Unit 4: Pillars of Prosperity: The political economics of development clusters

The limitations (or barriers) to economic development outlined in many A-level Economics text books will include factors such as primary product dependency, corruption, civil war, debt and human capital inadequacies. However, none will point towards the state’s ability to enforce contracts and protect property rights in conjunction with the state’s ability to raise tax revenue; but this is exactly what Timothy Besley and Torsten Persson have looked to prove in their new book, “Pillars of Prosperity: The political economics of development clusters.”

At a captivating talk at the LSE on Monday 7th November, Besley and Persson outlined the key concepts of their new book, which was followed by a critique by LSE economists, Robert Wade and Francesco Caselli.

Persson started off by illustrating the POSITIVE relationship between a country’s ‘fiscal capacity’ (i.e. tax revenue as a percentage share of GDP) and their ‘legal capacity’ (i.e. protection of property rights). Low income countries were clustered together at the bottom of the trend line (low state and low fiscal capacity) and high income countries at the top.

As well as income, a country’s experience of civil war was also found to be linked to fiscal and state capacity, with those having experienced more civil war clusters at the bottom of the trend line and those countries who haven’t experienced civil war clustered at the top.

Building Effective State & Fiscal Capacity

Persson then went on to address what forces are needed to build effective state (judges, courts, registries for registering property) and fiscal capacity (tax collection, audit and enforcement). Both sides complement each other. In a country invests in one side it will benefit the other.

He highlighted the three major factors which influence whether a country can build an effective state is the cohesiveness between the political institutions, the level of ‘common interest’ within the country in terms of whether they need to fight conflicts on their borders, and the resource/aid independence.

If there is more cohesiveness within political institutions there will be less political violence and civil wars within the country, enabling the state to build up state and fiscal capacity and thus increase income per capita.

Based on the theory outlined above, the reasons why there is a cluster of low developed countries in Sub-Saharan Africa are:

• Overdependence on aid
• The small threat of external conflict leading to the potential for more civil wars
• Non-cohesive political institutions

A lack of state capacity (contract enforcement) and fiscal capacity (an ability to collect taxes) means the countries can’t support markets, so income per capita is low, unemployment is high, leading to violence.

Application

All of this is nothing new….

“Little else is required to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice; all the rest being brought about by the natural course of things” Adam Smith 1755

….with the exception that most government’s raise 40% of GDP through taxes.

You could apply these concepts to Greece….

According to World Bank ranking, Greece finds itself 101 out of 173 for efficiency of tax collection and 151 out of 173 for legal capacity (or lack of!)

Food for thought…..

To accompany the book there is a fantastic user friendly website (www.pillarsofprosperity.org), which even has slides and notes if you want to teach any concepts found in the book.

Definitely worth a look…