Winter School in Political Economy

Lecture 1

Development

Set-up of the lecture

• Podcast
• Institutions and growth
• Developmental state
• Institutions and industrial policy
• Development and vulnerability
• Historical perspective

Podcast

Podcast

• Discuss a topic from the first week of the course

• It can be empirical or theoretical or combine empirics and and theory

• Make sure that you spell out your key point and core argument first

• You can use Power Point (.ppsx), but keep it a single slide!

• You can use dedicated apps

• Think of your favourite podcast

• Get inspired with (VoxEU, Chatham House, Brugel)

• Keep it between 6 and 8 minutes

• Do not rush

• Think of it as a recorded presentation

Growth

What drives growth

• Geography – weak effect on income
• Integration – strong effect on institutions & weak effect on income
• Institutions – strong effect on income

What drives growth

• Three types of institutions:

  • Market regulating (e.g. environmental protection agency)

  • Market stabilising (e.g. central bank)

  • Market legitimising (e.g. pension system)

• ​Conditionality mis-match
  • Short-term programmes versus long-term changes
  • Uncomfortable return of culture
  • What about the EU?

What drives growth

• Institutions, economic growth and the direction of change

• Growth and the division of benefits

  • Middle-income trap as a political problem

• ​Opportunity cost of institution-building

• Historical, anecdotal and quantitative evidence

Developmental state

Developmental state

• If institution are indeed drivers of growth, how they come about?

• Competent bureaucracy cooperating with organised private sector to spur growth (rather than seek rent) is rare

Developmental state

• South Korea, Taiwan and Singapore versus Indonesia, Philippines and Thailand

• Conditions for a developmental state:

  • Credible threat of unrest if living standards decrease

  • National security threat

  • Scarcity of easy revenues

Developmental state

• Size of the governing coalition and pressure for side-payments

• External threat requiring generous spending on the military

• How to accommodate the need for side payment and the cost of defence?

  • Natural resources

  • Upgrading

• Pressure for competent bureaucracy and cooperation with the industry
• CEE today as another example

Developmental state

Developmental state

Industrial policy

Industrial policy

• Low starting point

• Dependent market economy – profit driven multinationals

  • Geography, wages and skills
• Negative outlook of DME versus empirical evidence
• Not as liberal as assumed
  • Tariffs and non-tariff barriers
  • Good and bad FDI
  • Grooming and supervising
• Role of the EU

Development and vulnerability

Development and vulnerability

• Turning economic networks into political weapons

  • Obstacle to development

  • E.g. exclusion from a banking system (SWIFT)

• The renewalist argument is back
• Monopoly position always profitable (e.g. Visa or Fedex), now also weaponised

Development in a historical perspective

Development in a historical perspective

• The rise of West is far from obvious

  • China is superior until 15th century

  • GDP per capita matches until the industrial revolution

• West is not homogenous

Development in a historical perspective

• China is superior to the West until 15th century

  • Technology

  • Civil service

  • GDP per capita comparable until the industrial revolution

• What explains growth in China?

• • Flat income distribution

  • good healthcare and education

  • Removal of privileged elite

  • 4,000 years of culture

• Limit to growth in China

Development in a historical perspective

• Venice between 800 and 1350

  • Geographical advantage; long-distance trade generated a number of private fortunes

  • Constraints on the (hereditary) executive

• Modern finance: risk-sharing, capital raising (colleganza)
• Social mobility and rise of prosperity
  • Around 50% of colleganza involved commoners between 1050 and 1250
• From 1300 the most affluent merchants focus on stiffing political and economic competition
  • Barriers to entry high-profit sectors of trade

Thank you and see you in the Q&A