The Causes and Consequences of Development Clusters: State Capacity, - PowerPoint PPT Presentation

The Causes and Consequences of Development Clusters: State Capacity, Peace and Income Tim Besley (based on joint work with Torsten Persson)

The Issues • Why do we see this clustering between income levels, state capacities and violence? • A priori, it is plausible that: 1. income is both a cause and a consequence of violence and state capac- ities, 2. violence and state capacity cause each other, and 3. the correlations reflect common background variables.

Figure 1: State Capacity, Peace and Income 1 State Capacity circa 2000 .8 .6 .4 .2 0 .2 .4 .6 .8 1 Peace Index (1975-2006) High income in 2000 Mid income in 2000 Low income in 2000 Fitted values

The Issues • Isolating a specific unidirectional channel of causation — by a well-designed theory or empirical strategy — can only shed partial light on the complete picture. • To explain the clustering of good or bad outcomes, we need an approach that ties the three dimensions of development together. • Today, I will discuss an approach building on our recent and ongoing re- search with Torsten Persson

• This approach emphasizes: — the need to study common factors which shape a range of development outcomes, — and to understand complementarities (positive two-way feedbacks) be- tween different performance dimensions.

The Issues • To get at both these elements, we put the incentives to invest in state capacity and violence • Particularly, how these are shaped by an array of factors: — economic — political — social conditions.

• Can cast light on debates about fragile states — multidimensional cases of ill-being

Background • Approaches to income differences/development • Approaches to state capacity • Approaches to political violence

Approaches to income differences • Standard growth models: Solow (1956) to Aghion and Howitt (1998). — strong focus on technology differences • Development as misallocation: Lewis (1954) to Hseih and Klenow (2008) — strong focus on frictions due to poorly functioning markets and insti- tutions. — provides a good way of joining micro and macro — tie back to older literature on development and institutions: Stiglitz (1988)

• Early development models focused on how government policy could pro- mote growth and development — And this remains relevant — But is government policy always effective? ∗ much more recent focus on this issue ∗ means studying incentives in public organizations

Two Perspectives on Government Failure • Lack of knowledge • Lack of incentives (plus poor selection?)

Lack of Knowledge • Perspectives on the East Asian miracle: — Amsden (1992) and Wade (1990), suggested that more should be learned about the policy successes in “developmental states”. • Evaluation by randomized-control-trials (RCT) — see Banerjee and Duflo (2011) emphasize this.

Lack of Incentives • Not fashionable in earlier development literature — But Bauer (1972) and Krueger (1974) emphasized these issues — Bates (1981) applied the logic to post-colonial Africa • The more recent literature on institutions can be thought of in this spirit — Engerman and Sokoloff (2002) and Acemoglu and Robinson (2012) cast this as extractive versus inclusive states.

Our Approach • Governments may have enough knowledge about good policies and the will to implement them, but still lack the ability — i.e., the state capacity — to carry them out. • Political institutions still play a key role as a driver of state-capacity in- vestments.

Approaches to state capacity • Many debates in development have touched upon state capacity, but it is only recently that economists have focused on it. — For example, traditional normative public finance hardly ever touch upon lacking administrative infrastructure as important constraints on the taxes that governments can raise or the public goods they can deliver.

• State capacity a focus of other social sciences: — Historical sociology: Hintze (1906), Tilly, (1975), (1985) — Economic history: Brewer, (1989), Dincecco (2011) • But little on complementarities with other state investments. • Political scientists such as Herbst (2000), Levi (1988) and Migdal (1988) have also emphasized that many developing countries too weak states and hence lack the capacity to raise revenue and govern effectively.

Our Approach • Our approach underlines how military needs could provide a motive to build the power to tax. — but view this as an example of common-interests • However, what we offer is more than a formalization of old ideas. — adopt a multi-dimensional approach with a focus on complementarities

Approaches to political violence • Political scientists and economists have worked extensively on the causes of civil war. — Progressed from mainly cross-sectional inference to panel-data studies, which exploit within-country variation ∗ see Blattman and Miguel (2009). • A largely independent literature has explored the determinants of govern- ment repression and violations of human rights. — see Davenport (2007)

• Strong focus on empirical regularities • But little effort to bring theory and testing together.

• Clear pattern in the data is the strong correlation between civil war and low income levels. • Two leading interpretations — Collier and Hoeffler (2004) argue that it reflects a low opportunity cost of fighting at low income — Fearon and Laitin (2003) argue that it reflects low-income countries having poorer state capacity. • But violence and income may well have common determinants.

Our Approach • Three-dimensional development clusters embeds the analysis of political violence in a wider setting. — Government repression and civil war as alternative outcomes, but the two have the same underlying determinants. — Allows for two-way feedbacks between income and political violence. — It probes for an "equilibrium correlation" by considering the effect of the same economic, political and social forces on the investments in state capacity and political violence ∗ and allows the political instability generated by political violence to affect the investments in state capacity.

Roadmap • The logic of state capacity investment • The forces that shape political violence. • Forces behind development clusters • Policy implications • Topics for further research

The Logic of State Capacity Investment • Dimensions of state capacity 1. Supporting markets 2. Augmenting markets 3. Raising Revenue

Figure 2: Three Dimensions of State Capacity Three Dimensions of State Capacity Legal Capacity Fiscal Capacity Collective Capacity High Income Middle Income Low Income

Supporting Markets • Conventional infrastructure • Legal structures • Regulation

Augmenting Markets • Public goods • Externalities • Universal social protection

Raising Revenue • Broadening the tax base • Monitoring and compliance

Preliminaries • Starting point: that a state exists with an established monopoly over mar- ket support, market augmentation, and revenue collection • Focus on: state capacity investments by a unitary state • Standard capital investment problem, where costs today must be weighed against benefits tomorrow by the relevant decision makers.

• BUT: — How are choices made at a point in time in a polity with different interest groups? — How does the prospective replacement of the present decision maker affect intertemporal choice?

A normative benchmark • Essentially an application of the Arrow and Kurz (1970). • Some kind of social objective needs to be specified • Gives cost benefit rules — how far are these toutinely applied to state capacity beyond infrastruc- ture?

Complementarities • Two-way feedbacks between state capacity and income: — Growth process involves higher incomes as well as structural change, e.g., by extending the domain of markets. — Higher income will provide a natural boost to investments in some kinds of state capacity. — Citizens may demand more intensively goods best produced by the state, creating higher returns to investing in collective capacity and fiscal capacity. — Larger prospective tax bases also mean that a given investment in fiscal capacity tax generates larger revenues.

• Feedbacks between forms of state capacity — Fiscal capacity investment encourages moves to encourage formaliza- tion — Formalization encourages investment in fiscal capacity • Project-by-project, cost-benefit appraisal of individual state-capacity in- vestments could understate benefits. — critical mass effects

Natural resources and aid • These revenues substitute for fiscal capacity, which diminishes fiscal-capacity investments • Resource and aid dependence may also have a direct effect on legal-capacity building, as such income sources typically do not require the development of an effective market economy.

Legal Origins • Legal origins may have a direct impact on costs for building capacity with some kinds of underlying legal codes being more supportive of certain kinds of legal capacity. • Complementarities with other state capacities would lead to spillovers into other spheres of state action. — Thus legal origins may be a second common determinant of state ca- pacity.

Collective decision making • Cohesive Political Institutions • Transitions of power