1. 22nd Zahid Husain Memorial Lecture The Role of a Central Bank in National Economic Development   Paul Collier     1st February, Karachi, Pakistan  

2. The Standard Model of the Effective State   The capacity to tax     Checks and balances on the abuse of power  

3.   The capacity to tax.   Without such a capacity, the state cannot be effective since it cannot finance its activities. Historically, this capacity evolved through a winnowing process of military rivalry: only those states able to finance military spending survived. Once the state was capturing a substantial share of economic activity, it found it had an incentive to grow the national economy.  

4. Checks and balances on the abuse of power
  Checks and balances on the abuse of power.   In the absence of checks and balances, those in control of the state face a time-consistency problem: people do not trust the state, and so are unwilling either to lend to it, or to invest.

5. What’s gone wrong? The fundamental difficulty of microfoundations is that we simply do not have a comprehensive and convincing theory of economic behaviour at the micro level. (Martin Sandbu, Financial Times, Jan 21st, 2018    

6. Rational Economic Man:
Rational Economic Man: People make choices based on their desire to maximize their material consumption Subject to objectively given constraints Which they learn by direct observation of the world   Rational Social Man: People make choices on their desire to maximize esteem Subject to subjectively perceived constraints Which they learn from narratives circulating in their social network  

7. The Real Economics of Adam Smith
Source of mutual gains: exchange of commodities exchange of obligations Psychology: greed – REM esteem – RSM Public policy: create markets create reciprocal obligations: How ??

8. The trust needed for collective sacrifice to achieve future prosperity:
People need to trust each other that they should contribute because others will contribute.   People need to trust their rulers, that if they give the government their money, the rulers will use it wisely for these investments, rather than to enrich themselves.   

9. The beliefs needed for trust:
That we have a shared identity. That contributing to public saving is a purposive action leading to our future prosperity, because we can trust our rulers to use it for that purpose. That we ought to contribute because the others with whom we share identity will also be doing so.

10. What narratives and actions are needed?
  Narratives:   Building shared identity: We are all one.   Explaining purposive action:   Economic: Public savings will pay off   Political: Rulers are effectively constrained   Mutual obligations:   Since the people like us will be contributing, it is only fair that we do too.  

11. What narratives and actions are needed?
  Reinforcing Actions as signals: A signal (Spence) establishes credibility because a charlatan would find it prohibitively costly. Shared belonging: Share power with people who have diverse sub-national identities.   Purposive action: Economic: Build practical economic infrastructure Cancel prestige projects   Political: Rulers live simply; (Nyerere; Meles) Rulers dismiss corrupt supporters; (Lee Kwan Yew) Mutual obligations:   Transparency in tax payments, (e.g. Norway)

12. 22nd Zahid Husain Memorial Lecture The Role of a Central Bank in National Economic Development   Paul Collier     1st February, Karachi, Pakistan