Introduction

As discussed in the lectures, after the Second World War, governments in developing countries – socialist and non-socialist – instituted a complicated set of regulations and distortions that suppressed the functions of markets, such as financial depression, trade restriction, the rationing of capital and foreign exchange, the licensing of investments, administrative monopoly and state ownership. It has now been recognised that, no matter what the motivation might be, these policies often led to poor economic performance, low living standards and even frequent crises in developing countries. Despite the many competing hypotheses about the causes and effects of these regulations and distortions, none has revealed, convincingly, the internal logic among the various policies in the complicated set of regulations and distortions.

The classical theory for government regulations (Pigou, 1938) has been called the ‘helping hand’ view. Seeing the adverse effects of government regulations and distortions in developing countries, economists have proposed an alternative – ‘grabbing hand’ view (Acemoglu, 2007b; Grossman and Helpman, 1994; Shleifer and Vishny, 1994; Sokoloff and Engerman, 2000). These authors propose that government interventions were pursued for the benefit of politicians and bureaucrats – for example, favouring friendly firms and other political constituencies so as to obtain benefits such as campaign contributions and votes or benefiting selected groups within a country that had unusually strong political influence.