The Problem of Economic and Political Development

Success in economic as well as political development depends primarily on improving institutions. This has become the consensus among economists over the last twenty years, as the world has witnessed many development failures in spite of abundant capital, natural resources, and educated populations, who emigrate or stagnate if institutions do not put them to good use. The question now is: What institutions are right? As elaborated later in this chapter, some argue that developing countries should emulate the institutions of the most successful, high-income economies of the OECD. We and others, however, see evidence that most low- and middle-income countries are not ready to utilize many Western European or North American institutions or that these institutions function very differently if transplanted into these low- and middle-income economies.

The purpose of this volume is to develop and apply an alternative framework for understanding the dynamic interaction of political, economic, and social forces in developing countries, which was first laid out by North, Wallis, and Weingast (2009, hereafter NWW). The standard approach begins with neoclassical assumptions that growth will occur whenever profitable opportunities present themselves unless the intervention of political or social impediments prevent markets from working. In contrast, the alternative perspective presented here begins with the recognition that all societies must deal with the problem of violence. In most developing countries, individuals and organizations actively use or threaten to use violence to gather wealth and resources, and violence has to be restrained for development to occur. In many societies the potential for violence is latent: organizations generally refrain from violence in most years, but occasionally find violence a useful tool for pursuing their ends. These societies live in the shadow of violence, and they account for most of human history and for most of today’s world population. Social arrangements deter the use of violence by creating incentives for powerful individuals to coordinate rather than fight. The dynamics of these social arrangements differ from those described in neoclassical models, and this difference limits the value of the neoclassical tools for understanding the problems of development.

Thinking of developing countries as limited access orders with their own social dynamic rather than as flawed or incomplete open-access societies affords new insights into the impediments and paths to development. The perspective distinguishes between two development problems that are normally conflated. The second development problem involves the transition of societies from LAOs to OAOs. The first development problem involves the movement of LAO societies toward forms of social organization that enable more economic output, reduced violence, stable political outcomes, and greater individual well-being. World Bank borrowers face the first development problem: developing as an LAO, from fragile to basic and from basic to mature LAO, while avoiding regression. The lessons we draw from the case studies presented in this volume are primarily concerned with enabling places like the DR Congo to accomplish social outcomes that more closely resemble Mexico or Zambia. We also draw lessons about making transitions to open access, but our primary focus is on the first development problem because it is first in terms of human priorities. Understanding better the logic of limited access societies and the dynamics of how they change holds out greater rewards in terms of reducing poverty and violence.

The control of violence is central to the logic of all LAOs and hence is central to the problem of development. The traditional economic development framework focuses mainly on the second development problem and fails to understand violence or incorporate an appreciation of the dynamics of violence into policy recommendations. Indeed, the Washington consensus of the 2000s was dominated by efforts to embed institutions of open-access orders – property rights, entry into markets, elections, or institutions of good governance – directly into limited access orders. Because these reforms ignore the logic of the LAO, they often fail to produce development and sometimes exacerbate the problem of violence. The traditional development perspective typically treats violence as a country-specific phenomenon and leaves dealing with violence for local police and courts. By doing so, this perspective fails to understand that LAOs are organized to prevent violence and that this often hinders traditional reform efforts.

The Goal of the Project

The goal of Copenhagen Consensus 2008 project was to set priorities among a series of proposals for confronting ten great global challenges: Air pollution, Conflicts, Diseases, Education, Global Warming, Malnutrition and Hunger, Sanitation and Water, Subsidies and Trade Barriers, Terrorism, and Women and Development.

Ranking the Proposals

A Panel of economic experts, comprising eight of the world's most distinguished economists, was invited to consider these issues. The Panel members were: Jagdish N. Bhagwati of Columbia University, Franois Bourguignon of Paris School of Economics and former World Bank chief economist, Finn E. Kydland of University of California, Santa Barbara (Nobel laureate), Robert Mundell of Columbia University in New York (Nobel laureate), Douglass C. North of Washington University in St. Louis (Nobel laureate), Thomas C. Schelling of University of Maryland (Nobel laureate), Vernon L. Smith of Chapman University (Nobel laureate), and Nancy L. Stokey of University of Chicago.

The Panel was asked to address the ten challenge areas and to answer the question: “What would be the best ways of advancing global welfare, and particularly the welfare of the developing countries, illustrated by supposing that an additional $75 billion of resources were at their disposal over a four-year initial period?”

Ten Challenge papers, commissioned from acknowledged authorities in each area of policy (chapters 1–10 in this volume), set out more than thirty proposals for the Panel's consideration. During the week-long conference, the Panel examined these proposals in detail.

Every explanation of large-scale social change contains a theory of economics, a theory of politics, and a theory of social behavior. Sometimes, as in the materialist theory of Marx, the theories are explicit. Often, however, they are implicit, and even more often theories of economics and politics are independent. Despite a great deal of attention and effort, social science has not come to grips with how economic and political development are connected either in history or in the modern world. The absence of a workable integrated theory of economics and politics reflects the lack of systematic thinking about the central problem of violence in human societies. How societies solve the ubiquitous threat of violence shapes and constrains the forms that human interaction can take, including the form of political and economic systems.

This book lays out a set of concepts that show how societies have used the control of political, economic, religious, and educational activities to limit and contain violence over the last ten thousand years. In most societies, political, economic, religious, and military powers are created through institutions that structure human organizations and relationships. These institutions simultaneously give individuals control over resources and social functions and, by doing so, limit the use of violence by shaping the incentives faced by individuals and groups who have access to violence. We call these patterns of social organization social orders. Our aim is to understand how social orders structure social interactions.

Introduction

A natural state manages the problem of violence by forming a dominant coalition that limits access to valuable resources – land, labor, and capital – or access to and control of valuable activities – such as trade, worship, and education – to elite groups. The creation of rents through limiting access provides the glue that holds the coalition together, enabling elite groups to make credible commitments to one another to support the regime, perform their functions, and refrain from violence. Only elite groups are able to use the third-party enforcement of the coalition to structure contractual organizations. Limiting access to organizational forms is the key to the natural state because limiting access not only creates rents through exclusive privileges but it also directly enhances the value of the privileges by making elites more productive through their organizations.

Every state must deal with the problem of violence, and if we begin thinking about the state by positing a single actor with a monopoly on violence, we assume away the fundamental problem. All states are organizations, involving multiple individuals who cooperate to pursue a common goal even as they retain their individual interests. In natural states, powerful elites are directly connected to the organizations they head. The resources elite organizations bring to the dominant coalition strengthen relationships within the coalition. Increasing specialization and division of labor, including specialization in violence, come with increasing size of societies. Because the application of violence requires organization, violence specialists typically head or are embedded in organizations.

Institutionalizing Open Access

The transition proper begins when elites find a common interest in transforming some elite privileges into impersonal elite rights shared by all members of the elite. The process is by no means inevitable. The natural tendency of powerful groups faced with uncertainty and novel situations is to consolidate privileges, not to expand them to include more elites. The transition proper is the process by which elites open access within the dominant coalition, secure that open access through institutional changes, and then begin to expand access to citizenship rights to a wider share of the population.

In the logic of the transition, elites find it in their interests to protect their privileges by converting them into rights. The biggest threat to elite privileges is other elites, especially factions within the dominant coalition. It was believed that intra-elite competition in mature natural states presented the biggest internal threat to elites. Those ideas formed the core of a crystallizing political theory in the eighteenth century called the republican tradition or civic humanism by some (with roots stretching back to Greece and Republican Rome). The backward-looking idea that intra-elite competition posed the greatest threat to social order described a natural state, not an open access order. The specific idea that political manipulation of economic privileges posed the greatest threat to a republic was the central hypothesis of Whig or Commonwealth thinking in the eighteenth century in Britain, France, and the United States.

The Framing Problems

We have built our framework on the rich literature in history, political science, economics, anthropology, and the social sciences. Our story is set in the context of the growth in the stock of human knowledge, which is the deep underlying source of the improving human material well-being. We have taken as given the changing patterns of technology, fertility, mortality, migration, and general demographics undergirding our account. Our focus has been on the changing structure of human interaction and its implications for the human condition.

A full account of human behavior would begin by asking how the mind deals with the process of change. A necessary preliminary is to understand how the brain interprets signals received by the senses and how the mind structures the result into coherent beliefs. Although some progress has been made in cognitive science, a pressing concern for future research is to understand the origin of conflicting belief systems, their flexibility, and their interaction with organizations and institutions. Many of the changes in the environment are novel, without precedent. The theories we have in the social sciences, however, are predicated on the notion of an ergodic, repeated, and predictable world in which the same problems recur and individuals can fashion solutions to them. How do we think about social processes when individuals, at best, have a limited understanding of what is happening to them as they continue to confront new experiences and novel situations that require an awareness of the dynamic nature of the process of change in which they are participants?

Introduction

Although open access orders are far more peaceful than natural states, social scientists take this peace for granted. No models explain why violence is generally absent, whether in the form of coups, riots, rebellions, or civil wars. These societies are Weberian: the government holds a monopoly on the legitimate use of violence, which is subject to clear and well-understood rules. In open access orders, political and social arrangements identify a set of military and police organizations that can legitimately use violence and a set of political organizations that control the use of violence by the military and police. Control of the government, in turn, is contestable and is subject to clear and well-understood rules.

Open access orders exhibit a virtuous circle linking the control of violence and open access. The political system limits access to the means of violence; open economic and social access ensures that access to the political system is open; credible prohibitions on the use of violence to compete maintains open economic and social access; and political and judicial systems enforce prohibitions on the use of violence. Similarly, open access to organizations in all systems sustains competition in all systems. Competition in all systems, in turn, helps sustain open access.

Standard views about how developed societies operate and sustain themselves typically focus on one system, either markets or democracy, without considering the other. Economics takes open access as given and explores its consequences; explanations for market stability usually focus on the equilibrium properties of the economy.

Introduction

The logic of the natural state draws attention to the way the dominant coalition manipulates the economy to provide incentives for powerful individuals not to use violence. Land is the primary asset in agrarian societies. Access, use, and the ability to derive income from land therefore provide a rich set of tools with which to structure a dominant coalition and its relationship to the wider economy. As De Soto (1989, 2000) and the larger development literature emphasize, establishing well-defined and easily transferrable property rights to land remains a significant problem in many parts of the world today.

If access to land plays a role in balancing interests within a dominant coalition, then there are implications for the clarity of property rights with respect to land in developing societies. Clear property rights make land more valuable, but they may also reduce the ability to use land as a tool to structure elite relationships in natural states. As a result, elites have conflicting interests in making land rights more secure. In fragile natural states, the flexible redistribution of landownership and control can serve as a tool to balance interests within the coalition, especially as the balance of power shifts among prominent members. In basic natural states, landownership typically stabilizes, but control of land remains within the direct framework of the state.