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The Political Economy of Development: An Assessment

Author: Christopher Adam and Stefan Dercon
Date: 2009
Size: 16 pages (115 KB)

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Summary

How do political choices, institutional structures and forms of governance influence the economic choices made by governments and citizens? How are the methods of modern economics being used to deepen understanding of the ways in which political constraints shape economic development? This article summarises recent developments in the study of the political economy of development, introducing papers that illustrate key themes and methodological innovations. Translating research on the political economy of development into policy remains challenging. It is important to link the innovation of modern microeconomic research with broader aggregate analysis.

One broad conclusion emerging from growth regression research results commands universal support - that 'institutions matter' for growth and development. Understanding is needed of those institutional or political factors that shape the proximate determinants of growth.  

In the last two decades, questions of political economy have moved to the centre of the study of development and economic growth. The 'new' political economy of development has two defining characteristics:

• An attempt to refocus attention on how politics and institutional structures shape policy choices and ultimately economic outcomes. This has led to international agencies increasingly identifying institutional failure as the cause of slow growth and underdevelopment.
• An emphasis on empirical validation. This reflects developments in empirical methods and enormous investment in data generation.

The papers introduced are concerned with: the political economy of aggregate economic development; and microeconomic and more empirical analysis. Findings include the following:

• The Commission on Growth and Development has identified four key determinants of high and sustained growth: (1) commitment to a market-based resource allocation combined with an openness to trade; (2) predictability in macroeconomic policy-making and a stable macroeconomic environment; (3) high domestic savings to fund high levels of public and private investment; and (4) governance with the flexibility to adjust policy and institutional structures to changing circumstances in a credible, inclusive way.
• Brady and Spence argue that leadership matters and can be decisive in key settings. Political leaders must choose an appropriate economic model, build a constituency of support for the strategy and have the capacity to adapt it.
• Collier highlights the anti-developmental institutional structures imposed on African states. He argues that, in addition, lootable natural resources and the dominance of ethnic or national identity both shortened and narrowed economic horizons and discouraged investment in state capacity.  He suggests political and institutional reforms – at international and national levels – to address the obstacles of small economic size, ethnic diversity and the resource curse.
• Aidt asks whether corruption is really bad for development. He shows that when using broader measures of development, the link with corruption appears strong and robust.
• Vincente and Wantchekon examine how candidates attract votes in elections. They find that clientelism works particularly well for incumbents while vote-buying works for challengers.

Developing a robust normative political economy of development remains a difficult challenge. There are two main tensions, between: the positive and normative dimensions of political economy; and the internal and external validity or generalisability. Formal models are still highly stylised, while empirically-based understanding of key relationships is very tentative. In order to improve understanding of robust statistical findings and to fit this evidence into more general theories of institutional development, microeconomic research must be linked with broader aggregate analysis. 

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Source: Adam, C. and Dercon, S., 2009, 'The Political Economy of Development: An Assessment', Oxford Review of Economic Policy, vol. 25, no. 2, pp. 173-189
Author: Stefan Dercon , stefan.dercon@economics.ox.ac.uk