agenda
Todays Democracy and economic conditions,
continued
How do economic development and the structure of the
economy affect the likelihood that a country will become
and remain a democracy?
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What exactly is the modernization
that promotes democratization?
Is it wealth per se?
Or something about the character of economic
relationships that changes as wealth accumulates?
According to modernization theory, all societies move
through a series of stages.
A key feature of this passage:
Shift from agriculture to manufacturing and services
Sectoral reshaping of the economy
As elsewhere, these structural changes occurred in
early modern Europe.
Peasants moved from rural to urban areas
Gentry increasingly involved in commercial activities in towns
Bates and Lien (1985) have argued that these changes
played a crucial role in the creation of representative
government in England.
Why?
Sectoral reshaping of the economy
Shift in economic power away from traditional
agricultural elites
who controlled easily observable assets
toward a rising class of wool producers, merchants,
and bankers
who controlled assets that were more difficult to observe.
Want to tax some activity or kind of asset?
Need to be able to observe or measure it.
Same point goes for predation.
Hard to expropriate what you cannot find.
Observable assets
Bates and Lien:
Increased ability of gentry to hide assets from state
predation changed the balance of power between
modernizing social groups
traditional seats of power such as the Crown
The Crown, needing money, now had to negotiate with the
new economic elites to extract revenues.
In return for paying their taxes, the economic elites
demanded limits to state predation.
Led to supremacy of Parliament over the Crown
North and Weingast
North and Weingast (1989) made a similar argument.
Now that economic actors could hide their assets, Crown
had to find some way to credibly commit not to engage in
predation against economic elites.
Ensuring credible commitment is a common problem.
The challenge of credible commitment
Enforceable contracts
Repeated interactions
We saw how repeated play of the Prisoners Dilemma
game allowed the efficient, cooperative outcome to be
sustained through the use of punishment strategies
If players are sufficiently patient ( close to 1)
But determining and playing these strategies can be
complex
And there are usually other equilibria, too, many
involving non-cooperation and inefficiency
Change in the distribution of power
North and Weingast
North and Weingast (1989) made a similar argument.
Now that economic actors could hide their assets, Crown
had to find some way to credibly commit not to engage in
predation against economic elites.
One way to do this was to give Parliament the power to
check the Crown.
Helps to explain the Glorious Revolution of 1688, which saw
the establishment of modern parliamentary democracy in
Britain.
Timing in England and France
Bates and Lien: introduction of more limited state
occurred earlier and more definitively in England than
in France because of the unique structure of the
economy that early modernization had produced in
England.
To see why, lets return to the Exit, Voice, and Loyalty
game from Chapter 3.
EVL and credible commitment
Prehistory: Crown has confiscated the assets of a
segment of the elite represented by Parliament
Parliamentarians are faced with three options:
Exit: Disinvest in the economy.
Voice: Petition Crown for protections against future
confiscations in exchange for a promise to continue
investing their assets
Loyalty: Keep investing and paying taxes
Parliamentarians v. Crown
Pay taxes and produce
Parliamentarians v. Crown
Pay taxes and produce
Parliamentarians v. Crown
Parliamentarians v. Crown
Limited government,
growing economy
Unlimited government,
growing economy
Pay taxes and produce
Unlimited government,
growing economy
Unlimited government,
stagnant economy
Unlimited government,
stagnant economy
Parliamentarians v. Crown
England in early modern Europe
Crown is dependent on the Parliamentarians.
The Crown needs their money to fight wars etc.
L>1
Assume for now that Parliamentarians have mobileor
hidableassets.
Credible exit threats: E > 0
Parliamentarians v. Crown: E > 0 and L > 1
Parliamentarians v. Crown: E > 0 and L > 1
Assume, as before, that E < 1 c.
(A)
Find the terminal
node reached
from play of the
SPNE strategies.
(B)
(D)
(C)
(E)
Parliamentarians v. Crown: E > 0 L and > 1
(A)
Find the terminal
node reached
from play of the
SPNE strategies.
(B)
(D)
(D)
(E)
SPNE: (Demand Limits, Disinvest;
Accept Limits)
Observed Outcome: Limited
Government and Growing Economy
France in early modern Europe
Continue to assume that Crown is dependent on the
Parliamentarians.
But now assume that Parliamentarians do not have
mobile assetsthey cannot hide their assets.
No credible exit threats: E < 0
Parliamentarians v. Crown: E < 0 and L > 1
Parliamentarians v. Crown: E < 0 and L > 1
SPNE: (Pay Taxes, Pay Taxes; Reject Limits)
Observed Outcome: Unlimited Government and
Growing Economy
England v. France
The English monarchy in early modern Europe
accepted limits on its predatory behavior because it
depended on elites with credible exit threats (mobile
assets).
The French monarchy in early modern Europe did not
accept limits on its predatory behavior because it
depended on elites who did not have credible exit
threats (nonmobile assets).
Structure of the Economy
So far, we have assumed that the state is dependent
on some set of elites who either have credible exit
threats or not.
What if the state is autonomousit does not depend on
any elites?
This is when L < 1.
Structure of the Economy
If the state is autonomous, there are two possible
scenarios.
If elites have credible exit threats
The Crown will ignore the elites, the elites will exit, and the
economy will stagnate.
If elites do not have credible exit threats
The Crown will ignore the elites, the elites will remain loyal,
and the economy will grow.
Crown
Autonomous
L<1
Credible exit
1C>E>0
Dependent
L>1
Poor dictatorship
(Unlimited government,
stagnant economy)
Rich democracy
(Limited government,
growing economy)
Rich dictatorship
(Unlimited government,
growing economy)
Rich dictatorship
(Unlimited government,
growing economy)
Parliamentarians
No credible exit
E<0
Structure of the Economy
Democracy
We expect democracy to emerge only when (a) the
state is dependent and (b) the elites have credible exit
threats.
Representative government is more likely to emerge
and survive when the rulers of a country depend on a
segment of society consisting of a relatively large
number of people holding liquid or mobile assets.
No bourgeoisie, No democracyBarrington Moore, Social
Origins of Dictatorship and Democracy
Structure of the Economy
State of Nature
Recall that Hobbes saw the creation of a strong state as a
solution to the security dilemma between individuals in the
state of nature.
One problem with this solution was that individuals now had to
worry about being predated upon by a strong state.
The argument that we have just made suggests that, under
some conditions, states will voluntarily agree to limit their
predatory behavior.
Under these conditions, no one need guard the guardian because the
guardian will guard itself!
Structure of the Economy
The key to the argument is that the state must depend on a
group of people with credible exit threats.
A central concept to the viability of exit options is quasirents.
A quasi-rent is the difference between an assets value in its best case
scenario usage and its value in its second best case scenario usage.
Examples include oil wells, copper mines, and so on.
This concept allows us to generalize the argument even further.
Its not just about the mobility of assetsit is also about the type of assets
people own.
Structure of the Economy
Quasi-Rents
All societies contain some actors who own hard-toredeploy, or fixed, assets (no credible exit threat).
All societies also contain some actors who own easyto-redeploy, or liquid, assets (credible exit threat).
Many studies have shown that democracy is less likely
to emerge and survive in countries whose economies
depend heavily on things like oil production or mineral
extraction.
Structure of the Economy
Resource Curse
The resource curse refers to the paradox that
countries with an abundance of natural resources tend
to experience things like poor governance, low levels
of economic development, civil wars, and
dictatorships.
Structure of the Economy
Foreign Aid
The argument suggests that democracy is unlikely
when the state is autonomous and does not depend
on its citizens.
Foreign aid can reduce the dependence of the state on
its citizens.
Numerous studies show that foreign aid to
dictatorships harms the welfare of the average citizen
in these countries and helps dictators hold on to
power.
Structure of the Economy
Economic Performance
The argument suggests that democracies should
produce reasonably good economic performance.
In contrast, some dictatorships should have pretty
good economic performance and some should have
pretty bad economic performance.