswe

havenotedbefore,whencompetitioncanleadtoaracetothe

bottom44.Withoutpoliticalcentralizationpoliticalcompetition

underdemocracycanencouragecompetitivepopulismor

short‐termism:comeelectiontime,Indianpoliticians,for

example,oftenpromisefreeelectricityandwater,whichcan

wrecktheprospectsoflong‐terminvestmentsinthem,orbank

loanwaiversforfarmers,whichcanwreckthebankingsystem.

Manyscarceresourcesarethusfritteredawayinshort‐run

subsidiesandhandouts,whichhurtthecauseoflong‐runpro‐

poorinvestments(likeinroads,irrigation,waterand

                                                            43 For a popular‐level discussion of these cases see Zakaria (2004). It also involves a definitional issue: in our judgment democracy should not be identified with just regular elections even where the incumbent has a chance of being defeated, but some accountability processes in day‐to‐day administration and respect for basic human rights should also be essential parts of the definition of democracy. 44 This is related to the proposition in Persson et al (1997) that separation of powers can make citizens worse off by creating a common‐pool problem in public decision‐making. 

52  

electricity).Bates(2008)givesexamplesfromAfricahow

competitivedemocracycouldinducetherulingpartytouseits

powertolootthepublicresourcesforshort‐termgain.Bardhan

andYang(2004)constructsomemodelstoshowthatwhile

politicalcompetitioncanyieldallocativebenefitsforthepublic,

itcanalsogenerateaggregatewelfarecostsbyconstrictingthe

setofpoliticallyfeasiblepublicinvestments.Ofcourse,insocial

servicedeliverypoliticalcompetitioncanworkbetterwhen

executiveactioniseasilyverifiable(forexample,verifiabilityin

theloweringofschoolfeesiseasierthanintheimprovementof

schoolquality).Consistentwiththis,HardingandStasavage

(2012)citeevidencethatinAfricademocracieshavehigher

ratesofschoolattendancethaninnon‐democracies.Fujiwara

(2014)findsthatchangesinvotingtechnologyinBrazilthat

enabledthepoliticalparticipationofthepoorandtheilliterate

resultedingreaterhealthspendingandimprovedchildhealth

outcomes.

Insomecases,insteadofprovidingbroad‐basedpublicgoods,

thepoliticalleaderscanworkoutaclientelisticsystemfor

dispensingselectivebenefits(privateorclubgoods)atleastto

agroupofswingvoterstowinelections—anecdotesonthisare

easytofind,butfortheoreticalandempiricalanalysesofsuch

systems,seeBardhanandMookherjee(2012),andRobinson

53  

andVerdier(2013).InahouseholdsurveyinruralWestBengal

Bardhanetal(2009)findevidencethatvotingbehavioris

significantlyinfluencedmorebyrecurringbenefitsarrangedby

localgovernments(likesubsidizedcreditoragricultural

inputs,employmentonpublicworks,helpinpersonal

emergencies,etc.)thanbyevenlargeone‐timebenefits(like

landreforms,orprovisionofhousesandlatrines),suggesting

politicalclientelism.Also,insituationsofsocialandethnic

heterogeneitywherevotemobilizationgetsorganizedon

sectarianlines,theremaybemoreselectivepatronage

distributionandlesspoliticalinterestininvestingingeneral‐

purposepublicgoods.Wantchekon(2003)conductedafield

experimentinBenininwhichpoliticalcandidateswere

persuadedtorandomlyvarytheirelectoralplatformsbetween

aclientelisticprogramprovidingcashtospecificethnicgroups

andadevelopmentallocalpublicgoodorientedprogram—the

formerplatformendedupgeneratinghighervotes.Such

politicalclientelism,evenwhilehelpingsomepoorpeople,can

harmthecauseofgeneralpro‐poorpublicinvestments.

FujiwaraandWantchekon(2013)citesomeexperimental

evidencefromBeninthatshowshowinformedpublic

deliberationintownhallmeetingscanreduceclientelism.

54  

Theincidenceofclientelismmayingeneraldependonthe

stageofdevelopment.Asincomesriseandmarketsdevelop,the

needforpoliticalconnectionsforjobsorpersonalizedhelpmay

decline(thoughratherslowly,asmanycasesinsouthernItaly

suggestevennow).Withthespreadofeducationand

information,theimportanceofthelocalvotemobilizerwho

providesselectivebenefits(theproverbialwardcaptainin

Chicagoprecincts)diminishes,herdingofvotersbyethnicityor

regionalaffinitymayalsodecline.Withthedevelopmentof

transportandcommunication,thereductionofterritorial

insulationallowsforsupra‐localaffinitieswhichmaydiminish

theimportanceofthelocalpatron.

Myerson(2013)hasstressedhowdemocraticdecentralization

canimproveopportunitiesandincentivesforlocalleadersto

buildreputationforusingpublicfundsresponsibly,andmay

evenreducepoliticalentrybarriersfortheminnational

elections.Someofthesereputationincentiveslinkedwithlocal

developmenthavebeenbuiltintothecareerpromotion

schemesinChina,evenwithoutdemocracy.Ingeneral,onthe

relationbetweenpoliticalsystemsanddevelopmentagreat

dealofinstitutionalconditionsandcontingenciesareinvolved,

andunderthecircumstancesitiseasytoseethatdemocracy

(orthelackofit,forthatmatter)isneithernecessarynor

55  

sufficientforeconomicdevelopment.Atthesametime,going

backtotheChina‐Indiacase,onecannotdenyabasic

comparativepoliticalfeaturerelatedtothesourceof

legitimacy.ThepragmaticandprofessionalChineseleadership

oftenshowtheabilitytotakequickanddecisiveactionsmore

thantheelectedIndianleaders,butinthefaceofcrisisor

politicalshockstheformeroftenover‐react,suppress

informationandactheavy‐handedly,whichraisethechancesof

goingofftherailsorthedangerofinstability.Foralltheir

apparentmessinesstheIndiandemocraticgovernmentsarein

adeepersenselessfragile,astheydrawtheirstrengthfrom

legitimacyderivedfromdemocraticpluralism.

VITheRoleoftheStateinResolvingCoordinationFailures

Theinstitutionaleconomicsliteraturepreoccupiedwiththe

capacityofthestatetosecurepropertyrightsleavesoutavery

importantaspectofthenecessarystatecapacityinearlystages

ofindustrialization,thatofresolvingcoordinationfailures,

whichtheearlydevelopmentliteratureusedtoemphasize.In

thisrespecttheEastAsianstatehasbeenhistorically

distinctive.EastAsiangrowthwasnotsimplyaproductofthe

statesecuringpropertyrightsandprovidingsomemarket‐

56  

supportinginstitutions.Analogoustothe‘varietiesof

capitalism’literaturewhereHallandSoskice(2001)pointedto

thequalitativedifferencesbetweenAnglo‐American‘liberal

marketeconomies’andthe‘coordinatedmarketeconomies’of

GermanyandScandinavia,itmaybeimportanttobringoutthe

varietiesofdevelopmentalrolesofthestateintermsofliberal

marketsupportvis‐a‐viscoordination.

Thelargepoliticalsociologyliteratureontheso‐called

developmentalstateofEastAsiaissuggestiveanddescriptive

but—withexceptionslikeEvans(1995)‐‐notalways

analyticallyclearaboutthemechanismsinvolved.Aokietal

(1997)havemorefruitfullydescribedthedealbetweenthe

stateandlargebusinessconglomeratesinSouthKoreaand

Japanasassuringsomeformof“cooperation‐contingentrent”

thatwillaccruetothelatterinexchangeofplayingaroleinthe

statecoordinationefforts.Inthisperspective45,economic

developmentinthesecountrieswasnotfoundedjuston

institutionsthatsecurepropertyrightsandenforcecontracts—

nodoubtveryimportantforlong‐terminvestment—butona

statethathelpedtofostercoordination,particularlyin

financialmarketsinearlystagesofindustrialization,facilitate                                                            45 This is consistent with the well‐known 1993 World Bank Report on The East Asian Miracle. 

57  

interdependentinvestmentdecisionsinorchestratednetworks

ofproducersandsuppliers,establishpublicdevelopment

banksandotherinstitutionsforlong‐termindustrialfinance,

andnudgefirmstoupgradetheirtechnologyandmoveinto

sectorsthatfitwithanationalvisionofdevelopmentgoals.

Enablingandencouragingsuchcoordinationisfundamentally

differentfromprotectingpropertyrights.

Therecentliteratureonindustrialpolicyhasthevirtueof

recognizingthis.Butindustrialpolicyhastobedissociated

fromtheold‐fashionedsupportforblanketprotectionist

policies,whicharenowparticularlyill‐suitedtoindustriesthat

canthriveonlyintheworldofglobalsupply‐chainnetworks.

HausmannandRodrik(2003)haveemphasizedthatindustrial

policyshouldhavelesstodowiththeimpossibletaskof

‘pickingwinners’—theusualargumentagainstindustrial

policy‐‐butmorewithawayof‘discovering’acountry’srange

ofpotentialcomparativeadvantageinacoherentwayina

worldofuncertaintiesandmissinginformation.Therewillbe

privateunderinvestmentinanysuchdiscoveryprocess,since

thepositiveresultsarelikelytobeappropriatedbyothersin

thebusiness.Stateinvolvementinhelpingandcoordinating

suchexplorationintoneweconomicactivitiesinevitably

impliesmanytrial‐and‐errorexperiments,someofwhichare

58  

boundtofail.Themainstatecapacityissuehereisnotthatof

pickingwinnersbutmoreoflettinglosersgo,whichis

politicallydifficult,aswehavediscussedearlieronthe

questionofsoftbudgetconstraints.

Aswithmanyotherimportantdevelopmentpolicyquestions,

theunderlyingissuesinvolvedhere—capitalconstraintsand

creditmarketimperfections,learningspillovers,lumpy

interdependentinvestmentsrequiringcoordination‐‐areeasy

toconceptualizebutdifficulttoquantify46.Onlearning

processesinnewexportableactivitiestherehavebeenmany

casestudies,evenoutsideEastAsia.Sutton(2012)showshow

intheIndian(asintheChinese)carindustrywithinafewyears

afterthearrivalofinternationalcarmakers,thedomestic

producersofcarcomponentsinIndiaattained‘worldclass’

standards(asmeasured,say,byconventionaldefectratesin

thepartssupplied).Theprocessinvolvedthestateatthattime

providingmanykindsofsupportincludinglocal‐content

protectionism(whichis,ofcourse,nowWTO‐illegal).Sabeletal

(2012)reportmanycasestudiesofpublic‐supportedexport

pioneersfromLatinAmerica–forexample,floriculturein

Colombia,furniture‐makingandcommercialaircraftsinBrazil,                                                            46 Rodrik (2008) discusses the difficulties involved in statistical inference on this topic, particularly when policy adoptions are endogenous. 

59  

avocadosinMexico,veterinaryvaccinesinUruguay,etc.—

whereanensembleofpublicsupportpoliciesfacilitated

coordination,providedindustry‐specificpublicorclubgoods

(sayintheformofspecializedservicesliketechnical

assistance,helpinmeetingphyto‐sanitaryandotherquality

standards,etc.),andenabledexportproductionactivitiesto

gainfromsubstantialagglomerationeconomiesinclustersofa

largenumberofspecializedfirms.Thestudiesalsogarner

insightsfrom‘counterfactuals’offailedeffortsinbroadly

similarcases.

Ofcourse,empirically,evencarefulcasestudiesofexport

pioneersfromdevelopingcountriessufferfromreplicability

issues,apartfromafrequentselectionbias(successfulcases

survivingtogetdiscussed).Thereisasizeableempirical

literatureon‘learningbyexporting’,butmuchofitismarred

bythepossibilitythatmoreproductivefirmsmayselectinto

exportingandbymeasurementissuesintheabsenceof

detailedfirm‐levelperformancedata.Apaperthatislargely

freeofbothproblemsisthatofAtkinetal(2014),which,onthe

basisofarandomizedcontroltrialthatgeneratesexogenous

variationintheaccesstoforeignmarketsforrug‐makingfirms

inEgypt,findssubstantiallearningeffects.

60  

HarrisonandRodriguez‐Clare(2010)haverecommendeda

wholerangeof‘soft’industrialpolicies,notincompatiblewith

WTOregulations(likeencouragingR&D,extensionservices,

vocationaltraining,supportingcollectiveactionforself‐helpin

businessclusters,improvingregulationsandinfrastructure,

andsoon),wherethegoalistodevelopdomesticpoliciesof

coordinationthatimproveproductivitymorethan

interventionsthatdistortprices.Aghionetal(forthcoming)

citepaneldatafrommediumandlargeChineseenterprises

over1998to2007toshowthatindustrialpoliciestargetedto

competitivesectorsorthatfostercompetition(say,policies

thataremoredispersedacrossfirmsinasectorormeasures

thatencourageyoungerandmoreproductiveenterprisesina

sector)increaseproductivitygrowth.Furtheradvancesinthe

industrialpolicyliteraturehavetoexploretheparticular

institutionalcombinationsofdomesticpoliticalcoalitionsand

marketstructureandthedesignofparticularpolicieswhich

makethedifferencebetweensuccessandfailure,alongwith

rigorousempiricalandexperimentalstudiestodiscernthelink

betweenpolicyandoutcome.

Inthenearfuturetheissueofstatecoordinationmayalso

becomeimportantininducinginvestmentin‘green’technology

thatreducesnegativeexternalities,or,assomedeveloping

61  

countriesgraduatetothemiddle‐incomestage,infostering

frontierinnovations47beyondthesimplecatch‐upprocess(of

learningandimitatingoff‐the‐shelftechnology),orinfinding

somealternative48tothecurrentintellectualpropertyrights

regime,whichsometimestransferstoohighamonopolyrentto

theinnovator,attheexpenseofpoorconsumersandfuture

innovatorstryingtobuildonthecurrentinnovation.

Industrialpolicyisitselfoftensuspectedofgeneratingrent‐

seekingopportunities.Theemphasisoncombiningsectoral

targetingwithsomeformofmarketdisciplineistherefore

necessarytocurbexcessiverentcreation.ButasRodrik(2008)

haspointedout,someamountofrentgenerationmaybe

indispensabletopreservewhathecalls‘second‐best’

institutions,whenfirst‐bestinstitutionalrulesorbestpractices

arenotfeasibleintheusualpolitical‐economycontextof

developingcountries.Ifentrepreneurialactivityisabinding

constraintrentsmayprovidedynamicincentives(asinsome

Schumpeteriangrowthmodels),orwhenthemainchallengeis

                                                            47 In this context Aghion (2014) calls for a ‘strategic state’ that “acts as a catalyst using selective and properly governed support to the market‐driven innovation process”. 48 Alternatives like the state buying the patent and putting it in the public domain have been suggested. This is, of course, subject to the arbitrariness and moral hazard in the pricing of the patent by the state. 

62  

tostimulateinvestmentinaweakcapitalmarketrents

sustainedbymoderateamountsofentryrestrictionsmay

providethenecessaryfinance.AcemogluandRobinson(2013)

showmoregenerallyhowrentsareoftennecessaryfora

balanceofpoliticalpowerorpreservationofapolitical

equilibrium,andhowinsistenceonfirst‐bestrulestoeliminate

rentsmayhaveunintendedorcounter‐productivepolitical

consequences.InasomewhatdifferentcontextNorth,Willis

andWeingast(2009)considerthecreationofrentsasthekey

tocontrollingviolenceinwhattheycall“limitedaccesssocial

order”oftenprevalentindevelopingcountries.Particularlyin

weakorfragilestates,wherethereisan‘oligopoly’ofviolence

incontrasttotheWeberian‘monopolyofviolence’vestedinthe

state,theyconsiderrent‐sharingasimportantinpreserving

order.

Butrent‐sharingasawayofpoliticalcoalition‐buildingcanbe

andhasbeenanimportantfeatureofthepoliticalequilibrium

eveninwell‐functioningstates.TheEastAsiancasessuggest

thattechnologicaldynamisminlargeconglomerateshasco‐

existedwithrent‐sharing,withpoliticalpartiesdeeply

implicatedinrent‐seeking(ofwhichtheJapaneseLDPisanold

63  

anddurableexample).49Aswehavementionedbefore,itis

possiblethatalongandcontinuoushistoryofstateinstitutions

overmanycenturiesthatEastAsiancountriesingeneralhave,

incontrastwiththoseinAfricaandLatinAmerica,helpsin

buildingabureaucraticculture,whichalongwithadense

networkoftiesbetweenpublicofficialsandprivate

entrepreneurs,maymoderatetheexcessesofrent‐seeking.

Possiblymoreimportantly,thestate‐directedpressureof

exportsuccessinanopeneconomyinEastAsiahasdisciplined

theseexcessesandtheneedforcostandqualityconsciousness

inglobalcompetitionhaskeptcollusion‐pronefirmsand

bureaucratsontheirtoes.Intheabsenceofstrictmarket

discipline,thereisplentyofevidenceindevelopingcountriesof

dysfunctionalindustrialpolicieswithpoliticallyconnected

firmsinkleptocraticstatesmakingmoneywhilethe

developmentprocessisatrophied.

                                                            49 Even in early modern west European history, there are cases where patrimonial, rather than Weberian impersonal rule‐bound, arrangements between ruling families, civil servants and merchant capitalists have been important in fostering the growth process—see Adams (2005) for an example from the 17th‐century Netherlands. 

64  

VIIPublicEnterprisesandStateEffectiveness

AswehaveindicatedinSectionIVinrecentdecadesthe

Chinesecasehasbeendistinctiveindecentralized

development,withlocalgovernmentsplayinganactiverolenot

justindeliveringsocialservices,butinvigorouslypursuing

localbusinessdevelopment,someofthemostsuccessful

companiesbeingrunandfundedbymunicipalgovernments.

Evenbeyondthelocallevel,theChinesestatehasbeen

remarkableinpresidingoverareinvigoratedmodelofwhat

usedtobecalledStateCapitalism50(wherestate‐runorguided

enterprisespursueprofitsorsurplus).Inrecentyearswehave

seenaspectsofitinBrazilandRussiaaswell,butnowhereas

prominentlyandinaslargeascaleasinChina.Largestate‐

ownedcompanies(SOE’s)dominateintransport,energy,basic

metals,financeandtelecominChina.SomeoftheChineseSOE’s

arenowimportantplayersintheglobalmarketcompetition.

Theyareoftenhighlycommercialized:inrecruiting

professionalmanagers,broadeningtheirinvestorbase,and

sheddingtheirearlierbloatedlaborforceandtraditionalsocial

andpoliticalobligations,manyChineseSOE’sdonotconformto

theusualstereotypesaboutSOE’s.Theirlistinginforeignstock                                                            50 This term originated in its negative use by anarchists and other socialists, but with more positive use by Lenin and his followers. 

65  

marketsoftensubjectsthemtointernationalrulesofcorporate

governance.TherearealsosomesuccessfulChineseprivate

companies(Lenovo,Huawei,Haier,Geely,Alibaba,etc.),

heraldedasnationalchampions,buttheyoftenoperateinthe

shadowofthestate,withthestateifnotowningsharesactively

guidingandhelpingthem.Thestate‐ownedorsupported

companieshavetheadvantageofdeeppocketstobackthemor

easieraccesstobankloansandland,usuallycantakealonger‐

runperspectivecomparedtomostpurelyprivatecompanies

(thatareanxiouslywatchingshort‐runsharepricesand

quarterlyearningsreports),andcanridethebusinesscyclea

bitbetter.Ontheotherhand,theirprofitabilityisoftenbased

onmonopolisticpower51andpoliticalconnections(givingrise

tothefrequentchargeofcronycapitalism);theymaythrivein

thecatch‐upphaseofdevelopment,butsome‐–forexample,

AcemogluandRobinson(2012)‐‐doubtiftheywillperform

whenitcomestoinnovationsand‘creativedestruction’.52

                                                            51 Li, Liu, and Wang (2012) suggest that the Chinese economy is largely dualistic in a vertical economic structure, with the state deriving profits and political rent from its monopolistic control in the upstream sectors  that provide capital and inputs and services to the successful downstream largely private (including joint‐venture) or hybrid sectors. 52 A ‘collectivist’ culture encouraging conformity, rather than creativity, may also be not very conducive to innovations. For general evidence on 

66  

Thisraisesageneralquestionabouttherelationbetweenlarge

conglomerates(privateorpublic)anddifferenttypesof

innovations.Theroleoftheselargeorganizationsin

stimulatingR&Dandtheinnovationprocessmayvary

dependingonthetypeofinnovationonehasinmind,whether

itisofthe‘disruptive’kindthatchallengesincumbentfirms

(whichtheUSprivateinnovatorsincollaborationwithventure

capitalistsaregoodatandalargeentrenchedorganization

usuallyisn’t),orthesteady‘incremental’kindwhichaddsupto

significantgains(theJapanesecallitkaizen)whichsomelarge

organizationsinGermanyandEastAsiahaveexcelledin.Itis,

ofcourse,hardtodenythatinbothkindsofinnovationsin

mostcountriessomeformofbackground(ifnotalwayspro‐

active)supportofthestatehasbeensignificant.Butthereis

alwaysadangerthattoo‐big‐to‐failorganizations(privateor

public)mayultimatelyturnintorentalhavens.

Withoutmoreempiricalstudies,notjustanecdotes,thisdebate

aboutinnovationsunderStateCapitalismisdifficulttosettle.

ErnstandNaughton(2012)citeexamplesofnewdirectionsof                                                                                                                                                                                                

the positive link between ‘individualist’ culture and innovations, see Gorodnichenko and Roland (2013). This may also suggest that in collectivist societies the state may have a special role in stimulating individual creativity and innovation. But if the state is autocratic, it may dampen the creative and free spirit often important for innovation. 

67  

Chineseinnovationsfromtheintegratedcircuitdesign

industry.Awayfromthegovernment‐sponsoredattemptsat

‘indigenousinnovations’,Chinaseemstobemoresuccessfulin

innovatinginareasthatinvolveglobaltechnologysourcingand

quicklyrespondingtochangesintheincreasinglyfinedivisions

oftheglobalvaluechain.Atthesametimethereisevidenceto

believethatlargeSOE’sandpolitically‐connectedprivatefirms

inChinamayhavespawnedaseriousmisallocationofcapital

(andmanagerialtalent)andbuild‐upofexcesscapacity.Such

misallocationmayhavemorebiteinfutureasChinesesaving

andinvestmentrates(aswellastheunpopularlandgrabbing

bythestate)comedown.Meanwhileentrenchedvested

interestsofthepoliticalelitewithstakeinincumbentfirms

maymakeresistancetochangestronger.

Finally,itshouldbestressedthatingeneraltheperformanceof

stateenterprisesinanycountryisoftendiscussedinthe

literatureinakindofpoliticalandorganizationalvacuumand

intermsofasingleandsimplemetricofnarrowly‐defined

efficiency.Questionsliketherelativeefficiencyofdeliveryof

publicservicesbystateorprivateorganizationsaboundinthe

publiceconomicsliterature.Standardcomparisonsofefficiency

offirmsareoftenvitiatedbyfrequentcasesofprivate

monopolysubstitutingforpublicmonopolyafterprivatization,

68  

orbypoliticalagendaandsoftbudgetconstraintsforpublic

firmsreplacedbyregulatorycapturebyprivatefirms.Still,

muchoftheempiricalliterature53showssuperiorefficiencyof

privatefirms,whereastheliteratureonprivatizationofpublic

utilitiesgivesmixedresults54.Inbuildinginfrastructurepublic‐

privatepartnerships(PPP’s)areincreasinglyinvogue.While

thesemayusefullyharnesstheservicesofprofit‐seeking

privatefinanceandexpertise,inactualcasesquiteoftenthe

downsiderisksareonthepublicsectoreitherthrough

opportunisticrenegotiationoftermsorbadloansinpublic

sectorbankswhichthetaxpayershavetore‐capitalize.

AcemogluandRobinson(2013)emphasizethepolitical

consequencesofprivatization:well‐intentionedefficiency‐

mindedprivatizationprogramssometimesupsetoldrentaland

politicalarrangementsandmaybecounter‐productive.An                                                            53 There are quite a few survey articles; see, for example, Parker and Kirkpatrick (2005). JEL published an overview on the effects of privatization in transition economies by Estrin et al (2009). 54 For example, in privatization of water supply, Galiani, Gertler and Schargrodsky (2005) show in a panel data framework that in Argentine municipalities where water services were privatized, there is indirect evidence that access and water quality improved. Using an almost similar method, Borraz et al (2013) find direct evidence that nationalization of water companies in Uruguay, after a period of privatization, delivered progress in terms of both access and water quality relative to companies that were consistently publicly owned.  

69  

obviousexampleisinthecaseofthepoliticalconsequencesof

Russianprivatizationinthe1990’s‐‐redistributingassets

extremelyunequallyinfavorofaplunderingoligarchy,the

backlashtowhichpavingthewayforPutin’sauthoritarian

crony‐capitalistregime.

Therearealsoorganizationalcounterfactualstowhichthe

publicsectorreformdebatesoftendonotpayenoughattention.

Inassessingtheinefficiencyofapublicutility,forexample,we

havetokeepinmindthesimultaneousandconflicting

objectivesitisrequiredtoserve(likecostrecovery,cross‐

subsidizationasinthecaseofcommercialfreightsvis‐à‐vis

passengerfaresinrailways,providingcheapservicetothe

weakersectionsofthepopulationandremoteareas,etc.).In

suchausualcontextofmultiplemandates,multi‐dimensional

goals,conflictingpoliticalprincipalsfacingagents,multiplicity

oftasksandimpreciselymeasuredandincompletely

contractibleoutcomesthatsuchanagencyoftenfaces,allofthe

inefficiencyofthestateagencymaynotbe‘remediable’inthe

senseofWilliamson(1996)inasimplewaybyalternative

organizationaldeviceslikethemarketortheprivatefirm.As

Dixit(2012)hasargued,whilestateagenciesobviouslyhave

somecrassinefficiencies(particularlywhenbudgetconstraints

arepolitically‘soft’)remediablebyorganizationalreformsand

70  

incentivedesigns,theyareoftencalledupontoundertake

functionsthataretoocomplexfortheprivatesectorto

perform.Privatizingthesefunctionsmayevenmakethings

worse,asprivatefirmsarenotcapableofcopingwiththe

transactionandgovernancecostsofthecomplexandmulti‐

dimensionalissuesthatstateagenciesmusthandle.Hart,

ShleiferandVishny(1997)giveanexamplefromtheissueof

prisonprivatizationtomakethegeneralpointthatwhena

governmentcontractsoutaservicetoaprivateproviderthe

non‐contractibleaspectsoftheservicequalityarelikelyto

suffer.Thedilemmainpublicsectoradministrativereformis

thatinthecontextofmulti‐dimensionalityofgoalsandtasksit

isdifficulttodevisehigh‐poweredincentivecontractsforcivil

servants;ontheotherhand,withlow‐poweredincentivesthey

arepronetocorruptionandcapturebyspecialinterest

groups.55

VIIIConcludingComments

Ingeneral,differenttypesofgovernancemechanismsare

appropriatefordifferenttasks.Takethegeneraltaskof

                                                            55 For a discussion of incentive and organizational reforms to fight corruption, see Bardhan (2005), chapter 8. 

71  

coordination.Economiesatearlystagesofdevelopmentare

besetwithcoordinationfailuresofvariouskinds,and

alternativecoordinationmechanisms—thestate,themarket,

thecommunityorganizations‐‐allplaydifferentroles,

sometimesconflictingandsometimescomplementary,in

overcomingthesefailures,andtheseroleschangeinvarious

stagesofdevelopmentinhighlycontext‐specificandpath‐

dependentways.Toproclaimtheuniversalsuperiorityofone

coordinationmechanismoveranotherissimplisticand

ahistorical.Marketsaresuperbcoordinationmechanismsin

harmonizingnumerousnon‐cooperativeinteractions,in

disciplininginefficiency,andinrewardinghigh‐valued

performance.Butwhenresidualclaimancyandcontrolrights

aremisaligned(say,onaccountofinitialassetownership

differencesthatconstraincontractualopportunities)andthere

areimportantstrategiccomplementaritiesinlong‐term

investmentdecisions,marketsfailtocoordinateefficiently.In

particular,theimplicationsof‘imperfections’andcontract

‘incompleteness’increditandinsurancemarketsareseverefor

thepoor,sharplyreducingasociety’spotentialforproductive

investment,innovation,andhuman‐resourcedevelopment.The

statecanprovideleadership(andofferselectiveincentivesand

disincentives)tostimulateindividualstointeractcooperatively

72  

insituationswherenon‐cooperativeinteractionsare

inefficient.Butthestateofficialsmayhaveneitherthe

informationnorthemotivationtocarryoutthisrole.Theymay

beineptorcorrupt,andthepoliticalaccountability

mechanismsareoftenmuchtooweaktodisciplinethem.We

thusneedawholevarietyandintermixtureofinstitutional

arrangementstocopewiththestrengthsandweaknessesof

differentcoordinationmechanisms,andthenatureofoptimal

intermixturechangesinthedevelopmentprocess.

Thepurposeofthisessayhasbeentobringoutsomeofthe

complexitiesthatareoverlookedintheusualinstitutional

economicsliteratureandsupplementthelatterwitha

discussionofsomeofthealternativeapproachestolookingat

thepossibledevelopmentalroleofthestate‐‐particularly

involvingresolutionofcoordinationfailuresandcollective

actionproblems,theconflictingissuesofcommitmentand

accountabilityandtheneedforbalancingthetrade‐offsthey

generate,someingredientsofstatecapacityandpolitical

coalition‐buildingusuallymissedintheliterature,the

advantagesandproblemsofpoliticalcentralizationand

decentralization,thepossibleimportanceofrent‐sharingina

politicalequilibrium,andthemulti‐dimensionalityofstate

73  

functionswhichmaynotbeaddressedbymarketsorprivate

firms.

Theexplorationoftheseproblemssuggestsseveralunder‐

researchedareasintheliterature,andweendwithabrief

enumerationofonlyasmallsubsetofthem.

(a) Theliteratureisasyetinitsinfancyinunderstandingthe

forcesandmotivationsbehindformationsofpolitical

coalitionsanddifferentkindsofelitebargainsindifferent

historicalcontexts.Notmerelyshouldthetheorybelinked

upwiththegeneralliteratureoncoalitions56,butmore

empiricalanalysisandhistoricalcasestudiesonformation

andbreakdownsofpoliticalcoalitionswillbevaluable.

Thedecliningroleoforganizationsofunskilledlaborin

politicalcoalitions,giventhenatureoftechnological

progressandglobalizationinrecentyears,anditsimpact

onstatepolicyand(thealreadyweak)welfareregimesin

poorcountriesisaneglectedareathatneedstobe

discussedinthiscontext.

(b) Thetheoryofcollectiveactionanditsvarious

determinantsneedtobefarricherthanthefree‐rider

issuesemphasizedoriginallybyOlson(1965).For

                                                            56 See, for example, Ray and Vohra (2014). 

74  

example,collectiveactionmaybreakdownifthereisa

bargainingimpasseontheperceivedfairnessof

distributionofgainsamongdifferentgroups,andthisand

otherdistributiveconflictsarelikelytoplayaroleinthe

politicalcoalitionformationissuesmentionedin(a).

(c) Aswehavenotedinthecontextofindustrialpolicyin

SectionVI,moreempiricalandexperimentalstudiesare

neededinunderstandingthepreciselinkbetweenpolicy

andoutcome,andabetterinsightintotheparticular

institutionalcombinationsofdomesticpoliticalcoalitions

andmarketstructureandthedesignofparticular

industrialpolicies.

(d) AsindicatedinSectionVII,therelationbetweenlarge

publicfirmsandtheinnovationprocessparticularlyin

medium‐incomedevelopingcountriesisarelatively

unexploredresearcharea.Wedonothaveyetenough

empiricalstudiesinthosecountriesonhowentrenched

incumbentfirmshindertheinnovationprocessorhowthe

incrementalinnovationsassociatedwiththosefirms

(particularlyifthereisworkplacedemocracyencouraging

exchangeofideasbetweenworkersandmanagers)can

delaytheset‐inofdiminishingreturnsintechnological

advance.

75  

(e) Similarly,theexperienceinthemanyrecentcasesof

public‐privatepartnershipsinlargeinfrastructural

projectsneedstobecriticallyexamined,inthelightof

initialenthusiasmandrecentonsetofdisillusioninsome

cases.

(f) Inthediscussionofpoliticalaccountabilitytheoriginal

hopefromdecentralizationanddevolutionofpowertried

inmanydevelopingcountrieshasfadedsomewhaton

accountofthevariouscaptureanddysfunctionalityissues

raisedinSectionIV.Theempiricalfindingsaremixed,

primarilybecausethepoliticalandinstitutionalcontextof

decentralizationandhencethedesignand

implementationofdevolutionprojectsarewidely

divergent.Itistimewedigalittledeeperandtryto

decipherfrommicroempiricalandexperimentalstudiesif

thereareanypatternsinthejumble.

(g) Animportant,yetlargelyunresolved,issueistofindclear

directionsfromempiricaldataaboutwhendemocratic

processesleadtolong‐terminvestmentsinpublicgoods

servingthepoorandwhentheyinsteaddegenerateinto

short‐termpopulismandclientelisticpatronage

distribution.

76  

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