1 Development and Good Government Lecture 23 Don J. DeVoretz

2 Some Questions 1. Is Democracy a necessary and sufficient condition for development ? –India: One person-One vote –China: One person-No vote Which country has greater rent seeking ? Which country has more efficient markets ? Which country has greater equity ? Which has higher GDP or GDP growth ?

3 Theories of Good Government Libertarian: minimal state is most effective –John Locke: “Social Treatise on Government” People have natural rights prior to gov’t –right to life, liberty and property Minimal State is the most extensive state that can be justified Justification: State must prevent the use of force by citizens against one another. Example: Hong Kong

4 Pareto and tests of Good Gov’t Good government is defined as a set of policies that: –1. Improve the welfare of all without reducing the welfare of at least one individual –2. Theory of the second best: What if two imperfections in society –monopoly –tariffs and quotas on international trade Will reducing one bring you closer to perfection ?

5 Pareto Improving

6 Gov’t Actions for First Best Preconditions: –2 goods X and Y –2 People –Pareto Superior Line: Move on will improve at least one person and not harm another on this contract curve any further movement along this line will make one person better off at anothers expense

7 Gov’t reduce price controls or supply restrictions Initially at M and N Excess Supply due to controls Relax controls and move to HERE Miracle: –No excess demand or supply –Both person 1 and 2 are better off

8 History, Institutions and Growth Douglas North: –Role of government emerged in a Lockean sense in 15th Century in Europe to reduce transactions costs of trade. –Problems:Transactions costs were too high International trade was risky; –Brigands –insurance –payment

9 Government and Externalities Externalities Removed by gov’ts creating –Crown Monopolies :reduce uncertainities –Armies: Land transport –Banks and Insurance schemes:finance trade –Navies: Sea transport –Roads: reduce tolls –Property rights: insure investment

10 Socio cultural Preconditons today Trust (banks, insurance companies) Law and order (enforcement of contracts) Security of Persons and Property Honest govt Social mobility Free flow of Information

11 Specifics for Market Driven Development Property Rights Commercial Law and Courts Stable currencies and banking for transfers Public management of externalities Stable monetary and fiscal policies Do we democracy for the above ?

12 End of Show