state failure in developing countries and strategies of institutional reform by: mushtaq h. khan...

Presented By: Mohamed A. Salem 1

State Failure in

Developing Countries and

Strategies of Institutional

ReformBy: Mushtaq H. KhanDepartment of Economics, SOAS, University of London

6/16/2010


What is the role of the government?Service provider: To provide law and order, stable property

rights, key public goods and welfares re-distributions.

ORSocial transformer: From traditional production systems to a

capitalist economy.

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Service-Delivery viewThe three theoretical component of liberal

market economy:1. Efficient markets are rent-free and have

stable property rights.2. Rent-Seeking creates rent and destabilizes

property rights.3. The absence of democracy and a weak

bureaucracy allows rent-seeking to continue.

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Failure

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How can we deal with this failure?Institutional (governance) reforms:Economic reforms.

Rent-free marketsPolitical reforms.

Democracy-Decentralization-Civil societyInstitutional reforms.

Right size – Judiciary independence – Raise salaries

+ Fighting corruption

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Presented By: Mohamed A. Salem 66/16/2010


The social transformation state view

Social and Economic Change.

The economic power and violence potential of the

state is inevitably deployed for better or for worse.

The state is an instrument in the hands of

contending classes, groups and political

entrepreneurs each attempting to capture resources

and steer the transformation in specific directions

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Economic facts in capitalist countriesMuch of the resources for running the political

system comes from the capitalist sector.

The dominance of the capitalist sector means

that the immediate welfare of most people,

even if they are not capitalists, depends on the

health of the capitalist sector.

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Failure

The absence of a dominating feedback loop

from the performance of the capitalist

sector to the political process allows a much

greater range of variation in policies and

institutions, and makes it possible for there

to be sustained state failure in ensuring a

dynamic transformation.6/16/2010


State intervention – Social Transformation

A tax system that is efficient in raising resources for delivery of democratically agreed upon public goods

Well-defined rights would help efficient re-allocations only if transaction costs were low.

The outcomes of transfer and destruction of property rights depend not on the stability of prior property rights structures but on who is capturing resources and the institutional structure imposing discipline.

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The stability which distinguishes

high- growth states is not a stability

of property rights but rather a more

subtle stability of commitment to

growth, which means that dynamic

entrepreneurs could have stable

expectations that if they remained

dynamic, they were unlikely to be

touched.6/16/2010


South KoreaMaintaining sufficient discipline to ensure that

the transfer of wealth process was not entirely captured by inefficient groups.

The conditional subsidy scheme for learning technologies could have had high social costs if as a result many plants had to be scrapped. But in practice, not only subsidies, but plants too were re-allocated across industrial groups when failure appeared likely. The state was involved in frequent corporate restructurings that re-allocated plants, using its financial muscle in the banking sector to get its way

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ChinaProperty rights are not well-defined in

China but its growth is much better than

all countries.

China was able to re-allocate rights over

land and to control internal population

movements that allowed it to set up such

massive export zones (Changing

objective) in the first place.6/16/2010


Dynamic State !?Managing growth-enhancing rents.

Institutions for managing information rents.Schumpeterian rents are essential for

innovation.Creating learning rents to enhance the usage

of advanced technologies.

Destroy growth-reducing rents.competition policy. regulation.6/16/2010


Organizing ring-fenced transfers to maintain

political stability.

In reality, transfers often cause serious

economic damage if the only way in

which fragmented groups can capture

resources is by creating or capturing a

large number of uncoordinated value-

reducing rents, like inferior public good

provision or by capturing subsidies for

industrial learners.6/16/2010


What is required? Set of institutions with the regulatory

capacity to make distinctions between

different kinds of rents and with the

political capacity to manage these

rents to generate growth and rapid

transformation.

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Transformation States

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Other dimensions of state failure during the transformation.

The Effectiveness of Institutional Enforcement.

Fail to effectively enforce industrial policy regimes.

Fail to enforce any growth-generating institution, including property rights for potentially productive users.

Effective enforcement requires both institutional capacity and a compatibility of institutions with the interests of powerful social groups.

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institutional capacityinstitutional capacity means the

ability of the state to do (positive) things. It requires:

1. Staffed court system.2. Effective political capacity to:

Neutralize unproductive groups. Creation of political organization

of productive groups. 6/16/2010


Compatibility of institutions The need to construct a compatible package

of institutional reform and political restructuring of organized power which may allow better enforcement of a dynamic transformation strategy in the future.

The lesson is that in poorly performing countries, much more deliberate steps have to be taken to construct compatible packages of institutions and political settlements to achieve even second-best transformation success.

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The Costs of Enforcement The enforcement cost is the aggregate rent-seeking

cost of running particular institutions including: The costs of lobbying, The resources spent in economic and political

corruption, The costs of all types of “political” activity from

maintaining patron-client networks to contributions to political parties,

The policing costs of the state, All expenditures and activities that aim to protect

or change institutions.

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The Location of State Failure

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Critical success factors for growth-enhancing institutional transition

1. Political will and democracy,

2. Wisdom of leaders,

3. The institutions through which

the change is organized, and

4. Distribution of power between

groups.6/16/2010


Reforming the State: The Challenge for PolicyThe transformation state perspective identifies

critical state capacities for managing and

regulating rents and for organizing changes in

property rights systems.

The experience of the high-growth economies

suggests that if growth and sustained poverty

reduction are the objectives, these capacities have

to become the focus of institutional and political

reform6/16/2010


Thank You

6/16/2010

state failure in developing countries and strategies of institutional reform by: mushtaq h. khan...

Documents

stability of property

stable property rights

capitalist sector

destruction of property

capitalist economy

economic reforms

capitalist countriesmuch

dynamic transformation