NS4301 Summer Term 2015

Political Economy of Growth

Overview I

Political Economy Factors in Growth

•Recent literature on growth has increasingly highlighted:

• Its elusive nature

• The strong role of political economy factors

•Variances in the growth record of countries in Africa, significantly influenced by the alignment or lack of between

• Needed reforms and

• The success of leadership in creatively overcoming institutional constraints

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Overview II

• Future growth in African countries will depend on how well leaders are able to align institutional innovation with reforms

• An emerging pattern success sees countries falling into two main groups

• Growing economies drawing on liberal capitalist approaches, and

• Growth economics relying on partially liberal capitalist approach's

• A third group – conflict-prone and broadly stagnation economies where

• Leaders are unable to align institutions with reforms.

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Political Economy I

• Political economy approach emphasizes the role of leadership that

• Continually aligns policies and institutions to changing circumstances and opportunities, while

• Being credible and enjoying broad support

• Emphasis on leadership in growth successes also reinforces the argument that growth is difficult because reforms are stymied by existing institutions

• Institutions demonstrate high inertia because they reflect the existing balance of power

• While intuitions do change, difficult to predict when and how they do and reversals are not uncommon

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Political Economy II

Various themes

•Africa’s poor growth record before 2000 largely due to the anti-growth policy syndromes that were spawned by political factors

• Attempt to secure political power and to retain it led many African governments to opt for narrower anti-growth policies

•Poor institutions meant that patronage politics or neo-patrimonialism was the dominant political framework for decision making even in democracies

•Neo patrimonialism continues to get in way of reforms in key areas such as

• Public-sector reforms

• Budgeting for results

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Political Economy III

• Cross country evidence on political forms (democratic and non-democratic) shows democracies sustaining better rates of growth – not a high correlation however

• Within this broad characterization many underlying perspectives

• Collier has argued that superficial democratic institutions under certain conditions permit elites to loot a country’s resources and diminish its growth possibilities

• Many observers attribute the tragedy of African non-growth to poor governance

• Anti aid stances of Easterly and others aimed at deflecting locus of economic decision making towards non-governmental actors and the private sector away from governments

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Political Economy IV

• Where there has been growth in Africa what does the evidence support? -- often anecdotal

• Botswana the one African countries among the 13 in the Spence study

• Many interpret Botswana’s success due to the alignment of inherited institutions and elite interests

• Thus making possible the use of Botswana’s diamond resources for growth-oriented national development rather than for private uses – the case in many other mineral rich countries

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Political Economy V

• Other anecdotal evidence

• Post conflict countries such as Mozambique and Rwanda have exhibited strong growth for at least 15 years

• Political economy factors were clearly at play here as was the ability to adopt pro-growth policies because the earlier conflict had significantly flattened the landscape of potential gainers and losers from the new reforms and policies.

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Political Economy VI

Lessons from East Asian economies

•Success of these countries has produced competing hypothesis

• Some claim success demonstrates power of following a market-driven export strategy

• Others have stressed that state-led reforms played a critical role and tis was facilitated by, at least for a short period non-democratic forms of governing

• Still others have placed the emphasis on leadership and its ability to develop a vision and rally society around that vision, trading off short-term sacrifices in favor of longer term growth

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Political Economy VII

• One variant argues leaders in East Asian countries worked hard to encourage new alliances with and between entrepreneurs

• Assured their citizens that they would share in the gains from growth by investing in their education, in land reform, rural infrastructure, and public housing

• This activist stance with respect to crafting new growth-oriented micro level institutions and credible mechanisms for promising inclosing and a leadership role is strikingly absent in many African countries

• Instead emphasis has been on

• various macro-institutional initiatives, and

• patronage instruments aimed largely at reinforcing the status quo

• Weak inherited institutions have often meant that leaders end up being more reactive than activist 10

Political Economy VIII

Future of growth in Africa•For all countries, deepening growth –related reforms will be essential•Patronage politics, weak institutions and leadership's responses to these will be an important determinant of progress on growth•East Asian leaders made good use of crisis in fostering reform•In addition to crisis, other triggers can be used to usher in a new wave of reforms

• New resources and

• Regionally binding agreements

•However the degree of freedom available for leaders is limited by their inheritance of weak institutions

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Political Economy IX

• Today African countries fall into two prototypes

• Liberal capitalism, and

• Partially liberal capitalism

• Reminiscent of the contrast between the two fast growers in Asia today, India and China

• Liberal capitalist group includes countries such as

• Ghana

• Senegal,

• Kenya, and

• Zambia

• In these countries, liberal democratic processes and institutions are embedded in an economy largely oriented towards the private sector

• With an overlay of strong patronage politics

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Political Economy X

• In the partially liberal capitalist group have countries such as

• Burkina Faso

• Ethiopia

• Tanzania

• Uganda

• Rwanda, and

• Mozambique

• These countries have partial adherence to liberal democratic processes and institutions with some strong departures from the latter

• Absence of term limits or

• Single party states

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Political Economy XI

• These countries have a much weaker overlay of patronage politics

• In effect some institutional constraints are imposed on the liberal democratic approach in order to offset some of the pressures that would otherwise lead to strong patronage politics

• Superfical comparison of recent growth rates in these two groups of countries – as in comparing India and China – suggests

• Both groups grow but the partially liberal group has higher growth rates -- not just spurts of growth but sustained high rates of growth

• Still needs to be rigorously tested

• True test not spurts of growth, but sustained levels of growth

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Political Economy XII

• Important to determine views of African citizens on their political preferences

• Afrobarometer surveys have found

• First, most Africans (over two thirds) have a strong preference for democracy

• Second an even larger share 4/5 are against authoritarian forms of government

• Suggests that partially liberal capitalist approaches are decidedly opposed by most Africans

• Third, the preferences for democracy declines at the margin when economic performance deteriorates and revives as economic performance improves

• Thus strong political preference for democracy, at least at the margin appears to exhibit some trade-off with economic performance

• Suggests two forms of capitalism will persist

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