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Presented By: Mohamed A. Salem 1
State Failure in
Developing Countries and
Strategies of Institutional
ReformBy: Mushtaq H. KhanDepartment of Economics, SOAS, University of London
6/16/2010
Presented By: Mohamed A. Salem 2
What is the role of the government?Service provider: To provide law and order, stable property
rights, key public goods and welfares re-distributions.
ORSocial transformer: From traditional production systems to a
capitalist economy.
6/16/2010
Presented By: Mohamed A. Salem 3
Service-Delivery viewThe three theoretical component of liberal
market economy:1. Efficient markets are rent-free and have
stable property rights.2. Rent-Seeking creates rent and destabilizes
property rights.3. The absence of democracy and a weak
bureaucracy allows rent-seeking to continue.
6/16/2010
Presented By: Mohamed A. Salem 4
Failure
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Presented By: Mohamed A. Salem 5
How can we deal with this failure?Institutional (governance) reforms:Economic reforms.
Rent-free marketsPolitical reforms.
Democracy-Decentralization-Civil societyInstitutional reforms.
Right size – Judiciary independence – Raise salaries
+ Fighting corruption
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Presented By: Mohamed A. Salem 66/16/2010
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Presented By: Mohamed A. Salem 8
The social transformation state view
Social and Economic Change.
The economic power and violence potential of the
state is inevitably deployed for better or for worse.
The state is an instrument in the hands of
contending classes, groups and political
entrepreneurs each attempting to capture resources
and steer the transformation in specific directions
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Presented By: Mohamed A. Salem 9
Economic facts in capitalist countriesMuch of the resources for running the political
system comes from the capitalist sector.
The dominance of the capitalist sector means
that the immediate welfare of most people,
even if they are not capitalists, depends on the
health of the capitalist sector.
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Presented By: Mohamed A. Salem 10
Failure
The absence of a dominating feedback loop
from the performance of the capitalist
sector to the political process allows a much
greater range of variation in policies and
institutions, and makes it possible for there
to be sustained state failure in ensuring a
dynamic transformation.6/16/2010
Presented By: Mohamed A. Salem 116/16/2010
Presented By: Mohamed A. Salem 12
State intervention – Social Transformation
A tax system that is efficient in raising resources for delivery of democratically agreed upon public goods
Well-defined rights would help efficient re-allocations only if transaction costs were low.
The outcomes of transfer and destruction of property rights depend not on the stability of prior property rights structures but on who is capturing resources and the institutional structure imposing discipline.
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Presented By: Mohamed A. Salem 13
The stability which distinguishes
high- growth states is not a stability
of property rights but rather a more
subtle stability of commitment to
growth, which means that dynamic
entrepreneurs could have stable
expectations that if they remained
dynamic, they were unlikely to be
touched.6/16/2010
Presented By: Mohamed A. Salem 14
South KoreaMaintaining sufficient discipline to ensure that
the transfer of wealth process was not entirely captured by inefficient groups.
The conditional subsidy scheme for learning technologies could have had high social costs if as a result many plants had to be scrapped. But in practice, not only subsidies, but plants too were re-allocated across industrial groups when failure appeared likely. The state was involved in frequent corporate restructurings that re-allocated plants, using its financial muscle in the banking sector to get its way
6/16/2010
Presented By: Mohamed A. Salem 15
ChinaProperty rights are not well-defined in
China but its growth is much better than
all countries.
China was able to re-allocate rights over
land and to control internal population
movements that allowed it to set up such
massive export zones (Changing
objective) in the first place.6/16/2010
Presented By: Mohamed A. Salem 16
Dynamic State !?Managing growth-enhancing rents.
Institutions for managing information rents.Schumpeterian rents are essential for
innovation.Creating learning rents to enhance the usage
of advanced technologies.
Destroy growth-reducing rents.competition policy. regulation.6/16/2010
Presented By: Mohamed A. Salem 17
Organizing ring-fenced transfers to maintain
political stability.
In reality, transfers often cause serious
economic damage if the only way in
which fragmented groups can capture
resources is by creating or capturing a
large number of uncoordinated value-
reducing rents, like inferior public good
provision or by capturing subsidies for
industrial learners.6/16/2010
Presented By: Mohamed A. Salem 18
What is required? Set of institutions with the regulatory
capacity to make distinctions between
different kinds of rents and with the
political capacity to manage these
rents to generate growth and rapid
transformation.
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Presented By: Mohamed A. Salem 19
Transformation States
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Presented By: Mohamed A. Salem 20
Other dimensions of state failure during the transformation.
The Effectiveness of Institutional Enforcement.
Fail to effectively enforce industrial policy regimes.
Fail to enforce any growth-generating institution, including property rights for potentially productive users.
Effective enforcement requires both institutional capacity and a compatibility of institutions with the interests of powerful social groups.
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Presented By: Mohamed A. Salem 21
institutional capacityinstitutional capacity means the
ability of the state to do (positive) things. It requires:
1. Staffed court system.2. Effective political capacity to:
Neutralize unproductive groups. Creation of political organization
of productive groups. 6/16/2010
Presented By: Mohamed A. Salem 22
Compatibility of institutions The need to construct a compatible package
of institutional reform and political restructuring of organized power which may allow better enforcement of a dynamic transformation strategy in the future.
The lesson is that in poorly performing countries, much more deliberate steps have to be taken to construct compatible packages of institutions and political settlements to achieve even second-best transformation success.
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Presented By: Mohamed A. Salem 23
The Costs of Enforcement The enforcement cost is the aggregate rent-seeking
cost of running particular institutions including: The costs of lobbying, The resources spent in economic and political
corruption, The costs of all types of “political” activity from
maintaining patron-client networks to contributions to political parties,
The policing costs of the state, All expenditures and activities that aim to protect
or change institutions.
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Presented By: Mohamed A. Salem 24
The Location of State Failure
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Presented By: Mohamed A. Salem 25
Critical success factors for growth-enhancing institutional transition
1. Political will and democracy,
2. Wisdom of leaders,
3. The institutions through which
the change is organized, and
4. Distribution of power between
groups.6/16/2010
Presented By: Mohamed A. Salem 26
Reforming the State: The Challenge for PolicyThe transformation state perspective identifies
critical state capacities for managing and
regulating rents and for organizing changes in
property rights systems.
The experience of the high-growth economies
suggests that if growth and sustained poverty
reduction are the objectives, these capacities have
to become the focus of institutional and political
reform6/16/2010
Presented By: Mohamed A. Salem 27
Thank You
6/16/2010