Reviewing the Theories on the Politics of Growth

In this section, we will review the major theoretical and empirical literature on the politics of economic growth, and assess the strengths and weaknesses. We will deliberately be selective in our review, concentrating on recent contributions which help us to understand the political determinants of economic growth across different phases of growth. The three major theoretical bodies of literature that we will discuss are the work of: i) Daron Acemoglu and James Robinson (Acemoglu and Robinson); ii) Mushtaq Khan (and the work of the Africa Power and Politics programme, which draws some of its central propositions from Khan's work); and iii) the set of literature on coalitions and development leadership (including the work of the Centre for the Future State). We begin with a review of the work of Acemoglu and Robinson.

The Politics of Growth Maintenance: Acemoglu and Robinson

As with much of the recent literature on the politics of economic growth, Acemoglu and Robinson (AR)'s starting point is the work of Douglas North, who brought into the literature on the determinants of economic growth the key insight that institutions are the fundamental cause of economic growth (Acemoglu et al. 2005; Acemoglu and Robinson 2008, 2012). The set of institutions that matter for broad-based economic growth, according to AR, are inclusive economic institutions and inclusive political institutions. Inclusive economic institutions are secure property rights for the majority of the population (such as smallholder farmers and small firms), law and order, markets that are open to relative free entry of new businesses, state support for markets (in the form of public goods provision, regulation, and enforcement of contracts), and access to education and opportunity for the great majority of citizens. Inclusive political institutions are political institutions that allow broad participation of the citizens of the country and uphold the rule of law, and place constraints and checks on politicians along with the rule of law. AR argue that together with political pluralism, some degree of political centralization is also necessary for the states to be able to effectively enforce law and order. In contrast to the growth-enhancing effects of inclusive economic and political institutions, AR argue that extractive economic institutions such as insecure property rights and regulations that limit entry to markets and extractive political institutions that concentrate power in the hands of a few, with limited checks and balances, are not likely to lead to broad-based and sustained economic growth (i.e. growth can occur for some time under these institutions but is not likely to last and will benefit a narrow set of elites rather than the majority of the population).

But what determines the set of economic and political institutions prevailing in the country at a particular point of time? Economic institutions are not distribution neutral: they not only determine the aggregate growth potential of the economy but also the distribution of resources in the country. This implies that economic institutions are politically determined, as the prevalent power relations will determine which set of economic institutions are more likely to emerge. A similar argument can be made for political institutions, and AR argue that these are determined by the political power of different groups in society. Political power can be both de jure and de facto. De jure political power refers to power that originates from the political institutions in society. De jure political institutions determine the constraints on and the incentives of key actors in the political sphere and could be both formal (i.e. whether the political system is democratic or autocratic) or informal (i.e. the set of informal constraints on politicians and political elites). De facto political institutions, on the other hand, originate from the possibility that important social and political groups which hold political power may not find the distributions of benefits allocated by de jure political institutions and by economic institutions acceptable to them, and may use both legal and extra-legal means to impose their wishes on society and try to change these institutions (e.g. they may revolt, use arms, co-opt the military, or undertake protests).

AR argue that the degree of de facto political power originates from the ability of some groups to solve their collective-action problem and from the economic resources available to the group (which determines their capacity to use force against other groups). In the ultimate analysis, therefore, the initial distribution of economic resources and the nature of de jure political institutions determine both de jure and de facto political power and these in turn determine the set of economic institutions and political institutions that are likely to emerge in the economy, which in turn determine economic performance and the distribution of resources that are compatible with the distribution of political power. This can be seen in the schematic representation in Figure 2.2.

While AR do not directly invoke the concept of political settlement in their discussion of how political factors determine the form and functioning of economic institutions, and by doing so affect economic growth, they introduce the concept of political equilibrium which is similar to the manner in which the concept of political settlements has been used in the literature, particularly, as we will see later, by Mushtaq Khan. According to AR, the political equilibrium is the set of political and economic institutions compatible with the balance of de facto political power between groups. The key point here is that it is the political equilibrium that determines the institutional arrangements in society and the manner in which economic

The evolution of political and economic institutions in Acemoglu and Robinson Source

Figure 2.2. The evolution of political and economic institutions in Acemoglu and Robinson Source: Acemoglu and Robinson (2008).

institutions function. Therefore, as AR argue, 'making or imposing specific institutional reforms may have little impact on the general structure of economic institutions or performance if they leave untouched the underlying political equilibrium'. An example of this was in Argentina during the imposition of Washington Consensus-type economic reforms in the late 1980s when Menem and the Peronist party after 1989 recognized that the policies of the Washington Consensus could be bent to function as 'politics as usual', and there was little change in the underlying political equilibrium even though the instruments that the Peronists used after 1989 were different (Acemoglu and Robinson 2008). AR point out that the reason the reforms failed was not due to the nature of the reforms but that the political equilibrium would have to change if the reforms were to succeed.

An important implication of AR's theory is that bad political equilibrium that leads to poor economic performance may persist over time, and economic growth may stagnate in a country for many years as a consequence. Since the distribution of political power determines the evolution of economic and political institutions, political elites who hold power will always have an incentive to maintain the political institutions that give them political power, and the economic institutions that distribute resources to them. Furthermore, the initial distribution of resources enables elites who have access to these resources to increase their de facto political power, allowing them to push for economic and political institutions favourable to their interests, reproducing the initial disparity in political power (Acemoglu et al. 2005). Therefore, there will be a persistence of extractive economic and political institutions in societies with such institutions, since the elites who benefit from these institutions would have no incentive to change them. Conversely, inclusive and political institutions will be more likely to prevail, once they emerge, as the emergence of such institutions (e.g. democratization and secure property rights for the majority of the population) will be likely to result in strong economic performance, reinforcing the welfare-enhancing effects of these institutions and allowing states to become more credible via greater legitimacy to the commitment of these institutions.

But what explains the switching from one growth regime to another; say, from stagnant growth to miracle growth? AR argue that while bad political equilibrium tends to persist, change is possible. With time, institutional drift may occur, leading to a critical juncture where there may be institutional divergence. This is shown in Figure 2.3.

Many factors can contribute to this divergence. For example, new economic elites may emerge who challenge the existing balance of power and demand change in economic institutions from extractive to more inclusive institutions. There is also the possibility of revolt from citizens excluded

Institutional change in Acemoglu and Robinson Source

Figure 2.3. Institutional change in Acemoglu and Robinson Source: .

from current political institutions, and the elite may respond with greater political pluralism. AR view these critical junctures as 'stochastic' and therefore, to a large extent, exogenous, and they state that it is not clear 'under what circumstance political equilibria that lead to economic growth will arise' (Acemoglu and Robinson 2008, p. 10). Therefore, it is not clear how a country will move from a bad political equilibrium associated with growth stagnation/crisis to a good political equilibrium associated with stable or miracle growth, where the political drivers of this move are endogenously determined, and not due to external events or to exogenous factors.

The political channels that are evident in AR's theory of growth are formal institutions of credible commitment (as in the rule of law that leads to the security of property rights) and public goods provision. There is less recognition in their theory of the important role the state can play in overcoming coordination failures, and that the emergence of formal institutions of credible commitment and the provision of high quality public goods may not be enough to bring about the structural transformation that has been evident in the successful cases of economic growth in East Asia. Notwithstanding this omission, AR's theory is more a theory of growth sustenance (and by association, also a theory of long-term growth stagnation) than a theory of growth acceleration or of growth collapse. Once growth has ignited in a country, the emergence of inclusive economic and political institutions may lock in the growth process, and also by implication, broaden the process of growth to make economic growth inclusive. Also, while AR do not directly state that the inclusive economic and political institutions they take to be correlated with sustained economic growth are formal institutions, the specific examples they provide of inclusive economic institutions, such as contract enforcement and state regulation of markets, and inclusive political institutions, such as the rule of law for all citizens, suggest that these are more likely to be formal institutions. This also suggests that AR's theory of growth may be more relevant in the understanding of growth maintenance rather than growth acceleration, as the formal institutions that AR take to be crucial to economic growth need a sufficient level of state capacity for enforcement and for their effective functioning, and these enforcement capabilities (and the commitment of the ruling elite to enforce these institutions) are unlikely to be observed in the very early stages of economic growth when growth has begun to accelerate. To understand the political drivers of growth acceleration, we need a theory that can help us understand how economic growth occurs even without the presence of well-functioning formal institutions. We now discuss the work of Mushtaq Khan which, as we will argue, provides such a theory.

 
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