Professional Documents
Culture Documents
A Reappraisal of The State P Bardhan
A Reappraisal of The State P Bardhan
http://dx.doi.org/10.1257/jel.20151239
This essay tries to bring out some of the complexities that are overlooked in the usual
treatment of the state in the institutional economics literature and supplement the
latter with a discussion of some alternative approaches to looking at the possible devel-
opmental role of the state. It refers to a broader range of development goals (including
the structural transformation of the economy) and focuses on problems like the reso-
lution of coordination failures and collective-action problems, the conflicting issues of
commitment and accountability and the need for balancing the trade-offs they gener-
ate, some ingredients of state capacity and political coalition building usually missed
in the literature, the possible importance of rent sharing in a political equilibrium, the
advantages and problems of political centralization and decentralization, and the mul-
tidimensionality of state functions that may not be addressed by markets or private
firms. ( JEL D72, H11, H77, K00, O17, O43, P26)
862
Bardhan: State and Development 863
are overlooked or underemphasized in this that form integral parts of the development
now-dominant tradition. In particular, we
process—for example, popular participa-
shall refer to a broader range of development tion and democratic deliberation lend legit-
goals (including the structural transforma- imacy and sustainability to development. On
tion of an economy) and multidimensionality the other hand, the political competition of
of state functions compared to those that democracy can occasionally lead to a “race
have been usually considered in the institu- to the bottom” and, instead of focusing the
tional economics literature. leadership’s attention on broad-based inter-
A strong state may help economic growth, ests, may in some cases encourage political
but what does one mean by a strong state? clientelism to win elections. In contrast with
In the different strands of the literature one the general impression in the literature that
can decipher defining issues like a certain “all good things go together,” we’ll point to
commitment ability of the state to tran- these kinds of antinomies and trade-offs that
scend narrow sectarian pressures, and that are largely missing in the discussion.
of political centralization that allows the There is now a burgeoning literature on
state to transcend diffuse local interests. state capacity contributing to the aforemen-
But the ability to transcend narrow inter- tioned state “strength,” spelling out the vari-
ests may not necessarily be accompanied ous ingredients, particularly fiscal, legal, and
by willingness to do so, thus constraints on military aspects of capacity. For example, the
executive power are considered necessary role of wars in forging such capacity, and that
to restrain pandering to narrow interests or of a Weberian bureaucracy, its autonomy
self-aggrandizement on the part of the lead- from the political process, its career paths,
ership (hence the frequent call for strong but and incentive payments have been discussed
“limited” government). in this context. Less often discussed is the
But if the social goal is broad-based
nature of political coaltion among different
development, such essentially negative bars interest or identity groups and “social pacts”
restraining government are not enough. In and intertemporal bargains that make the
many cases, it may be imperative for the key difference and the underlying problems
state to play a more positive role. Pluralistic of collective action that have to be overcome
institutions, in the sense of being respectful in building the all-important
political capac-
of diversity of interests and goals, may facil- ity of the state.
itate such a positive role of the state. But The focus on security of property rights
those institutional economists who see the and market institutions has also diverted
need for pluralism do not always pay atten- attention from the important issue of devel-
tion to the possible tension between plu- oping state capacity in resolving coordina-
ralism and the ability to carry out collective tion failures. This issue used to be at the
action toward development goals, or even to forefront of discussion in the early develop-
secure property rights; similarly, those who ment literature, particularly when structural
advocate political centralization do not give transformation used to be regarded as the
enough weight to its trade-off with local core of development. In the more recent
accountability, or the trade-off between literature, there has been some parallel dis-
commitment and flexibility. Democratic cussion of state promotion of industrial pol-
accountability mechanisms in this literature icy and the lessons one can learn from its
mainly take the form of constraints on the experience in several East Asian countries.
executive or checks and balances; but there In political sociology there has been active
are other aspects of the democratic process discussion on the so-called developmental
864 Journal of Economic Literature, Vol. LIV (September 2016)
state in this context. Much of this has been and incomplete markets. The trade-offs
sidelined in the institutional economics dis- between different aspects discussed here
cussion on property rights and state capacity, also suggest the need for some balance in
mainly drawing examples from premodern working toward multifaceted development
European and Atlantic economy, and more goals, and a prefixed one-sided
formula may
recently from institutional failures in Latin not be desirable. The multiple functions of
America and Africa, largely overlooking the the state and the m ultidimensionality of its
analytical lessons from the experience of agenda (compared to those of private firms
East and South Asia. It is time to join the or markets) also imply, as we’ll discuss, that
stream of the literature on industrial policy even when a state enterprise is inefficient in
with the mainstream on state capacity for carrying out its functions, privatization need
market-supporting institutions, and discuss not always be a better solution, particularly
the problems and prospects of industrial when contracts are necessarily incomplete.
policy in this larger context, particularly if it Our focus on a broader role of the state,
can be moved away from its old protectionist multidimensionality of its functions (and
association and oriented to improving pro- that too at different levels of the political
ductivity, rather than distorting prices. Of system), and the trade-offs
and dissonances
course, targeting of sectors and firms will between objectives or mechanism designs
generate rental opportunities, but in contrast does not make it easy for a unified theory
with the strictures on rent seeking in the ear- or tidy, unambiguous conclusions. But as
lier literature on the state, the new literature Williamson (2000) said in a JEL survey of
has emphasized how in second-best situ- institutional economics, “there being many
ations, particularly in early stages of devel- instructive lenses for studying complex insti-
opment when entrepreneurship and capital tutions, pluralism is what holds promise for
are the binding constraints, some amount of overcoming our ignorance.”
rent generation within broad limits of market The roadmap in this essay is as follows. In
discipline can provide dynamic incentives section 2, we start with the idea of a “strong
for new investments and learning processes. but limited” government and its various
Rent sharing may also be important in forg- ramifications. We concentrate in section 2.1
ing political coalitions behind structural on two related aspects of state strength sug-
change. gested in the literature, one on commitment
In general, the purpose of this essay will ability and the other is political centralization.
be to open up the role of the state in the In the context of state strength, we shall com-
development context beyond the narrow ment in section 2.2 on the different ingredi-
confines to which much of the institutional ents of state capacity discussed in a growing
economics literature has limited it, apart literature. In connection with limited gov-
from pointing to the various trade-offs
ernment, we discuss in section 2.3 the con-
among the types of roles already envisaged. straints on the executive and the role of other
Beyond being a “nightwatchman” of prop- accountability mechanisms. In section 3, we
erty rights and markets, the state often needs shall start our critique of the view discussed
to be a guide, coordinator, stimulator, and in the previous two sections by pointing to
a catalytic agent for economic activities in tensions and trade-offs between different
situations where, for various historical and aspects of governance recommended in the
structural reasons, the development process literature. In section 4, we wade into a small
has been atrophied and the path forward is part of the large literature on democracy and
darkened by all kinds of missing information development, k eeping our attention on how
Bardhan: State and Development 865
the democratic accountability mechanisms on the state are riddled with problems in
discussed earlier help in the development causal interpretation.2 In addition, unlike in
process and at the same time point to fea- the case of some macroeconomic policies,
tures of political competition in a democracy it matters a great deal more in this litera-
that may actually hinder development. In ture that the effectiveness of the state varies
section 5, we shall draw upon the growing lit- enormously across localities and administra-
erature on decentralization and accountabil- tive levels within the same country in their
ity downward and show how the latter may effect on the development process, not at all
provide a counterweight to the advantages of captured in data that take a whole-country
political centralization discussed in section 2, average as the point of observation, which
while at the same time drawing attention to is particularly problematic for countries
trade-offs in terms of special problems that with a medium- to large-sized
population.
afflict decentralized governance in pursuit of On top of all this, there are inherent diffi-
development goals. In this context, we shall culties of measuring quality of public goods
discuss the unique combination of politi- and services. There are a few micro exper-
cal centralization and economic decentral- imental studies now available, but as usual
ization that the recently successful case of the relevance of the conclusions faces prob-
the Chinese state represents, and also the lems in scaling up or in “external validity.”
pitfalls of the Chinese state model. In sec- There have, however, been some hopeful
tion 6, we discuss the broader role of the beginnings of collaboration between the
state in coordinating investment activities policy-making and research communities in
and learning processes and how the poten- carrying out quasi-experimental
evaluation
tial dynamic role of rental opportunities of micro aspects of state policies covering
that sectoral targeting in industrial policy large segments of the population.
generates needs to be tamed by market dis- Since this essay is not primarily on the
cipline. In section 7, we discuss the special, process of state formation as such, we shall
often multidimensional, functions of public largely confine ourselves to states that have
enterprises and the uncertainty of their role some minimum coherence in striving for
in fostering necessary innovations once the development, and thus leave out many
developmental catch-up process in technol- important cases where internecine violence
ogy is over. In the final section 8, we have and extreme social fragmentation have not
some concluding comments and brief sug- yet allowed the minimum conditions for
gestions on under-researched
areas. state building. While keeping in mind that
Much of the analysis in this essay, as in the differences in the relevant state capac-
the literature discussed, is comparative and ity are often a matter of degree rather than
historical-institutional. Although we shall
kind, we shall bypass the large and growing
often refer to the quantitative-empirical
lit- literature on “failed states” and civil conflicts.
erature available, the latter is as yet relatively For a relatively recent overview piece in JEL
scanty, scattered, and not always satisfac- on civil conflicts,3 which are often associated
tory in terms of the identification strategies
applied. For example, as the growth econo-
metrics literature1 makes it amply clear, the 2 In this essay, while we have not refrained from refer-
cross-country regressions of the literature
ring to some cross-country empirical exercises, the pur-
pose is mainly to illustrate findings suggestive of interesting
correlation, not causation.
1 See, for example, Durlauf, Johnson, and Temple 3 For my own take on civil conflicts, see Bardhan (2005),
(2005). chapter 9.
866 Journal of Economic Literature, Vol. LIV (September 2016)
with fragile states, see Blattman and Miguel of the Glorious Revolution, resulting in a
(2010). political pluralism, which along with central-
ization in England helped to secure private
property rights against state predation and
2. The Call for a Strong but Limited
allowed private enterprise and capital mar-
Government
kets to flourish. Besley and Persson (2011)
The idea of a strong but limited govern- take a closely related approach, citing Adam
ment in the institutional economics literature Smith that “peace, easy taxes,6 and a tolera-
follows a long tradition of Anglo-American
ble administration of justice” are the pillars
political philosophy dating back at least to of the wealth of nations.
Hobbes and Locke (the former emphasizing
2.1 State Strength
a strong state to prevent “war of all against
all,” and the latter emphasizing limits to The “strength” of a state in the develop-
government at least for securing property ment context has, of course, to be defined in
rights). This is actually akin to much older a noncircular way (without reference to the
ideas familiar from the classical texts of some development outcome). A search of the liter-
ancient civilizations. ature suggests two (somewhat overlapping)
A major proposition in the recent components of a definition of strength, with-
institutional-economics literature associated out being just a reflection of the success of
with North and Weingast (1989, 2000) and the economy: (1) political centralization, and
others is that for the purpose of economic (2) capacity to commit.
development, the state has to be strong Acemoglu and Robinson (2012) are the
enough to protect property rights and other most emphatic in stressing the importance of
institutions underpinning markets and con- political centralization. In their view, nations
tracts, but not too strong to be confiscatory, succeed or fail in development according to
hence the need for democratic checks and how “inclusive”7 their political and economic
balances.4 They have cited the landmark institutions are, and political centralization (a
historical case of the Glorious Revolution well-functioning state establishing a cohesive
in England in 1688, which by strengthen- order across local jurisdictions) is one of their
ing political institutions that constrained the essential inclusive political institutions. It can
king enhanced his commitment to securing internalize externalities generated by policy
private property rights and thus fostered actions of different local authorities, enabling
economic growth (a major mechanism has an encompassing organization to override
been through lowering the cost of capital). various pressures of local clientelism. This
Acemoglu and Robinson (2012) in their
recent remarkable book5 also cite the case 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
4 A referee has rightly pointed out that there is a distinc- their understanding of institutions and development.
tion between a “limited” government and a “constrained” 6 The idea of “easy taxes” was explicit in the Indian epic
one. North and Weingast do talk about a limited gov- Mahabharata, where it was suggested that taxes should be
ernment that has strict limits on interfering with private gathered in the manner of “the bee taking honey from the
property rights and markets. Scholars in the public choice flower.”
tradition also explicitly talk about limited government. 7 Acemoglu and Robinson keep the definition of “inclu-
Acemoglu and Robinson also emphasize security of prop- sive” somewhat vague. One presumes an inclusive political
erty rights, but I presume they are more open to a more institution is one where large numbers (possibly a major-
active role of the government. ity) of people are included in the process of governance.
5 Even though the book is meant primarily for a Similarly, an inclusive economic institution expands eco-
nonspecialist readership and their various technical articles nomic rights to large numbers of people.
Bardhan: State and Development 867
also provides incentives for incumbent polit- be a Stackelberg leader. In contrast, one
ical leaders to invest in the creation of fiscal can say that the weak or the “soft” state is
and legal capacity, as suggested by Besley and a Stackelberg follower; it cannot commit to
Persson (2011).8 Empirically, Osafo-Kwaako a particular policy and merely reacts to the
and Robinson (2013) cite evidence from a independent actions of the private actors
cross-cultural sample for a strong positive cor- like special-interest groups. In this model it
relation between political centralization (in is easy to show that compared to the “strong”
the sense of “jurisdictional hierarchy beyond state, the “soft” state will have too much
local community”) and different measures undesirable intervention (creating distor-
of public goods and development outcomes. tions in the process of generating rent for the
For eleven European countries over four lobbying groups), as the institutional econ-
centuries, Dincecco and Katz (2016) show a omists (as well as the earlier public choice
direct positive relation between fiscal central- theorists on rent seeking) usually emphasize.
ization and economic growth. For different But they do not usually note that by the same
African polities, Bandyopadhyay and Green logic, the “soft” state will have too little desir-
(2012) and Michalopoulos and Papaioannon able intervention, since the state does not
(2013) provide direct econometric evidence take into account or internalize the positive
of positive impact of historical measures of effects of its own policies (for example, the
political centralization on contemporary eco- positive externalities of public investment).
nomic development. So the distinction between a “strong” state
While political centralization refers to (say, in much of East Asia) and a “soft” state
encompassing the divergent local interests (say, in much of Africa or South Asia) is not
and decisions, a more general characteristic necessarily in the extent of intervention, but
of a strong and effective state is the capacity in its quality.
to make credible commitments in the face An important example of the strong state’s
of pressures from diverse interest groups. ability to precommit like the Stackelberg
One can depict the relationship between the leader arises in the case of the popular
ruler and the ruled in such a strong state in infant-industry argument for protection. In
terms of a simple principal–agent model.9 the last two hundred years this argument has
Suppose the ruler of a strong state is envis- been applied by the state in many countries
aged as maximizing his own objective func- in the early stages of industrialization, with a
tion, subject to the reaction function of the few successes and numerous failures, which
ruled, and in the process the ruler internal- has partly to do with the strength of the state
izes the economic costs and benefits of his or lack of it. At the time when such protection
actions in accordance with that reaction is initiated, by the very nature of this argu-
function. In this case, the ruler is taken to ment for temporary protection, it is granted
for a short period until the industrial infant
8 The theoretical model of Besley and Persson is that
stands up on its feet. But in most countries,
of a contest between an incumbent ruler and a chal- infant industry protection inevitably faces the
lenger. Aoki (forthcoming) has a model of a more complex “time inconsistency” problem: when the ini-
three-person game, played by the ruler, the challenger tial period of protection nears its completion,
and the opportunist (say, the local gentry) who chooses a
strategic position between them, applied to interpret the the political pressures for its renewal from
transition out of the p remodern states of Tokugawa Japan the vested interests become inexorable, and
and Qing China.
9 For expositions of the strong state in these terms, see
in this way the infant industry in a weak state
Rodrik (1992), Bardhan (1990), and Bardhan and Udry can degenerate into a geriatric protection
(1999), chapter 17. lobby (the history of import-substituting
868 Journal of Economic Literature, Vol. LIV (September 2016)
10 Forsome examples of this, see Wade (1990). 12 There is clear evidence that Marx himself essentially
11 For the micro-foundations of such “soft” financing abandoned this view after 1850. For an elaboration on this
problems, see Dewatripont and Maskin (1995). see Elster (1985).
Bardhan: State and Development 869
state supersedes the narrow or particularistic to be able to provide public goods and ser-
interests of the capitalists and takes indepen- vices (including law and order). In the bur-
dent decisions and policies, even though it by geoning literature on state capacity, different
and large safeguards their l ong-term systemic writers have emphasized different aspects. A
interests. (In non-Marxist
literature, during a well-known line of thinking associated with
depression or financial crises this sometimes Tilly (1985) links the historical making of the
appears in the form of a call for the state to fiscal-military state in early modern Europe
“save capitalism from capitalists.”)13 Later, with interstate wars (or threats thereof). Levi
many political sociologists in and outside this (1988) associated state making with inducing
group went even beyond this, and recognized citizen compliance in providing revenue and
several historical instances of the clearly vital conscripts for war. Others,14 however, have
role of the strong state. For example, Skocpol suggested that in more recent times and out-
(1982) refers to “the explanatory centrality of side Europe, states have been formed with-
states as potent and autonomous organiza- out wars, and there have been cases where
tional actors.” There are, of course, serious wars have unraveled preexisting states.
constraints posed by the imperatives of the In examining the ingredients of state
dominant proprietary classes (after all, they capacity, Evans and Rauch (1999) stressed
provide the main source of public revenue), the importance of certain Weberian charac-
but these writers recognized that to focus teristics of the state bureaucracy, like mer-
exclusively on those constraints is often to itocratic recruitment and long-term career
ignore the large range of choices in goal for- rewards for officials. There is also a cumula-
mulation, agenda setting, and policy execu- tive logic of bureaucratic functioning. A long
tion that the state leadership usually has. The history of continuous bureaucratic structure
strong state thus acts neither at the behest in place may foster a helpful bureaucratic
of, nor on behalf of, the dominant classes. culture15 or esprit de corps that can con-
Of course in most actual situations, the tribute to state effectiveness. Bockstette,
state is neither a Stackelberg leader nor a Chanda, and Putterman (2002) have com-
Stackelberg follower; neither the state actors puted an index of state antiquity (continu-
nor the private interest groups usually have ous territory-wide state structure above the
the power to define unilaterally the param- tribal domains over the last two millennia). It
eters of their action. Both may be strategic shows that among developing countries, this
actors with some power to influence the index is much lower for sub-Saharan Africa
terms, and the outcome of the bargaining and Latin America than for Asia, and even
game will depend on their varying bargain- in Asia the index for South Korea is several
ing strengths in different situations. times that for the Philippines (a country that
lacked an encompassing state before the
2.2 Ingredients of State Capacity
sixteenth-century colonization by Spain). A
Besley and Persson (2011) associate a cross-country statistical exercise16 shows a
weak state with a lack of state capacity, par-
ticularly fiscal, legal, and military capacity,
14 See, for example, Leander (2004), and Taylor and
Botea (2008).
15 Analogous to the term “democratic capital” that
13 Marx in Capital volume I, when discussing the Persson and Tabellini (2009) have used, one may call this
English Factory Acts, deduces the necessity of the state historical experience of bureaucracy a kind of “bureau-
as a particular form “alongside and outside bourgeois soci- cratic capital,” though one should be careful in not stretch-
ety”, protecting capital from its own “unrestrainable pas- ing the definition of capital too far.
sion, its werewolf hunger for surplus labor”. 16 See Bardhan (2005), chapter 1.
870 Journal of Economic Literature, Vol. LIV (September 2016)
significant positive association between this results suggest that investing in secure
state antiquity index and that for the rule of authentication and payments infrastructure
law currently in the country. can significantly add to state capacity in
The effectiveness of a bureaucracy, of effective implementation of social programs
course, depends on the compensation struc- in developing countries. Similar issues arise
ture and incentives.17 There is now a grow- in the context of building capacities in judi-
ing literature on experimental evaluation of cial, auditing, and regulatory bodies.
incentive and monitoring reforms in bureau- Organizational capacity of a state is often
cracy; for an overview, see Finan, Olken, and crudely measured in the empirical literature
Pande (forthcoming). For example, Dal Bo, in terms of tax–GDP ratio. But, as is usually
Finan, and Rossi (2013) provide experimen- recognized, this ratio may be relatively high
tal evidence from Mexico that not merely do in a natural resource abundant country on
higher wages attract higher-quality
recruits to account of the resource rents, not necessarily
the government (even in difficult locations), organizational capacity, or low in a poor
but also, contrary to a common presuppo- country where for independent reasons (say,
sition, they do not “crowd out” the intrinsic the nature of factor market imperfections),
nonpecuniary motivations18 valuable in pub- the informal sector is large. Organizational
lic service. capacity is also related to modes of gover-
Cornick (2013) has classified the different nance. For example, Bandiera, Pratt, and
types of state capacity into technical, orga- Valletti (2009) show (from a policy experi-
nizational, and political. Technical capacity ment associated with a national procurement
is particularly relevant, for example, in the agency in Italy) that much of the sheer wast-
context of screening worthwhile public proj- age in public procurement arises from some
ects or monitoring the delivery to intended organizational modes (“ top-down” gover-
beneficiaries in social programs. Information nance modes in public bodies perform the
technology has expanded the realm of pos- worst). Organizational capacity, of course,
sibilities here. Muralidharan, Niehaus, and varies between different types of state func-
Sukhtankar (2014) evaluate the impact of a tions. The Indian state shows extraordinary
biometrically authenticated payments infra- capacity in some large episodic matters,
structure on public employment and pen- like organizing the complex logistics of the
sion programs in India, using a large-scale world’s largest elections or the world’s second
experiment that randomized the rollout of largest Census. But it displays poor capacity
the new system over 158 subdistricts and in, for example, some regular essential activ-
19 million people. They find that the new ities like cost-effective
pricing and distribu-
system delivered a faster, more predictable, tion of electricity. This is partly because local
and less corrupt payments process without political considerations interfere in matters
adversely affecting program access. These like under-recovery of costs from a large and
politically sensitive customer base.
17 However, the recent evidence of Bandiera, Pratt, Political capacity is often largely an issue
and Valletti (2009) on passive waste in public procurement of commitment and resisting pressures for
in Italy and Chong et al. (2014) on effectiveness of postal short-termism and soft budget constraints,
systems across several countries suggests that bureaucratic
performance is not a matter of incentives alone. as we have discussed above. In many parts
18 Ashraf, Bandiera, and Jack (2014) find experimen- of India and Africa, the police and bureau-
tal evidence in Zambia that financial incentives augment, cracy are highly politicized and deliberately
rather than crowd out, public service motivation. A some-
what contrary evidence is found in Uganda by Deserranno incapacitated to serve short-term
political
(2015) goals of leaders. In such contexts, measures
Bardhan: State and Development 871
to be paid in this literature to the theory to political institutions that are sufficiently
of the determinants of collective action. centralized and pluralistic as inclusive politi-
Thirdly, economic inclusion in the world cal institutions” (italics added). This is unsat-
of Acemoglu and Robinson requires secure isfactory without an independent measure
property rights. But political inclusion, with of sufficiency, since “sufficiently” leaves the
its pluralistic distribution of political power door open for circularity. Clearly we do not
and broad popular participation, may not want to call institutions “politically inclu-
always secure the property rights of the sive” when they are inclusive enough to yield
few against the numerous encroachers and development and still claim that inclusive
squatters or against high taxes. Similarly, in institutions foster development.
the world of Besley and Persson, all good Historically, however, England has indeed
things go together (like pluralism and secu- been a successful case where political central-
rity of property rights), and thus they ignore ization and pluralism have fit together. But,
the possible tension between those factors. contrary to North, Weingast, Acemoglu, and
Or, to take another example, the rule of Robinson, economic historians like Epstein
law—part of political inclusion—is often (2000), Clark (2007), and Allen (2009) have
an instrument used to protect the proper- expressed doubts if the economic success
tied from the propertyless, thus enforcing of England can be mostly attributed to the
economic exclusion.20 English enclosure constitutional changes that came with the
laws famously turned the poor users of the Glorious Revolution. Even some of the more
village commons into poachers. Of course, recent defenders of North and Weingast,
the rule of law may be, on balance, a very like Cox (2012) and Pincus and Robinson
good thing, even if it is sometimes at odds (2011), agree that neither cost of capital nor
with economic inclusion.21 enforcement of property rights improved
There is also a definitional problem. significantly after that Revolution,22 even
Acemoglu and Robinson say they will “refer though it represents an important consti-
tutional watershed (Cox) or an institutional
20 “Civil government, so far as it is instituted for the
change shifting the balance of power from
security of property, is in reality instituted for the defense the king to the new manufacturing classes
of the rich against the poor, or of those who have some (Pincus and Robinson). Nor did it lead to a
property against those who have none at all”—this is a particularly limited government; in fact taxes
quote not from Marx, but from Adam Smith in the Wealth
of Nations. and public debt increased sharply after the
21 The nature of the tension involved in the rule of law Revolution.23
is captured well in the nuanced conclusion of Whigs and On the state’s ability to commit, it is
Hunters (1975), by the Marxist historian E. P. Thompson:
important to keep in mind that in some cases
We reach, then, not a simple conclusion (law = class
power) but a complex and contradictory one. On the of state effectiveness commitment has not
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 rela- 22 On this, see also Hoppit (2011) and Sussman and
tions through legal forms, which imposed, again and Yafeh (2006).
again, inhibitions upon the actions of the rulers. . . . 23 Outside England, across early modern Europe,
In a context of gross class inequalities, the equity Stasavage (2011) cites evidence of how the government’s
of the law must always be in some part sham. . . . ability to raise long-term credit depended on assemblies
We ought to expose the shams and inequities which where merchant representatives looking after lenders’
may be concealed beneath this law. But the rule of interests had some political control over fiscal affairs.
law itself, the imposing of effective inhibitions upon Dincecco (2011) shows how across countries in Europe
power and the defense of the citizen from power’s in the period 1650–1913, political centralization com-
all-intrusive claims, seems to me to be an unqualified bined with parliamentary oversight of the executive helped
human good. develop fiscal structures.
Bardhan: State and Development 873
been necessary; as we have indicated before, weakness of state capacity in India has been
reputational substitutes for formal commit- more a symptom of the underlying politi-
ment devices established over a period have cal difficulty of organizing collective action
worked. More importantly, there are costs for the long term25 (even among its divided
of commitment, say in terms of sacrifice of elite), not because the country lacks admin-
flexibility in dealing with changing techni- istratively capable people. Consistent with
cal and market conditions and in correcting the theory of collective action,26 India’s large
wrong decisions. As part of the flexibility, heterogeneous population, fragmented pol-
some political sociologists, like Evans (1995), ity, and high social and economic inequal-
have emphasized the need for a Weberian ity make it hard to agree on long-term
bureaucratic structure with meritocratic common goals and, even when the latter is
recruitment to be combined with channels of achieved, to get its act together in pursuit
deliberative processes involving the import- of those goals. Moreover, in recent years
ant political stakeholders in the development in many developing countries (including
process—what he calls “embedded auton- India), short-term considerations have some-
omy” prominent in his account of South times predominated in the interest conflicts
Korea. But we know that not all stakehold- between rentier and entrepreneurial capital-
ers were included—the autonomous Korean ism—as the price of land (and other natural
state for some decades had also ensured resources) shot up with economic growth,
political suppression of the labor movement a growing nexus between politicians and
so that the profits of the business stake- rentier interests like real estate magnates,
holders were not threatened too much. In a builders, and contractors has often worked
different political context, the Indian experi- to undermine state capacity for good gover-
ence has shown how the political process can nance and long-term
productive enterprise.
erode the commitment capacity of a merito- In general, divided societies and polities
cratically recruited bureaucracy, particularly will have weaker common interests, and as
as politicians can manipulate transfers and Besley and Persson (2011) have pointed out,
promotion of officers.24 in such cases the incentive to invest in state
In general, our discussion of political capacity will be less.27 In contrast, in the
capacity in the previous section needs to postwar decades in n ortheastern Asia and
be linked with the ability to form “social northwestern (particularly Nordic) Europe,
pacts” among important political stakehold- relative social homogeneity and less unequal
ers and the nature of distribution of power distribution of wealth and human capital
and political coalitions. The Korean political may have made it somewhat less difficult to
coalition in the early decades of develop- enlist the support of most social groups in
ment involved a tight integration between a
military bureaucracy and conglomerate busi-
25 For an analysis of the difficulty of collective action
ness, which was clearly out of bounds for the
in India in terms of the large numbers and heterogeneity
elite to accomplish in democratic India. But of influential socioeconomic groups, see Bardhan (1984).
within a democratic framework, the relative 26 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.
24 For evidence on manipulative transfers of Indian 27 For some cross-country evidence on the relation
administrative officers, see Iyer and Mani (2012). A ran- between ethno-linguistic fragmentation and governance,
domized experimental study in the police department see Alesina et al. (2003). The experimental evidence for
in Rajasthan, India, by Banerjee et al. (2012) showed Uganda in Habyarimana et al. (2007) suggests that eth-
that a freeze on transfer of police staff increased police nic homogeneity facilitates coordination on public goods
effectiveness. provision.
874 Journal of Economic Literature, Vol. LIV (September 2016)
aking short-run
m sacrifices and coordinat- natural resource-intensive products (like
ing on growth-promoting policies. This also oil, sugar, bananas, timber, and diamonds),
means that in terms of our earlier discus- for example, has strengthened the political
sion, the “strength” of the state is ultimately power of plantation elites and other large
sustainable by the breadth of support in the exporters who raised domestic barriers to
general population. entry and promoted oligarchic dominance
These matters are obviously helped if, as over the state.29 More recently, globaliza-
some cultural theorists point out,28 the pre- tion in the context of asymmetric interna-
dominant culture in society is “collectivist” tional mobility of capital relative to labor has
(when individuals internalize group inter- weakened labor organizations and practices
ests), which is prominent in some descrip- in many countries and altered the political
tion of East Asian societies, as opposed to equilibrium in favor of capital.30 The fall in
“individualist.” Going into the cultural issues customs revenue and capital taxes in a more
is beyond the scope of this paper, except only open economy may also affect state fiscal
to note that the issue of culture is a welcome capacity.
reminder that some institutions of state
capacity may not be easily transplanted in an
4. Political Decentralization and Local
alien cultural context.
Accountability
An important but complicated question
relating to the prevailing political coalition, There are trade-offs between commit-
and hence the political capacity of the state, ment structures and accountability pro-
seldom discussed in this context is its link cesses. Political centralization, for example,
with globalization, even apart from the usual often leads to distant insulated bureaucracies
constraints on state power in a global econ- that are insensitive to local needs and con-
omy posed by volatile capital flows and inter- cerns and that fail to tap local information,
national credit ratings. On the one hand, initiative, and ingenuity. The central govern-
international competition and integration ment, of course, may also care about winning
may strengthen domestic political account- elections locally, but electoral sanctions are
ability processes and make the political usually more effective at the local elections
coalition somewhat more b road based—his- than at national or even provincial elections,
torically, Acemoglu, Johnson, and Robinson since at the latter forums multiplicity of elec-
(2005) show that the rise of international toral issues dilutes responsibility compared
trade in the Atlantic economies during the to the narrower agenda of local elections.31
early modern period promoted a demand for As opposed to the interjurisdictional encom-
institutional reforms; in more recent periods, passing advantage of centralization, there are
the European economic integration has many who argue for the local accountability
been reported to have improved some gover- and other advantages of decentralization.
nance institutions in Europe’s southern and These include peer-monitoring, ease of cit-
eastern periphery. On the other hand, much izen participation, and relative transparency
depends on the initial conditions, the type of of d
ecision making and program benefits at
goods internationally traded, and the nature
of political and economic competition. In
many historical cases, trade expansion in 29 For a recent survey of these issues see Nunn and
Trefler (2014), section 5.
30 For a discussion of these issues see, for example,
28 On this, see references that are cited in Rodrik (2011).
Gorodnichenko and Roland (2013). 31 See on this Seabright (1996).
Bardhan: State and Development 875
the local level. Brazil now has a participatory (1956) mechanism, by which fully informed
budgetary (PB) process (with citizens’ direct and mobile citizens vote with their feet in
input in budgeting and investment priori- response to differential public performance,
ties) in a substantial fraction of municipali- is of limited applicability in the context of
ties. From a panel dataset from all Brazilian many poor societies (largely on account of
municipalities over 1990–2004, Gonçalves various types of factor market imperfec-
(2014) shows that municipalities adopting tions). The empirical literature33 on capture
PB increased spending on health and sani- suggests that the preconditions of local cap-
tation significantly more than those that did ture depend on:
not, and this has already had sizeable effects
on outcomes like infant mortality. (i)
The initial social and economic
Contrary to the earlier fiscal federal- inequality in the local area
ism literature, the more recent literature32 (ii) The degree of political competition in
on decentralization and development has the area
pointed out the political-economy
and insti- (iii) How regular and well-functioning
tutional issues (like malfeasance, rent seek- the deliberative processes of local
ing, shirking and absenteeism, and other democracy (public hearings, town
agency problems of governance) involved hall meetings, etc.) are
in political centralization. Decentralization (iv) How free the flow of information
also enables competition among regional is regarding the functioning of gov-
governments for mobile private capital, ernments and the entitlements and
which may keep them on their toes and off allocations at the local level. Here,
excessive rent extraction. In some devel- the importance of information cam-
oping countries—say, Brazil, South Africa, paigns (and media exposure) about
and Indonesia—decentralization has been resources allocated to local govern-
an integral part of the democratic transition ments and how they have been spent
itself and has significantly affected the struc- and audited (if there are provisions
ture of subsequent development policy, par- of periodic independent audits of
ticularly in the delivery of social services. accounts) are clear.
On the contrary, decentralized gover-
nance is often prone to local capture by a Apart from trying to improve matters34
collusive elite (landed oligarchy, in some relating to (i) through (iv), attempts at miti-
agrarian contexts), proximity making collu- gation of the effects of capture have included
sion easier, as James Madison worried more political reservation of seats at local coun-
than 200 years back in the Federalist Papers. cils and their headships for disadvantaged
The well-known
safeguard in the fiscal fed- social groups, like mandatory reservations
eralism literature in the form of the Tiebout for lower castes, tribes, and women in India.
32 We are somewhat cryptic in our discussion here of 33 See, for example, Galasso and Ravallion (2005) for
the growing literature, as we want to confine ourselves Bangladesh; Araujo et al. (2008) for Ecuador; Ferraz and
only to issues that are directly relevant in the contrast Finan (2008) for Brazil; Bardhan and Mookherjee (2010)
with the earlier discussion of political centralization that for West Bengal, India; Bjorkman and Svensson (2010)
is supposed to be associated with better state capacity. The for Uganda; and de Janvry, Finan, and Sadoulet (2012) for
reader interested in more detail may refer to surveys of Brazil.
this literature in Bardhan (2002) and Mookherjee (2015), 34 Welfare losses from local elite capture may not always
and to case studies from developing countries in different be large, as Alatas et al. (2013) show from a study of tar-
continents in Bardhan and Mookherjee (2006). geted welfare programs in Indonesia.
876 Journal of Economic Literature, Vol. LIV (September 2016)
35 A different example of adverse effects of jurisdic- 37 Galiani, Gertler, and Schargrodsky (2008) study the
tional competition is given by Burgess et al. (2012), who distributional effects of decentralization across municipal-
show evidence of how an increase in the number of polit- ities on educational quality in Argentine secondary schools
ical jurisdictions in Indonesian decentralization has been and find that schools in poorer municipalities fell further
associated with increased deforestation. behind, while those in better-off areas improved.
36 See, for example, Cai and Treisman (2004) and 38 See the chapters on Bolivia and South Africa in
Slinko, Yakovlev, and Zhuravskaya (2005). Bardhan and Mookherjee (2006).
Bardhan: State and Development 877
and professions, and so supralocal exper- gives considerable weight to the performance
tise may come to weigh more. Accordingly, of the local economy that the official is in
comparative advantage of decentralization
charge of (along with maintenance of polit-
will vary from case to case and over time. ical “stability” in the area), thus combining
In the debates on centralization versus political centralization with local bureau-
decentralization, it is important to note that cratic performance incentives.39
China, a recent dramatically successful state Jia, Kudamatsu, and Seim (2015) show
in achieving high growth, has been in this from the data on the CVs of political lead-
respect a unique hybrid institutional case, ers in China between 1993 and 2009, the
with a high degree of political centraliza- interesting complementary roles of politi-
tion, meritocratic recruitment, and person- cal patronage connection and local growth
nel control under an authoritarian party, at performance in the promotion of provincial
the same time combined with a great deal of leaders. This complementarity is found to be
regional decentralization, competition, and stronger the younger the provincial leaders
experimentation. Xu (2011) has described are, relative to their connected top leaders.
the system as “regionally decentralized But while connections with their patron/
authoritarianism,” in contrast with most mentors increase the likelihood of pro-
authoritarian systems that are highly cen-
motion, provincial leaders with weak local
tralized. Particularly in the first two decades economic performance are unlikely to be
after economic reform started, decentraliza- promoted. The Chinese system thus allows
tion has helped local business development for a rather rare combination of political loy-
in rural China through regional competi- alty and meritocracy.
tion and a somewhat hard budget constraint But the Chinese authoritarian system
enforced on failing local business enterprises. without sufficiently independent sources of
These were the essentials of the so-called
collecting information has from time to time
market-preserving federalism—see, for made catastrophic mistakes (Great Leap
example, Qian and Weingast (1997) and Forward, Cultural Revolution, etc., in the
Qian and Roland (1998). But, as Rodden and past), and the lack of institutions of account-
Rose-Ackerman (1997) have pointed out in ability makes course correction even in the
a general critique of market-preserving fed- case of lesser mistakes delayed and difficult.
eralism, the institutional milieu determines Similarly, the absence of checks and balances
whether political leaders of a local govern- in China allows the tight political-business
ment respond positively to highly mobile relations both at the central and the local lev-
investors or instead pay more attention to els to easily degenerate into massive corrup-
the demands of strong distributive coalitions tion and abuse of power (resulting in recent
dominated by less mobile factors. It is possible years in high inequality, arbitrary land grabs,
that the highly egalitarian distribution of land unsafe working conditions and food supply
cultivation rights following decollectivization chains, and toxic pollution). Thus, there is
of agriculture in rural China meant that the
local capture by oligarchic owners of immo-
39 Persson and Zuravskaya (2016), however, note on
bile factors like land, familiar in many devel-
the basis of career background data for provincial party
oping countries, was unimportant for China, secretaries between 1980 and 2005, a distinction between
at least in the initial years after reform. native-born provincial leaders and outsiders—the former
The Chinese system of bureaucratic pro- spend more on education and health and less on infrastruc-
ture. It is possible that the local leaders have some alle-
motion, unlike the Indian (which is based giances that compete with their career concerns outside
more on seniority than on performance), the province.
878 Journal of Economic Literature, Vol. LIV (September 2016)
now quite often capture of local governments complexity not captured in the usual
by a collusion between commercial interests cross-country regressions in the literature
and local officials. There are also fewer on the subject. As Durlauf, Johnson, and
checks on o verinvestment and excess capac- Temple (2005) and Brock and Durlauf
ity in state-controlled or politically connected (2001) indicate, the d emocracy–growth rela-
firms. All this brings us to the general ques- tion in these regressions is not robust, the
tion of the relationship between democratic identification strategies are not credible, and
governance and development, an issue that different papers in the literature have differ-
has been prominent in the discussion on the ent results because of different choices of
comparative performance of the two largest control variables and other forms of model
developing countries, China and India.40 In uncertainty. For our present purpose, what is
view of the clearly superior overall economic important is that the regressions do not help
performance of China, compared to India, us in understanding the mechanism in the
over the last three decades or so, it has been complex process involved.
the conviction of the elite in China as well Democracy is, of course, slow but its
as some outside China (often termed as “the deliberative and electoral processes manage
Beijing Consensus”) that authoritarianism is social conflicts better and lend some sta-
good for development. As we discuss in the bilizing legitimacy to policy decisions that
next section, this is a false and pernicious grow out of the “conditional consent” of
generalization, but one should be careful in citizens41—apart from enriching individual
not jumping to the equally facile but opposite autonomy and freedom, participation, and
generalities about the unambiguously pos- deliberation, which some would regard as
itive effects of democracy on development. an important part of development itself.42
Democracy also tends to curb the excesses
of capitalism and thus render development
5. Democracy and Development
more sustainable by, for example, encourag-
The literature on democracy and develop- ing social movements as watchdogs against
ment is by now large, and we want to wade environmental despoliation. To the autocrat,
into only a small part of it that is relevant to power is too valuable to lose, hence violence
our discussion of the trade-off between polit- and the attendant potential shattering of
ical centralization of power and accountabil- economic stability and the social fabric are
ity. I agree with Acemoglu and Robinson that never very far off. It is also generally the case
economic performance crucially depends that the variance in economic performance is
on political structures, but the political and larger among autocratic regimes than among
the economic institutions may sometimes democratic ones, as the checks and balances
coevolve and there may be strategic inter- in the latter weed out some of the worst lead-
actions between them that may not allow ers and outcomes.43
us to unambiguously privilege one over On the other side, there are many cases
the other. In particular, the relationship of electoral democracies functioning without
between democracy or p luralism (politi-
cally “inclusive” institutions, in general) and 41 This is emphasized by Levi (2006).
development is actually rather complex—a 42 See, for example, Sen (1999).
43 This may not always be the case when weakly institu-
tionalized democracies perform quite badly. On the other
40 For a detailed discussion of this relationship in the hand, even in the case of the best autocrats there is no
context of China and India, see Bardhan (2013), chapter inherent institutional guarantee that they will continue to
10. be so.
Bardhan: State and Development 879
investing in general-purpose public goods. and Frey (2015) for the Brazilian cash trans-
Wantchekon (2003) conducted a field fer program of Bolsa Familia.
experiment in Benin in which political can- Myerson (2013) has stressed how demo-
didates were persuaded to randomly vary cratic decentralization can improve opportu-
their electoral platforms between a clien- nities and incentives for local leaders to build
telistic program providing cash to specific reputations for using public funds responsi-
ethnic groups and a developmental, local, bly, and may even reduce political entry bar-
public-good oriented program—the former riers for them in national elections. Some of
platform ended up generating higher votes. these reputation incentives linked with local
Such political clientelism, even while help- development have been built into the career
ing some poor people, can harm the cause promotion schemes in China, even with-
of general pro-poor public investments. out democracy. In general, on the relation
Fujiwara and Wantchekon (2013) cite some between political systems and development,
experimental evidence from Benin that a great deal of institutional conditions and
shows how informed public deliberation in contingencies are involved, and under the
town hall meetings can reduce clientelism. circumstances it is easy to see that democ-
The incidence of clientelism may in gen- racy (or the lack of it, for that matter) is nei-
eral depend on the stage of development.47 ther necessary nor sufficient for economic
As incomes rise and markets develop, the development. At the same time, going back
need for political connections for jobs or per- to the China–India case, one cannot deny a
sonalized help may decline (though rather basic comparative political feature related to
slowly, as many cases in southern Italy sug- the source of legitimacy. The pragmatic and
gest even now); also, voters become more professional Chinese leadership often show
expensive to buy. With the spread of edu- the ability to take quick and decisive actions
cation and information, the importance of more than the elected Indian leaders, but
the local vote mobilizer who provides selec- in the face of crisis or political shocks, the
tive benefits (the proverbial ward captain in former often overreact, suppress informa-
Chicago precincts) diminishes, and herding tion, and act heavy-handedly,
which raise the
of voters by ethnicity or regional affinity chances of going off the rails or the danger of
may also decline. With the development of instability. For all their apparent messiness,
transport and communication, the reduction the Indian democratic governments are in a
of territorial insulation allows for supralocal deeper sense less fragile, as they draw their
affinities that may diminish the importance strength from legitimacy derived from dem-
of the local patron. For evidence of the ero- ocratic pluralism.
sion of the incumbent rulers’ clientelistic
arrangements following the introduction
6. The Role of the State in Resolving
of nationwide development programs, see
Coordination Failures
de Janvry, G onzalez-Navarro, and Sadoulet
(2014) for a Mexican program of land rights The institutional-economics literature
preoccupied with the capacity of the state
to secure property rights leaves out a very
important aspect of the necessary state
47 Camp, Dixit, and Stokes (2014) show, in the context capacity in early stages of industrialization,
of a model with two competing parties, how with indus- that of resolving coordination failures, which
trialization and increasing income, a former system of
agent-mediated vote buying can become costlier and gen- the early development literature used to
erate forces for its decline. emphasize. In this respect, the East Asian
Bardhan: State and Development 881
state has been historically distinctive. East The recent literature on industrial pol-
Asian growth was not simply a product icy has the virtue of recognizing this. But
of the state securing property rights and industrial policy has to be dissociated from
providing some market-supporting
insti- the old-fashioned
support for blanket pro-
tutions. Analogous to the “varieties of cap- tectionist policies, which are now particularly
italism” literature where Hall and Soskice ill-suited to industries that can thrive only in
(2001) pointed to the qualitative differences the world of global supply-chain networks.
between Anglo-American “liberal market Hausmann and Rodrik (2003) have empha-
economies” and the “coordinated market sized that industrial policy should have less to
economies” of Germany and Scandinavia, it do with the impossible task of “picking win-
may be important to bring out the varieties of ners”—the usual argument against industrial
developmental roles of the state in terms of policy—but more with a way of “discover-
liberal market support vis-à-vis coordination. ing” a country’s range of potential compar-
The large political sociology literature on ative advantage in a coherent way in a world
the so-called developmental state of East of uncertainties and missing information.
Asia is suggestive and descriptive but— There will be private underinvestment in
with exceptions like Evans (1995)—not any such discovery process, since the positive
always analytically clear about the mech- results are likely to be appropriated by others
anisms involved. Aoki, Murdock, and in the business. State involvement in helping
Okuno-Fujiwara (1997) have more fruit-
and coordinating such exploration into new
fully described the deal between the state economic activities inevitably implies many
and large business conglomerates in South trial-and-error experiments, some of which
Korea and Japan as assuring some form are bound to fail. The main state capacity
of “ cooperation-contingent rent” that will issue here is not that of picking winners, but
accrue to the latter in exchange for playing more of letting losers go, which is politically
a role in the state coordination efforts. In difficult, as we have discussed earlier on the
this perspective,48 economic development question of soft budget constraints.
in these countries was not founded just on As with many other important d evelopment-
institutions that secure property rights and policy questions, the underlying issues
enforce contracts—no doubt very important involved here—capital constraints and credit
for long-term investment—but on a state that market imperfections, learning spillovers,
helped to foster coordination (particularly in lumpy interdependent investments requiring
financial markets in early stages of industri- coordination—are easy to conceptualize but
alization), facilitate interdependent invest- difficult to quantify.49 On learning processes
ment decisions in orchestrated networks of in new exportable activities, there have been
producers and suppliers, establish public many case studies, even outside East Asia.
development banks and other institutions for Sutton (2012) shows how in the Indian (as in
long-term industrial finance, and nudge firms the Chinese) car industry, within a few years
to upgrade their technology and move into after the arrival of international car makers,
sectors that fit with a national vision of devel- the domestic producers of car components
opment goals. Enabling and encouraging in India attained “world-class” standards (as
such coordination is fundamentally different measured, say, by conventional defect rates
from protecting property rights.
49 Rodrik (2008a) discusses the difficulties involved in
48 Thisis consistent with the well-known 1993 World statistical inference on this topic, particularly when policy
Bank report on The East Asian Miracle. adoptions are endogenous.
882 Journal of Economic Literature, Vol. LIV (September 2016)
in the parts supplied). The process involved infrastructure, and so on), where the goal is
the state at that time providing many kinds of to develop domestic policies of coordination
support, including local-content
protection- that improve productivity more than inter-
ism (which is, of course, now WTO-illegal). ventions that distort prices. Aghion et al.
Sabel et al. (2012) report many case stud- (2015) cite panel data from medium and
ies of public-supported export pioneers large Chinese enterprises over 1998 to 2007
from Latin America—for example, flori- to show that industrial policies targeted to
culture in Colombia, furniture making and competitive sectors or that foster competition
commercial aircrafts in Brazil, avocados in (say, policies that are more dispersed across
Mexico, veterinary vaccines in Uruguay, firms in a sector or measures that encourage
etc.—where an ensemble of public-support younger and more productive enterprises in a
policies facilitated coordination, provided sector) increase productivity growth. Further
industry-specific public or club goods (say in advances in the industrial policy literature
the form of specialized services like techni- have to explore the particular institutional
cal assistance, help in meeting phyto-sanitary combinations of domestic political coali-
and other quality standards, etc.), and tions and market structure and the design of
enabled export production activities to gain particular policies that make the difference
from substantial agglomeration economies between success and failure, along with rig-
in clusters of a large number of specialized orous empirical and experimental studies to
firms. The studies also garner insights from discern the link between policy and outcome.
“counterfactuals” of failed efforts in broadly In the near future, the issue of state coordi-
similar cases. nation may also become important in induc-
Of course, empirically, even careful case ing investment in “green” technology that
studies of export pioneers from developing reduces negative externalities. It may be sim-
countries suffer from replicability issues, ilarly important, as some developing coun-
apart from a frequent selection bias (success- tries graduate to the middle-income stage, in
ful cases surviving to get discussed). There fostering frontier innovations50 beyond the
is a sizable empirical literature on “learning simple catch-up process (of learning and imi-
by exporting,” but much of it is marred by tating off-the-shelf technology), or in finding
the possibility that more productive firms some alternative51 to the current intellectual
may select into exporting and by mea- property rights regime, which sometimes
surement issues in the absence of detailed transfers too high a monopoly rent to the
firm-level performance data. A paper that is innovator at the expense of poor consumers
largely free of both problems is that of Atkin, and future innovators trying to build on the
Khandelwal, and Osman (2014), which, on current innovation.
the basis of a randomized control trial that Industrial policy is itself often suspected of
generates exogenous variation in the access generating rent-seeking opportunities. The
to foreign markets for rug-making
firms in emphasis on combining sectoral targeting
Egypt, finds substantial learning effects.
Harrison and Rodriguez-Clare (2010)
50 In this context Aghion and Roulet (2014) call for a
have recommended a whole range of “soft”
“strategic state” that “acts as a catalyst using selective and
industrial policies, not incompatible with properly governed support to the market-driven innova-
WTO regulations (like encouraging R & D, tion process”.
51 Alternatives like the state buying the patent and put-
extension services, vocational training, sup-
ting it in the public domain have been suggested. This is,
porting collective action for self-help
in of course, subject to the arbitrariness and moral hazard in
business clusters, improving regulations and the pricing of the patent by the state.
Bardhan: State and Development 883
with some form of market discipline is there- mentioned before, it is possible that a long
fore necessary to curb excessive rent creation. and continuous history of state institutions
But as Rodrik (2008b) has pointed out, some over many centuries that East Asian coun-
amount of rent generation may be indispens- tries in general had, in contrast with those in
able to preserve what he calls “second-best” Africa and Latin America, helped in building
institutions, when first-best institutional rules a bureaucratic culture, which along with a
or best practices are not feasible in the usual dense network of ties between public officials
political-economy context of developing
and private entrepreneurs, may have mod-
countries. If entrepreneurial activity is a bind- erated the excesses of rent seeking. Possibly
ing constraint, rents may provide dynamic more importantly, the state-directed pressure
incentives (as in some Schumpeterian growth of export success in an open economy in East
models), or when the main challenge is to Asia has disciplined these excesses, and the
stimulate investment in a weak capital mar- need for cost and quality consciousness in
ket, rents sustained by moderate amounts of global competition has kept collusion-prone
entry restrictions may provide the necessary firms and bureaucrats on their toes. In the
finance. Acemoglu and Robinson (2013) show absence of strict market discipline, there is
more generally how rents are often necessary plenty of evidence in developing countries of
for a balance of political power or preserva- dysfunctional industrial policies with politi-
tion of a political equilibrium, and how insis- cally connected firms in kleptocratic states
tence on first-best rules to eliminate rents may making money while the development pro-
have unintended or c ounterproductive politi- cess is atrophied.
cal consequences. In a somewhat different
context North, Wallis, and Weingast (2009)
7. Public Enterprises and State
consider the creation of rents as the key to
Effectiveness
controlling violence in what they call “limited
access social order” often prevalent in devel- As we have indicated in section 4, in
oping countries. Particularly in weak or fragile recent decades the Chinese case has been
states, where there is an “oligopoly” of vio- distinctive in decentralized development,
lence in contrast to the Weberian “monopoly with local governments playing an active
of violence” vested in the state, they consider role not just in delivering social services, but
rent sharing as important in preserving order. in vigorously pursuing local business devel-
But r ent sharing as a way of political coalition opment, some of the most successful com-
building can be and has been an important panies being run and funded by municipal
feature of the political equilibrium, even in governments. Even beyond the local level,
well-functioning states. The East Asian cases the Chinese state has been remarkable in
suggest that technological dynamism in large presiding over a reinvigorated model of what
conglomerates has coexisted with rent shar- used to be called state capitalism53 (where
ing, with political parties deeply implicated state-run or guided enterprises pursue
in rent seeking (of which the Japanese LDP profits or surplus). In recent years we have
is an old and durable example).52 As we have seen aspects of it in Brazil and Russia as
52 Even in e arly-modern West European history, (2005) for an example from the seventeenth-century
there are cases where patrimonial, rather than Weberian Netherlands.
impersonal rule-bound,
arrangements between ruling 53 This term originated in its negative use by anarchists
families, civil servants, and merchant capitalists have been and other socialists, but with more positive use by Vladimir
important in fostering the growth process. See Adams Lenin and his followers.
884 Journal of Economic Literature, Vol. LIV (September 2016)
well, but nowhere as prominently and in as when it comes to innovations and “creative
large a scale as in China. Large state-owned destruction.”55
enterprises (SOEs) dominate in transport, This raises a general question about the
energy, basic metals, finance, and telecom relation between large conglomerates (pri-
in China. Some of the Chinese SOEs are vate or public) and different types of innova-
now important players in the global market tions. The role of these large organizations in
competition. They are often highly commer- stimulating research and development and
cialized: in recruiting professional managers, the innovation process may vary depend-
broadening their investor base, and shedding ing on the type of innovation one has in
their earlier bloated labor force and tradi- mind, whether it is of the “disruptive” kind
tional social and political obligations, many that challenges incumbent firms (which the
Chinese SOEs do not conform to the usual US private innovators in collaboration with
stereotypes about SOEs. Their listing in for- venture capitalists are good at and a large
eign stock markets often subjects them to entrenched organization usually isn’t), or
international rules of corporate governance. the steady “incremental” kind that adds up
There are also some successful Chinese pri- to significant gains (the Japanese call it kai-
vate companies (Lenovo, Huawei, Haier, zen), in which some large organizations in
Geely, Alibaba, etc.), heralded as national Germany and East Asia have excelled. It is,
champions, but they often operate in the of course, hard to deny that in both kinds of
shadow of the state, with the state if not own- innovations in most countries, some form of
ing shares actively guiding and helping them. background (if not always p roactive) support
The state-owned or supported companies of the state has been significant. But there is
have the advantage of deep pockets to back always a danger that too-big-to-fail
organiza-
them or easier access to bank loans and land, tions (private or public) may ultimately turn
can usually take a longer-run perspective into rental havens.
compared to most purely private companies Without more empirical studies, not just
(that are anxiously watching short-run share anecdotes, this debate about innovations
prices and quarterly earnings reports), and under state capitalism is difficult to settle.
can ride out the business cycle a bit better. Ernst and Naughton (2012) cite examples
On the other hand, their profitability is often of new directions of Chinese innovations
based on monopolistic power54 and their from the integrated circuit-design indus-
survival dependent on political connections try. Away from the government-sponsored
and soft-budget favors (giving rise to the attempts at “indigenous innovations,” China
frequent charge of crony capitalism). Even seems to be more successful in innovating in
the better-performing SOEs may be thriv- areas that involve global technology sourc-
ing in the catch-up phase of development, ing and quickly responding to changes in the
but some—for example, Acemoglu and increasingly fine divisions of the global value
Robinson (2012)—doubt if they will perform
chain. At the same time, there is evidence ublic–private partnerships (PPPs) are
p
that large SOEs and politically connected increasingly in vogue. While these may use-
private firms in China may have spawned a fully harness the services of profit-seeking
serious misallocation of capital (and manage- private finance and expertise, in actual
rial talent) and build-up of excess capacity. cases quite often the downside risks are in
Such m isallocation may have more bite in the public sector, either through opportu-
the future, as Chinese saving and investment nistic renegotiation of terms or bad loans in
rates (as well as the unpopular land grab- public-sector banks that the taxpayers have
bing by the state) come down. Meanwhile, to recapitalize. Acemoglu and Robinson
entrenched vested interests of the political (2013) emphasize the political conse-
elite with stakes in incumbent firms may quences of privatization; well-intentioned,
make resistance to change stronger. efficiency-minded privatization programs
Finally, it should be stressed that in gen- sometimes upset old rental and political
eral, the performance of state enterprises arrangements and may be c ounterproductive.
in any country is often discussed in the An obvious example is in the case of the
literature in a kind of political and orga- political consequences of Russian privat-
nizational vacuum and in terms of a sin- ization in the 1990s: redistributing assets
gle and simple metric of n arrowly defined extremely unequally in favor of a plun-
efficiency. Questions like the relative effi- dering oligarchy, the backlash to which
ciency of delivery of public services by paved the way for Putin’s authoritarian
state or private organizations abound in crony-capitalist regime.
the public-economics literature. Standard There are also organizational counter-
comparisons of efficiency of firms are factuals to which the public sector reform
often vitiated by frequent cases of private debates often do not pay enough attention.
monopoly after privatization substituting In assessing the inefficiency of a public util-
for public monopoly, or by political agenda ity, for example, we have to keep in mind
and soft budget constraints for public the simultaneous and conflicting objectives
firms replaced by regulatory capture by it is required to serve (like cost recovery,
private firms. Still, much of the empirical cross-subsidization as in the case of commer-
literature56 shows superior efficiency cial freights vis-à-vis
passenger fares in rail-
of private firms, whereas the literature ways, providing cheap service to the weaker
on privatization of public utilities gives sections of the population and remote areas,
mixed results.57 In building infrastructure, etc.). In such a usual context of multiple
mandates, multidimensional goals, conflict-
56 There are quite a few survey articles. See, for exam-
ing political principals facing agents, mul-
ple, Parker and Kirkpatrick (2005). The JEL published an tiplicity of tasks, and imprecisely measured
overview on the effects of privatization in transition econo- and incompletely contractible outcomes that
mies by Estrin et al. (2009).
57 For example, in privatization of water supply, Galiani,
such an agency often faces, all of the ineffi-
Gertler, and Schargrodsky (2005) show in a p anel-data ciency of the state agency may not be “reme-
framework that in Argentine municipalities where water diable” in the sense of Williamson (1996) in
services were privatized, there is indirect evidence that a simple way by alternative organizational
access and water quality improved. Using an almost sim-
ilar method, Borraz, Gonzalez Pampillon, and Olarreaga devices like the market or the p rivate firm.
(2013) find direct evidence that nationalization of water As Dixit (2012) has argued, while state
companies in Uruguay, after a period of privatization, agencies obviously have some crass inef-
delivered progress in terms of both access and water
quality relative to companies that were consistently pub- ficiencies (particularly when budget con-
licly owned. straints are politically “soft”), remediable
886 Journal of Economic Literature, Vol. LIV (September 2016)
hence the design and implementation Poverty. New York: Random House, Crown Business.
of devolution projects, are widely Acemoglu, Daron, and James A. Robinson. 2013. “Eco-
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deeper and try to decipher from micro Adams, Julia. 2005. The Familial State: Ruling Families
empirical and experimental studies and Merchant Capitalism in Early Modern Europe.
Ithaca and London: Cornell University Press.
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ble. Also, there are very few empiri- sha Du, Ann Harrison, and Patrick Legros. 2015.
cal studies that bring out clearly the “Industrial Policy and Competition.” American Eco-
nomic Journal: Macroeconomics 7 (4): 1–32.
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tralization
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literature. Economy 105 (1): 1–29.
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A. Olken, Ririn Purnamasari, and Matthew W ai-Poi.
(7)
The puzzle of how the Chinese 2013. “Does Elite Capture Matter? Local Elites and
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Alesina, Alberto, Arnaud Devleeschauwer, William
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