SISAF 444 Africa Studies Seminar

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SISAF 444 Africa Studies Seminar
Winter 2007

• Political Economy 101
• A Toolkit of Concepts
• from Political Economy

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Palazzo Publico, Siena, Italy
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Ambrogio Lorenzetti,Allegory of Good Government
(Palazzo Publico, Siena, 1340)
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Ambrogio Lorenzetti,Allegory of Good Government
(Palazzo Publico, Siena, 1340)
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Ambrogio Lorenzetti,Allegory of Bad Government
(Palazzo Publico, Siena, 1340)
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Ambrogio Lorenzetti,Allegory of Bad Government
(Palazzo Publico, Siena, 1340)
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What is Political Economy?

• The study of how the
• allocation and use of power
• affects the
• allocation and use of resources

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What is Political Economy?

• The study of how the
• allocation and use of power
• affects the
• allocation and use of resources

politics
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What is Political Economy?

• The study of how the
• allocation and use of power
• affects the
• allocation and use of resources

politics
economics
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Adam Smith (Glasgow, Scotland 1723-1790)
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Adam Smith The Division of Labor

• The division of labor arises from a propensity
  in human nature to exchange
• Division of labor is limited by the extent
  of the market
• Division of labor being established, every man
  lives by exchanging (The Wealth
  of Nations, 1776)
• It is the division of labor which increases the
  opulence of a country (Lectures on
  Jurisprudence, 1762-63)

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Key concepts in political economy

• Exchange/Change in ownership (or trade)
• Division of labor (or specialization)
• Transaction costs (or costs of trading)
• Property rights
• Investment (or saving, or current sacrifice)
• Violence/Threats of violence (or power)

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Conditions of Exchange

• How costly or expensive is exchange?
• It depends on
• Geography (mountains, rivers, coastlines,
  deserts)
• Institutions (for example, the state and
  the legal system)

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Conditions of Exchange

• How costly or expensive is exchange?
• It depends on
• Geography (mountains, rivers, coastlines,
  deserts)
• Institutions (for example, the state and
  the legal system)

This is the question we study in economics and in
political economy How human institutions can
help or hinder exchange
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Transaction costs (costs of exchange)

• How costly or expensive is exchange?
• Economists
• think about this question
• in terms of
• transaction costs

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Transaction costs (costs of exchange)

• Exchange involves a change in ownership
• Changes in ownership are costly
• what has been exchanged, and when?
• is it of the right quantity and quality?
• will the other party comply?
• if not, can the contract be enforced?
• what will enforcement cost?
• The costs involved when ownership changes are
  called transaction costs
• Transactions costs exchange

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Transaction costs (costs of exchange)

• Changes of ownership (transfers of property
  rights) take place in markets
• Well-functioning markets enable exchange
• Well-functioning markets lower transaction costs

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Property rights and exchange

• Property rights are the rules that determine how
  goods or assets can be used, or exchanged.and by
  whom
• It is easier and cheaper to exchange something if
  it is clear who owns it (i.e. transaction
  costs are lower)

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Property rights and investment

• When property rights are more clearly defined,
  and more reliably enforced, people are more
  likely to make investments that increase the
  value of their property
• (because they can reap the rewards from that
  investment)

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Putting these concepts together

• Property rights can be enforced through informal
  arrangements (e.g. family, kinship group) which
  lowers transaction costs within that group,
  enabling exchange and investment
• but exchange with outsiders or strangers will
  face high transaction costs because it is
  difficult to enforce property rights when dealing
  with strangers
• which means the market will be small!

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Putting these concepts together

• A common system of property rights protection and
  property rights enforcement between strangers
  requires the threat of force or violence
• and the emergence of specialists in violence
  (the state)
• whose protection allows specialists in wealth
  creation to carry out exchange and investment

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Putting these concepts together
The state helps define and enforce property
rights between strangers using the threat of
violence

• A common system of property rights protection and
  property rights enforcement between strangers
  requires the threat of force or violence
• and the emergence of specialists in violence
  (the state)
• whose protection allows specialists in wealth
  creation to carry out exchange and investment

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Putting these concepts together

• A common system of property rights protection and
  property rights enforcement between strangers
  requires the threat of force or violence
• and the emergence of specialists in violence
  (the state)
• whose protection allows specialists in wealth
  creation to carry out exchange and investment

The state has the monopoly of legitimate violence

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Weingasts Dilemma

• The fundamental political dilemma of an economic
  system
• A government strong enough to protect property
  rights is also strong
• enough to confiscate the wealth of its
  citizens.
• Barry Weingast "The Economic Role of Political
  Institutions."
• The Journal of Law, Economics, and Organization
  (1995)

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Weingasts Dilemma
The state helps define and enforce property
rights between strangers using the threat of
violence

• The fundamental political dilemma of an economic
  system
• A government strong enough to protect property
  rights is also strong
• enough to confiscate the wealth of its
  citizens.
• Barry Weingast "The Economic Role of Political
  Institutions."
• The Journal of Law, Economics, and Organization
  (1995)

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Weingasts Dilemma
which can help lower transactions costs between
strangers and promote markets and exchange

• The fundamental political dilemma of an economic
  system
• A government strong enough to protect property
  rights is also strong
• enough to confiscate the wealth of its
  citizens.
• Barry Weingast "The Economic Role of Political
  Institutions."
• The Journal of Law, Economics, and Organization
  (1995)

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Violence

• The state can use violence in two ways
• domesticated to support the creation of
  prosperity for all
• (universal PR enforcement as a public good,
• impersonal rule)
• undomesticated to enrich itself and its key
  supporters
• (selective PR enforcement as a private good,
• personal rule)

PR property rights
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Violence
Governments often enrich themselves and their key
supporters by creating rents through policies
that restrict the functioning of markets

• The state can use violence in two ways
• domesticated to support the creation of
  prosperity for all
• (universal PR enforcement as a public good,
• impersonal rule)
• undomesticated to enrich itself and its key
  supporters
• (selective PR enforcement as a private good,
• personal rule)

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Robert Bates

• Prosperity and Violence
• The Political Economy of Development

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Bates Prosperity and Violence

• The importance of comparative development in
  historical perspective
• Growth of per capita incomes and the
  transformation of social and political systems
• Economic transformation
• 
  Political transformation

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Bates Prosperity and Violence

• Development
  Growth of per capita incomes
  Transformation of political and economic systems
• Economic development
• Political development

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Bates Prosperity and Violence

• Economic development
• Capital formation (investment)
• Formation of organizations (firms)
• Political development
• Domestication of violence
• Use of coercion to enforce laws impersonally

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Bates Prosperity and Violence
Providing public goods that lower transaction
costs for everybody and promote exchange
(e.g. law, order, infrastructure)

• Economic development
• Capital formation (investment)
• Formation of organizations (firms)
• Political development
• Domestication of violence
• Use of coercion to enforce laws impersonally

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Bates Prosperity and Violence

• Political foundations of economic development
• The decision to form capital
• and
• the formation of institutions
• that render it rational to form capital

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Bates Prosperity and Violence

• Political foundations of economic development
• The decision to form capital
• and
• the formation of institutions
• that render it rational to form capital

For investment decisions to be rational, the
states commitment to use violence in a
domesticated way must be credible
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Bates Prosperity and Violence

• Bates historical story
• Agrarian society
• informal enforcement (kinship),
• private violence, poverty
• Commercial/industrial society
• formal enforcement (state),
• public violence, prosperity

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Bates Prosperity and Violence

• Bates historical story
• Europe
• Growth of markets and towns
• Growth of violence and warfare
• Bargaining between rulers and traders
• Emerging states
• Warfare and the revenue imperative
• The promotion of commerce and industry

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Bates Prosperity and Violence

• Bates historical story
• Europe
• Growth of markets and towns
• Growth of violence and warfare
• Bargaining between rulers and traders
• Emerging states
• Warfare and the revenue imperative
• The promotion of commerce and industry

The need for rulers to raise revenue through
taxes or tariffs in order to be able to fight
wars
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The European Story

• The core of what we now call citizenship
  consists of multiple bargains hammered out by
  rulers and ruled in the course of their struggles
  over the means of state action, especially the
  making of war

Charles Tilly, Capital, Coercion, and European
States (1992)
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Bates Prosperity and Violence

• Bates looks at the emergence of sovereign states
  in developing countries
• and compares it to the way states emerged in
  European history

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Bates Prosperity and Violence

• Postwar period
• international system shapes the way developing
  countries are ruled
• Foreign sources of finance (aid)
• Countries did not have to develop their own
  domestic economies
• Limited bargaining power for citizens
• Bad governments, predatory states
• Patronage and privilege

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Bates Prosperity and Violence

• Highly politicized economies
• Widespread corruption
• Large informal sectors
• Lack of impersonal rule
• Governments provide private goods for supporters,
  not public goods for everyone
• Undomesticated state!

• Postwar period
• international system shapes the way developing
  countries are ruled
• Foreign sources of finance (aid)
• Countries did not have to develop their domestic
  economies
• Limited bargaining power for citizens
• Bad governments, predatory states
• Patronage and privilege

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Bates Prosperity and Violence

• Postwar period
• international system shapes the way developing
  countries are ruled
• Foreign sources of finance (aid)
• Countries did not have to develop their own
  domestic economies
• Limited bargaining power for citizens
• Bad governments, predatory states
• Patronage and privilege