Tag Archives: Douglas North

Graph of the week

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Over the last two decades there has been a remarkable shift in the composition of domestic government debt in Kenya, with long-term debt instruments (bonds) increasingly preferred to short-term debt (T-Bills).

The financial market in Nairobi is telling us a thing or two about creditors’ perceived time horizon of the Kenyan government; and Treasury’s capacity for credible commitment.

Screen Shot 2015-02-05 at 8.46.08 AM

Source: The World Bank

For curious readers, I would argue that the explanation for this structural change (especially after 2003) is more Stasavage than North and Weingast.

The decline of Economic History at MIT

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What is the cost of not having economic history at MIT? It can be seen in Acemoglu and Robinson, Why Nations Fail (2012). This is a deservedly successful popular book, making a simple and strong point that the authors made originally at the professional level over a decade before (Acemoglu, Johnson and Robinson, 2001). They assert that countries can be “ruled by a narrow elite that have [sic] organized society for their own benefit at the expense of the vast mass of people” or can have “a revolution that transformed the politics and thus the economics of the nation … to expand their economic opportunities (Acemoglu and Robinson, 2012, pp. 3-4).”

The book is not however good economic history. It is an example of Whig history in which good policies make for progress and bad policies preclude it. Only transitions from bad to good are considered in this colorful but still monotonic story. The clear implication is that if countries can copy the policies of English-speaking countries, they will prosper. No consideration is given to Britain’s economic problems over the past half-century or of Australia’s relative decline for a century.

That is Peter Temin writing about the story of Economic History at MIT in the 20th century. For more click here (H/T Greg Mankiw).

Also, to be honest, one of the reasons I am into development (and the politics around it) is because of my fascination with economic history. I wish more development practitioners and theorists alike cared a little bit more about economic history. At the very least, looking at how things really actually worked out in the past serves to temper the urge to completely fall for the latest fad within the development industry. 

Where do the poor live, and how do we make them become middle class?

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The Economist reports:

“WHERE do the world’s poor live? The obvious answer: in poor countries. But in a recent series of articles Andy Sumner of Britain’s Institute of Development Studies showed that the obvious answer is wrong. Four-fifths of those surviving on less than $2 a day, he found, live in middle-income countries with a gross national income per head of between $1,000 and $12,500, not poor ones. His finding reflects the fact that a long but inequitable period of economic growth has lifted many developing countries into middle-income status but left a minority of their populations mired in poverty. Since the countries involved include giants like China and India, even a minority amounts to a very large number of people. That matters because middle-income countries can afford to help their own poor.”

The article raises important issues that inform the debate on how to tackle problems of poverty and underdevelopment – is it all about politics & governance or all about economic expansion? The answer, of course is that it is a moderate mix of both.

But since political realities often force governments to concentrate on one or the other, a responsible answer is that it is all context-dependent; some places need strong economic expansion first, before political reforms can be anchored in society. In others, political change should be top of the checklist.

The Botswanas and Singapores of this world are lucky in that their leaders were smart enough to know what their countries needed and pursued it with singular ambition, despite the unavoidable mess that came with the choices they made.

This of course goes against the received wisdom among academics (me included) who believe in the strong power of the right types of (liberal, in the classical sense) institutions to put countries on the path to becoming Denmark. The problem with this approach is that it does not tell us how to compress the more than 600 years that transpired between the Magna Carta and the voting reform legislations in England in the latter part of the 19th century. Lest we forget, England (which is every scholar’s favorite source of empirical conceptualization of institutional development) has not always had good institutions.

Institutions take a lot of time to build. A lot more time than the average human life span.

So the question still stands: How do we get the most number of people out of poverty in the least amount of time with the least harm to their political and human rights?

More on this here.

Talk of unintended consequences…

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Judging from the NY Times coverage of the 1917 episode, legislators paid little attention to the implications of mandating a ceiling.  They focused instead on Treasury Secretary McAdoo’s request for a higher borrowing limit so as to fund an expensive war effort.  The ceiling was created to empower, not rein in, Treasury (prompting a failed effort to create a congressional  committee to oversee Treasury’s actions).  Similarly, the creation of the aggregate ceiling in 1939 reflected congressional deference to Treasury, granting the department flexibility in refinancing short term notes with longer term bonds.  As the Senate floor debate makes clear, senators viewed the move as removing a partition in the law that hampered Treasury’s ability to manage the debt.

……. This seems to be a case of the often unintended consequences of institutional design.   That is, we can’t always understand why we have a particular institution or practice by looking only at its contemporary usage.  Moreover, institutions crafted in a specific context to solve a particular problem often prove sticky, taking on new significance once politicians discover new ways to exploit them.  The often unintended consequences of institutional design will likely be central to any broader explanation of the evolving politics of the debt limit.

That is Sarah writing on the Monkey Cage blog.

I was struck by this post because I picked up Pierson’s Book – Politics in Time – today and couldn’t put it down. I highly recommend it for those of you out there interested in the temporal dynamics of institutional design and development.

Also, I just discovered this (in Pierson, 2004 p. 41): Stockman Reagan adviser in 1981 said of Social Security refrom that he didn’t want to waste “a lot of political capital on some other guys problem in the year 2010.” He was only one year off.

is kenya at last getting limited government?

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On Thursday Speaker of the Kenyan Parliament Kenneth Marende ruled that President Kibaki’s appointments to constitutional offices were unconstitutional. The politics of the decision aside (it is a war between Premier Odinga and others intent on succeeding Mr. Kibaki in 2012) it is a good sign that finally Kenya may have gotten a system of political balance of powers. No single faction appears to be able to do whatever it wants, wapende wasipende.

Scholars like Nobel Laureate Douglas North, Barry Weingast (of my Department), among others, have argued that limited government (in which centres of power balance each other to prevent tyranny) is one of the key ingredients in the quest for long-run Economic growth and political stability.

Kenya appears to be on the threshold of obtaining limited government. It began with President Kibaki’s laid back approach to governing which empowered centres in the political structure outside of the presidency. Raila Odinga, William Ruto, Uhuru Kenyatta, Martha Karua etc are all politicians who have elevated themselves to an almost equal footing, politically speaking, with the president himself.

And the change has not just been about personalities, typical of politics in Africa. Institutions have had a hand in it, too. The Kenyan parliament – which Barkan thinks is the strongest in SSA – with its committee system and relative autonomy from the executive has been at the forefront of checking the powers of the executive in general and the presidency in particular. The new constitution reflects this new equilibrium condition.

The new constitution also empowers the judiciary, previously seen as a rubber stamp institution in the pocket of the president. Although nominations to the institution has gotten off on a rocky start, it appears that the law society of Kenya and the Judicial  Service Commission might be strong enough to (self)regulate judges on the bench, regardless of who appoints them.

I am cautiously optimistic.

debating africa’s growth prospects

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The Economist has an interesting debate going on about Africa’s growth prospects. The consensus appears to be that structural factors – such as institutions, culture, colonial history and what not – are the main culprits in the tragic tale of African underdevelopment. I agree. Bad governance, the historical accident of colonialism which halted the natural processes of state formation, among other things such as historical low population densities and a culture that mystifies most things are what continue to deter African nations from realizing their full potential.

Gilles Saint-Paul argues that:

“most African countries are trapped at a “low-trust” equilibrium where basic property rights are not enforced and corruption is rampant. Essentially if I do not expect others to fulfil their side of the contract, it is rational for me not to fulfill mine, and transactions eventually disappear“

One of my favorite economists, Daron Acemoglu, adds that:

“The economic problems of African nations are a consequence of their postcolonial institutions, which are themselves the continuation of the precolonial institutions.“

But Lant Pritchett is quick to remind us of the folly of lumping all the sub-Saharan African countries together, pointing out the stark differences between places like Botswana and Somalia or Cote d’Ivoire and Mozambique.

More here.