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June 20, 2010 | Discoveries

markets and states

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Rod Alence
Thu Jun 30, 2005 11:23
I was interested to read Atsu's article and Amos's reply. I've been doing a lot of reading relevant to the "state-market" debate lately, and one idea that jumped to mind was Thrainn Eggertsson's 'macro version of Coase's theorem' in institutional economics, which goes as follows:

'The economic growth and development of a country are basically unaffected by the type of government it has, if the cost of transacting in both the political and economic spheres is zero. However, when transaction costs are positive, the distribution of political power within a country and the institutional structure of its rule-making institutions are critical factors in economic development' (Economic Behaviour and Institutions (Cambridge: Cambridge UP, 1990), p. 248.)

While it may initially seem strange to non-economists to approach, e.g., class conflict or the predatory/neopatrimonial state from a 'transaction cost' perspective, Eggertsson's extension of the Coase theorem could help inspire new insights about African development. The same can be said about Douglass North's book, Structure and Change in Economic History (New York: WW Norton, 1981), which examines the state's role in economic development, and is written to be accessible to non-economists (and happened to help North win a Nobel prize). It seems to me that the 'macro version of Coase's theorem' opens the door to incorporating traditional considerations of political economists and political sociologists into the 'economic' study of development.

In my recent article, mentioned by Amos, I analyzed the empirical relationship between democratic institutions and 'developmental governance' (economic policy coherence, public service effectiveness, and limited corruption) during the post-Cold-War wave of democratization in Sub-Saharan Africa. In other words, I looked for evidence about whether the introduction of democratic institutions has had any positive effects on African states' performance as agents of economic development. To make a long story very short, the answer is 'yes', and for more details you can look up the full article ('Political institutions and “developmental governance” in Sub-Saharan Africa,' Journal of Modern African Studies 42, 2 (June 2004): 163-87.)

My interpretation of the findings was consistent with Atsu's argument that any optimal economic strategy will mix elements of market and state. But I would put even more emphasis on Atsu's observation that it is not just the quantity of state involvement that matters for economic development, but also (more so?) the quality. (He points out that a 'redistributive' state may redistribute in the 'wrong' direction, from poor to rich. This means that any attempt to generalize about the proper balance between market and state will fail unless it is grounded in an understanding of what governments are trying to do when they use state power to intervene in markets.) In my article, I posed the question as one of what kinds of institutional arrangements best align governments' immediate political incentives with the longer-term social and economic welfare of their populations. What I did was to push the question back from 'what is the best mix of market and state' to 'what institutional arrangements create an environment in which governments are likely to choose the best mix of market and state'.

Finally, I'd like to recommend a recent Wits University PhD thesis that examines how and why the New Partnership for Africa's Development (Nepad) places governance reform at the heart of its strategy for economic development. The author is Francis Nguendi Ikome, and the title is 'From the Lagos Plan of Action to the New Partnership for Africa's Development: The Political Economy of African Regional Initiatives'. Francis argues that the drafters of the Lagos Plan of Action started from the premise that African governments were social welfare maximizers, then sought to give them a program of action; in contrast, Nepad starts from the premise that African governments are not social welfare maximizers, and identifies this 'governance failure' as a central obstacle to the continent's economic development. Nepad's African Peer Review Mechanism is an attempt to use multilateral African institutions to promote development by promoting governance reform. Whether or not it will work is an open question, but at least it is an interesting experiment.

(Francis's thesis should be available soon on Wits University's new “electronic thesis and dissertation database” (ETD) which is accessible through the library homepage,

http://www.wits.ac.za/library/index.htm
but it doesn't seem like the thesis is there yet.

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