The Political Economy of Collective Action, Inequality, and Development

THE POLITICAL ECONOMY OF COLLECTIVE ACTION, INEQUALITY, AND DEVELOPMENT

William D. Ferguson

Stanford University Press

Stanford, California

Stanford University Press

Stanford, California

© 2020 by the Board of Trustees of the Leland Stanford Junior University. All rights reserved.

No part of this book may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying and recording, or in any information storage or retrieval system without the prior written permission of Stanford University Press.

Printed in the United States of America on acid-free, archival-quality paper

Library of Congress Cataloging-in-Publication Data

Names: Ferguson, William D., author.

Title: The political economy of collective action, inequality, and development / William D. Ferguson.

Description: Stanford, California : Stanford University Press, [2020] | Includes bibliographical references and index.

Identifiers: LCCN 2019049300 (print) | LCCN 2019049301 (ebook) | ISBN 9781503604612 (cloth) | ISBN 9781503611979 (ebook)

Subjects: LCSH: Equality—Economic aspects. | Economic development. | Political development.

Classification: LCC HM821 .F47 2020 (print) | LCC HM821 (ebook) | DDC 320.01/1—dc23

LC record available at https://lccn.loc.gov/2019049300

LC ebook record available at https://lccn.loc.gov/2019049301

Cover image: iStock

Cover design: Rob Ehle

Typeset by Newgen in 10/14 Minion Regular

Dedicated to my wife, Claudia Beckwith; my children, Caitlin and Taylor Beckwith-Ferguson; and to the memory of my parents, Audrey I. and Allen R. Ferguson.

Contents

Preface: Sapiens and Neanderthals

Acknowledgments

Introduction: Toward a Framework for Development Theory

PART I: Foundations

1. Collective-Action Problems and Institutional Systems

2. Economic Development, Political Development, and Inequality

PART II: Five Key Developmental Hypotheses and Associated Collective-Action Problems

3. Public Goods, Externalities, and Collective-Action Problems of Governance

4. Economic Foundations of Unequal Development

5. Power, Social Conflict, Institutional Formation, and Credible Commitment

6. Policy Innovations Can Relax Political Constraints

PART III: Typologies and a New Framework for Development Theory

7. Alternative Typologies of Social Orders and Political Settlements

8. How Context Influences Development

9. Business-State Interactions

Conclusion: A Conceptual Framework for Development Theory

Appendixes

Notes

References

Index

Preface

Sapiens and Neanderthals

Thanks to their ability to invent fiction, Sapiens create more and more complex games, which each generation develops and elaborates even further.

—Yuval Noah Harari, Sapiens: A Brief History of Humankind (2015)

According to historian Yuval Noah Harari (2015), from about 70,000 to 30,000 years ago, Homo sapiens vied with Homo neanderthalensis for dominance in areas of Europe and the Middle East. The Neanderthals were larger, stronger, better adapted to cold climates, and had larger brains. They also used tools and knew how to care for their sick. Neanderthals could dominate in one-on-one combat. Yet, Sapiens ultimately prevailed. Indeed, they exterminated the Neanderthals. Sapiens triumphed because they had developed collaborative cognitive abilities that Neanderthals simply lacked. Specifically, Sapiens developed the ability to tell stories, not just about lions in bushes, but also about each other—that is, to gossip. This capability permitted forms of cooperation that Neanderthals could not achieve; it fostered organizing cooperative activity among individuals, resolving some collective-action problems. Concurrently, Sapiens developed the ability to talk about things not present, "things they have never seen, touched, or smelled. . . . Only Homo sapiens can speak about things that don’t really exist, and believe six impossible things before breakfast (Ibid., 24). Sapiens learned to share legends, myths, gods, and other abstract concepts (relevant later on) like nationhood. They shared stories that could forge common purpose, identity, and ideologies: Fiction has enabled us to not merely imagine things, but to do so collectively" (Ibid., 25; emphasis in original). Collective storytelling facilitated rapid social adaptation to changing environments. To alter group behavior, Sapiens could change shared stories—a process much faster than genetic evolution. This cognitive revolution ushered in the triumph of Homo sapiens over Homo neanderthalensis.

Before 10,000 years ago, Sapiens spread across the planet and survived as foragers. In terms of leisure and, arguably, quality of work, they achieved relatively high standards of living. Normally, work did not exceed 35–40 hours per week, and it involved multiple stimulating tasks. Foragers ate varied and balanced diets and exercised substantially. Children who survived their first few years had good prospects of living at least until age 60, sometimes age 80. With multiple sources of food, deprivation of one type rarely led to starvation.

Starting about 9,500 years ago, however, Sapiens began to develop agriculture. The agricultural revolution unfolded over the next 7,000 years, extending across the globe via simultaneous invention. Cultivating crops was not the idea of a single person or group but rather an adaptation to roughly similar environmental conditions encountered around the globe. The agricultural revolution, which Harari calls history’s greatest fraud, vastly improved food productivity, permitting substantial population growth. It also brought more labor, more disease (transmitted between humans and domesticated animals), lower life expectancies, additional reasons for territorial conflict, graver consequences to losing such conflicts—such as starvation, which might also arise from drought or insects—and dimensions of inequality and social hierarchy that Sapiens had not previously experienced. Whereas this shift in production benefited the species as a whole (the gene pool), most individuals—except those at the top of the hierarchy—experienced more deprivation. Adaptive human activity—sensible in multiple relevant contexts—fostered more work for mere survival, more disease, and so on. From the viewpoint of the peasant masses, the agricultural revolution introduced many new collective-action problems. How might they work together to escape toil, disease, instances of starvation, and the often cruel authority of those at the top of social hierarchies?

Acknowledgments

I wrote the bulk of The Political Economy of Collective Action, Inequality, and Development during a series of academic visits, most of which occurred during my 2017–18 sabbatical. The following institutions provided office support with extensive opportunities to interact with scholars, attend and present my work at seminars, workshops, and various lectures, while writing the basic manuscript: The Effective States and Inclusive Development Research Centre (ESID) of the Global Development Institute, University of Manchester; the Institute for New Economic Thinking (INET) at the Oxford Martin School, University of Oxford; the Political Science Department and Amsterdam Institute for Social Science Research (AISSR), University of Amsterdam; the Berlin WZB Social Science Center; and the Economics Department at University College London.

I want to thank the following individuals for arranging these visits: Kunal Sen, Julia Brunt, and Kat Bethell at Manchester’s ESID; Eric Beinhocker and Susan Mousley at INET Oxford; Brian Burgoon and Geoffrey Underhill at the University of Amsterdam; Steffen Huck at WBZ Berlin; and Wendy Carlin and Frank Witte at University College London.

I offer special thanks to Brian Levy and David Booth for their support and comments and for putting me in contact with ESID’s Kunal Sen and Sam Hickey. A special thanks also goes to Rob Axtell, who has consistently supported my work, offered me comments, and who introduced me to Eric Beinhocker.

The ESID visit and workshops contributed decisively to my understanding of the concept of political settlements. I especially thank Tim Kelsall and Matthias vom Hau, whose basic approach to political settlements underlies mine. Brian Levy and David Booth introduced me to the concept. I benefited substantially from conversations, workshops, and seminar sessions with scholars including Pritish Behuria, Abhishek Chakravarty, Ralitza Dimova, Sam Hickey, David Hulme, David Jackman, Thomas Lavers, Diana Mitlin, Dilip Mookherjee, Kate Pruce, Antonio Savoia, Nicolai Schulz, Kunal Sen, Maya Tudor, Matthias vom Hau, and Pablo Yanguas. I thank Tim Kelsall and Kunal Sen for their comments on several chapters. ESID also offered me the honor of delivering the 2017 Adrian Leftwich Memorial Lecture, about my book, on November 29.

At Oxford, I benefited from conversations and seminars with scholars including Eric Beinhocker, Richard Bailey, Enresto Carillo, Rita Maria del Rio Chanona, Paul Collier, Stefan Dercon, Doyne Farmer, Ian Goldin, Robert Hahn, Francois Lafond, Penny Mealy, Sharun Mukand, Brian Nolan, Kevin O’Rourke, Lars Osberg, Anton Pichler, Karthik Ramanna, Huei-chun Su, Vilhelm Verendel, Rupert Way, Martin Williams, and Peyton Young.

At Amsterdam’s AISSR, Abbey Steele and Imke Habers contributed to my understanding of subnational political dynamics. Joost Berkhout contributed to my understanding of policy dynamics. I also benefited substantially from conversations and seminars with scholars including Maarten Bavinck, Arnoud Boot, Jeroen Bruggerman, Brian Burgoon, Ursula Daxecker, Sijeong Lim, Nicky Pouw, Kris Ruijgrok, Seiki Tanaka, and Geoffrey Underhill.

At WZB Berlin, I learned from conversations and seminars with scholars including Hande Erkut, Steffen Huck, Macartan Humphreys, Levent Neyse, Justin Valasek, Pauline Vorjohann, and Michael Zürn.

At University College London, I benefited from conversations and seminars with Wendy Carlin, Martin Cripps, Philippe Jehiel, Imran Rasul, Vasiliki Skreta, Ran Spiegler, Marcos Vera Hernandez, and Frank Witte.

I gleaned useful ideas from several Political Science and Political Economy seminars at the London School of Economics and from conversations with Tim Besley, Richard Bronk, Lloyd Gruber, Bob Hanke, and Waltraud Schelkle. I thank Bob Hanke for his comments on several related papers.

I thank Peter Hall for his comments on several preliminary papers related to this project. Conversations with Leigh Anderson, Sam Bowles, Lukas Brun, Karla Hoff, Wade Jacoby, Mushtaq Khan, John Morrow, Dani Rodrik, Hilton Root, and Michael Woolcock informed my approach.

I thank Grinnell College and the Committee for Support of Faculty Scholarship for my sabbatical leave and financial support. Nicholas Haeg, Mukand Kalani, Terran Mott, and Takshil Sachdev provided useful research assistance. I especially thank (former) Dean Mike Latham for his consistent support of this project. My colleagues Janet Seiz and Eliza Willis offered useful comments on a draft prospectus. I appreciate consistent support from (former) Economics Department Chair Keith Brouhle. I thank my colleagues Mark Montgomery and Jack Mutti, who, as always, encouraged my work.

I offer special thanks to Margo Beth Fleming, my first editor at Stanford University Press, who, following a brief conversation at an economics conference, encouraged me to write my 2013 Stanford book and who subsequently supported this second book through its prospectus and contract. I thank Stanford’s current senior editor, Steve Catalano, and Sunna Juhn for their assistance on this project.

I appreciate comments on this book’s prospectus from Kaushik Basu and an anonymous reviewer. I also received very useful comments from two anonymous reviewers of the draft manuscript.

I extend a special thanks to my graduate school professors Sam Bowles and Herb Gintis, who have inspired my entire research career, and to my ninth grade (public school) Civics teacher, Patricia Rudy, for inspiring my interest in politics and social science.

I extend heartfelt thanks to my son, Taylor Beckwith-Ferguson, who, in the midst of his international travels, provided editorial comments on the entire draft of the manuscript. I especially thank my wife, Claudia Beckwith, for her consistent loving support during the, sometimes arduous, writing process.

Introduction

Toward a Framework for Development Theory

The power of a theory is exactly proportional to the diversity of situations it can explain.

—Elinor Ostrom, Governing the Commons: The Evolution of Institutions for Collective Action (1990)

WHY DO SOME SOCIETIES ACHIEVE high standards of living, with broad access to education and quality health care, serviceable infrastructure, predictable and largely impersonal legal procedures, along with relatively accessible avenues to peaceful political expression, while others stagnate with guarded islands of extravagant wealth, surrounded by oceans of poverty, corrupt autocratic systems, and simmering conflicts—or even full-blown civil wars? Why did South Korea, with an authoritarian patronage-oriented regime that faced a devastating war from 1950 to 1954, whose 1960 gross domestic product (GDP) per capita was half that of Mexico and twice that of India, have, by 2015, a per capita GDP that exceeded Mexico’s by a factor of 3 and India’s by a factor of 17? By that time, moreover, South Korea had become a functioning democracy. These two questions lead to a third. How might a society trapped in stagnation initiate and sustain processes of economic and political development?

In the Americas, the resource-rich areas first colonized by Europeans had, by the twentieth century, experienced substantially less growth in per capita output than the later colonized, resource-poor, and less desirable areas (Engerman and Sokoloff 2002). Following its 1994 brutal civil war and genocide, Rwanda developed a successful government that, although authoritarian, instituted stability and economic growth. That same year, South Africa elected Nelson Mandela as president, signifying the end of its repressive apartheid regime. Since 1979, under the political monopoly of its Communist Party, China, on the one hand, has attained an average annual rate of GDP per capita growth of 8.5%. Burundi, on the other hand, increased its per capita GDP at an average annual rate of 0.13% since 1961.

Development is not just a matter of achieving adequate rates of saving, building capital, and acquiring technology; nor is it just a matter of getting the institutions right—at least not in a superficial sense of importing constitutions, legislation, and concepts of property rights from developed countries. These two prescriptions speak to often necessary conditions that affect development, but they do not begin to establish sufficient conditions for development because the political economy of development is more complicated. The first prescription ignores power entirely. The second fails to adequately consider how configurations of power operating within specific social contexts shape the creation, evolution, and demise of institutions, and, perhaps more critically, how such configurations shape degrees of enforcement and implementation of institutional prescriptions within such contexts. Argentina’s electoral law of 1853, which purported to allow popular participation in the political process, from the beginning proved itself a sham. Elections were invariably ritualistic parodies, staged-managed by lackeys of the powerful, with only a minute fraction of the electorate participating (Rock 2000, 129; quoted in Acemoglu and Robinson 2006, 5).

Indeed, development has multifaceted economic and political components. At a simple level, economic development connotes sustainable, steady increases in average living standards, especially for the lower half of the income distribution. More comprehensively, it involves widespread realization of basic human capabilities by arranging for adequate health care, education, other public services, and infrastructure. At an institutional level, economic development connotes the evolution of mutually understood and expected informal and formal procedures for circumventing multiple forms of free riding that accompany public goods, common resources, and externalities; and for mitigating conflict, protecting universal (as opposed to selective) property rights, and enforcing production and exchange agreements. Political development connotes a similar evolution with respect to creating and enhancing the effectiveness, legitimacy, and sustainability of informal and formal political institutions that foster capacities to deliver public services, broad participation, and that, simultaneously, protect basic civil rights. In both cases, development requires reform of existing formal arrangements, along with a complementary evolution of informal institutions. It involves enhancing state capacity, balanced—over time—with broad avenues for political input and limits on concentrated private and public power.

Political and economic inequalities permeate developmental processes, both as conditions that shape their evolution and as developmental outcomes. Unequal access to power, decision arenas, knowledge, wealth, productive resources, and positions within exchange processes create large asymmetries with respect to basic capacities, opportunities, barriers, and ensuing outcomes—such as distributions of income, wealth, and political authority. Myriad social conflicts follow. These effects, in turn, influence and constrain future developmental prospects. A society’s often tenuous ability to resolve sets of associated collective-action problems, therefore, shapes its political and economic evolution—its prospects for development.

The complexity of political economy poses a core dilemma for social scientists: We know, for example, that institutions both facilitate and emerge from processes of economic and political development. Yet, why do functional institutions emerge in some places and not others? Why do institutional forms that appear to work well in some settings utterly fail in others? How can we systematically analyze phenomena that exhibit such intricate interactions, so many routes of causality, and so many instances of idiosyncrasy that emerge from unique combinations of social ingredients? Might we exhaust ourselves merely trying to list specific instances, inputs, relations, and outcomes, or do so by merely recounting anecdotes?

Biologists face similar, if not greater, complexity. There are myriad species, subspecies, genera, and phyla; so many possible competitive, symbiotic, and accidental interactions; so many mechanisms of transfer, locomotion, propagation, and reproduction; so many niche and environmental influences. Biologists address this complexity with a mix of theory—such as evolution, genetic transmission, photosynthesis, and predator-prey dynamics—along with description and categorization that draws distinctions among phyla, genera, species, components of cells, environmental conditions, and so forth.

In this text, I adopt an analogous approach. I construct a conceptual framework for development theory that integrates concepts of causality and techniques for categorization that integrates three related components, five core developmental hypotheses, a typology of political settlements, and an analytical approach based on the concept of collective-action problems. The developmental hypotheses address interactions between public goods, coordination of productive activity, power, institutional evolution, credible commitments, and a potential role for organizational and institutional innovation to relax political constraints. Political settlements are shared understandings, relationships, and arrangements held among powerful parties to use politics, rather than violence, as their primary method for resolving disputes. Political settlements underlie social order and shape the configuration of social orders. Collective-action problems (hereafter, CAPs) arise when, within a given social context, individual and group pursuit of inclinations and interests generates undesirable outcomes for one or more groups. Pollution, crime, and excess conflict are examples. CAPs are ubiquitous in human social interaction. Indeed, achieving economic and political development entails resolving multiple CAPs. CAPs, moreover, both condition and arise from the relationships specified in each of the core hypotheses, and the most foundational developmental CAPs concern limiting organized violence—by forging some form of a political settlement. Furthermore, classifying political settlements in terms of underlying social foundations and configurations of authority facilitates developmental inquiry by designating core attributes of developmental contexts; specific types of settlements imply specific sets of CAPs that condition developmental prospects.

The point here is to provide an analytical framework that permits tractable navigation of such complexities: one that allows traversing the difficult theoretical terrain stretched between relatively simplistic hierarchies of causality (e.g., geography or a combination of preferences and technology as ultimate causes), on the one hand, and idiosyncratic case studies on the other.

Here, I employ the straightforward concept of collective-action problems accompanied by game-theoretic reasoning as the principal analytical lenses for examining multifaceted interactions between inequality, power, and economic and political development. Although the idea of CAPs frequently appears in the literature, my approach adds nuance. I distinguish between first- and second-order CAPs. First-order CAPs involve multiple forms of free riding—letting others do the work, take the risks, pay the costs. Typically, they involve some form of distributional conflict. Who makes the coffee at work, lifts his head to oppose the dictator, or cuts her carbon consumption? In principle, negotiated agreements can resolve such CAPs, but why should anyone believe a mere promise to honor an agreement when cutting corners is easier or more profitable? Should we believe a firm’s promise to deliver a safe, high-quality product or not pollute, a politician’s promise to respect minority rights, a warring party’s promise to lay down arms if the other side does so first? Second-order CAPs involve arranging mechanisms (or relations) of coordination and enforcement that render agreements which (in principle) could resolve first-order CAPs, credible, implementable, indeed meaningful.¹ And the enforcement component of second-order CAPs, which always involves power, links economic and political processes and agreements; second-order CAPs underlie political economy. This two-sided concept of CAPs thus offers an analytical lens for examining a huge variety of developmental issues. Humans, after all, are simultaneously individuals and social beings. Individual activities and beliefs both respond to and influence group beliefs and interactions, and vice versa. Competition, cooperation, conflict, and incomplete or skewed understandings abound. CAPs thus permeate economic, political, and social dynamics.

Analogously, strategic behavior permeates human societies, occurring whenever one person’s or one group’s actions affects others. Game-theoretic reasoning permits systematic analysis of myriad strategic interactions. It fosters vicarious problem solving, wherein investigators attribute material and/or social goals to individuals or groups, along with possible actions and various obstacles and constraints (Schelling 1978). On this basis, one can infer (predict) likely behavior. Game-theoretic reasoning requires only an assumption that humans seek goals and that agents’ actions influence outcomes for others (Gintis 2009), hence its breadth of application—here, application to the political economy of development.

In the social sciences, a conceptual framework provides a platform for drawing distinctions, explaining core avenues of causality, and, often via extensions, predicting outcomes of social interactions that operate in various specific contexts (Jenkins-Smith et al. 2018). Conceptual frameworks provide vocabulary, sets of categories, and sets of causal principles that facilitate subsequent analysis. By designating and fostering avenues for inquiry, they create foundations for entire research programs. Although, given such breadth, many elements of a specific framework are, at best, difficult to test empirically, frameworks point to coherent bodies of complementary theory that may guide subsequent research, including multiple, more focused theoretical models with more precise conceptual and operational specifications. Multiple testable hypotheses may then follow.²

Despite its breadth, this book does not attempt to explain long-term historical origins of developmentally functional institutional systems. For example, it does not sort out the degree to which geographical differences have conditioned distributions of power and institutional evolution over centuries—a question posed by Stanley Engerman and Kenneth Sokoloff (2002). The present focus is more contemporary, primarily though not exclusively concentrating on the twentieth and early twenty-first centuries, and it pays considerable attention to short- and medium-term time horizons; the latter might extend a few decades. Even so, this approach addresses foundations of institutional development in a manner that is consistent with many historical accounts of institutional evolution.

This text employs the nation-state as its primary unit of analysis, but many of its principles apply to specific geographical and topical policy domains (addressed in Chapter 6), industrial sectors and various subnational regions including municipalities (addressed in Chapters 8 and 9), and supranational regions and organizations such as the European Union (EU) and the African Union. Indeed, the discussion of political settlements in Chapter 8 invites subnational distinctions within at least two of its four designated categories.

My proposed framework also merges several intellectual traditions. It utilizes a broad and flexible interpretation of economic and rational choice institutionalism—a variant on methodological individualism that employs a broad and minimal conception of rationality as goal-oriented behavior (Ostrom 1998; Gintis 2009). It adds a complementary emphasis on game-theoretic reasoning as a systematic method for conceptualizing ubiquitous strategic interactions among various agents, which may be individuals, organizations, or coalitions. As such, this framework offers multiple avenues for vicarious problem solving that analysts may apply to specific developmental contexts. It also incorporates social conflict theory. Distributions of power shape institutional formation, and asymmetric distributions of power generate commitment problems. To classify underlying developmental contexts, this approach considers discrete types of political settlements. Distinct configurations of these shared understandings, relationships, and arrangements among powerful parties that establish politics, rather than violence, as their key method for resolving disputes underlie distinct configurations of social orders. Finally, this approach frames processes of institutional evolution within a punctuated equilibrium dynamic, an addition that renders its premises compatible with historical institutionalism and punctuated equilibrium theory (PET) in policymaking.³

Because their concept of social conflict underlies two of this text’s core hypotheses, a brief comparison to Daron Acemoglu and James Robinson’s approach (2006, 2008, 2012) permits further elaboration.⁴ In their discussions of the economic origins of dictatorship and democracy, the uses of elite power, and the comparative economic success of nations, these authors utilize seven basic principles:

1. They start with an economic foundation, meaning that individuals use well-defined (broad) preferences (such as a desire for more income) to evaluate social outcomes. Corresponding economic incentives affect political attitudes, and individuals behave strategically, as in game theory.

2. They focus on social conflict among various groups of political actors who can affect economic and political outcomes through collective organization and access to resources (sources of de facto power) and, more generally, through exercises of both de facto and de jure power.⁵

3. They address the role of political institutions in designating decision-making authority (de jure power) and, more generally, the impacts of distributions of power on the evolution of both political and economic institutions.

4. The authors focus on commitment problems related to the typical inability of powerful parties to credibly signal that they will refrain from using their power for their own benefit—a condition that undermines the credibility and feasibility of potential agreements. By designating the distribution of relatively permanent de jure political power, however, political institutions can (sometimes) resolve such problems.

5. They pay attention to distinctions among various sources of income and wealth, notably that between the political incentives implied by land ownership as opposed to ownership of productive resources that rely on physical and human capital.

6. They apply a Schumpeterian approach to political development as constituting fair elections and broad political participation. This approach underlies the Acemoglu-Robinson distinction between authoritarian and democratic forms of governance.

7. They employ the concept of a political equilibrium in which powerful parties do not encounter sufficiently strong incentives to invest resources in acquiring (additional) de facto power for the purpose of altering existing institutional configurations.

Using these principles, Acemoglu and Robinson (2012) distinguish between extractive and inclusive institutions, with attention to the stability of each. Whereas extractive institutions sometimes foster short- to medium-term growth by transferring resources from relatively unproductive to productive sectors—for example, from agriculture to heavy industry in the USSR starting in the late 1920s—they cannot achieve sustained growth because extractive institutions stifle technological innovation and creative destruction. By contrast, inclusive political and economic institutions, when sufficiently stable, foster long-term growth.

My approach retains this emphasis on the importance of strategic reasoning and economic incentives—though with more leeway for shifts in preferences arising from social influence. It also retains a focus on social conflict, the significance of political incentives conferred by distinct sources of wealth, the impact of distributions of power on institutional evolution, the critical role of commitment, and a potential for institutions to establish credible commitment. Indeed, commitment problems reflect unresolved second-order CAPs, and, for complex exchanges, institutions underlie feasible possibilities for resolution.

Yet, there are differences. Rather than focus inquiry on distinguishing democratic from authoritarian paths of development, and corresponding concepts on inclusiveness and exclusiveness (important though they are), my approach adds dimension and nuance by directly considering categories of political settlements. The contours of political settlements, which depend on their social foundations and configurations of authority, influence the evolution of institutions and, consequently, corresponding economic and political development. They do so, moreover, in manners that do not necessarily rely on a democracy/dictatorship dichotomy. Even so, the notion of a political settlement (developed in Part III) does bear resemblance to the Acemoglu-Robinson concept of a political equilibrium. The implications of distinct types of political settlement, however, extend beyond an exclusive/inclusive dichotomy—relevant though that is. I also place more emphasis on second-order CAPs—especially those related to enforcing institutional prescriptions. Such CAPs interfere with attaining sufficient implementation and social mobilization for rendering nominally inclusive political and economic institutions inclusive in practice. Moreover, my approach does not require that political inclusion guarantee or lead to economic inclusion, and vice versa.⁶ Additionally, I include a richer concept of political development that extends beyond a Schumpeterian notion by also stressing state capacity, the rule of law, legitimacy, and social mobilization.

In many respects, this text offers a sequel to my 2013 book, Collective Action and Exchange: A Game-Theoretic Approach to Contemporary Political Economy. That book addresses the same basic proposition: development requires resolution of CAPs, but it does so with more micro foundation and less attention to macro-level interactions and processes of development. My 2013 text begins with micro foundations that address the ability of small and large groups to develop and implement cooperative agreements related to myriad types of free riding (first-order CAPs) as well as methods for rendering such agreements credible by establishing requisite coordination and enforcement (second-order CAPs). A key implication follows: resolution via enforcement requires exercises of power. The discussion proceeds to complicate the analysis by successively discussing the sources, instruments, and dimensions of power; social preference theory, especially the concept of intrinsic reciprocity; and bounded rationality, which then establishes foundations for conceptualizing institutions. Next, it turns to institutions as conduits for the transmission of motivation, information, and, more fundamentally, cognition. Informal and formal institutions and institutional systems thus act as social coordination devices—foundations of social choreography (Gintis 2009). This discussion proceeds to address the compatibility of informal and formal institutions (or lack thereof), with implications on relationships between local self-governance, third-party enforcement, social norms, formal institutions, and complex exchange. These are foundations of governance and economic development. After considering social networks and the political economy of policymaking, my 2013 text closes at the macrolevel: location, information, growth, power, commitment, and development.

My new text expands on these final topics.

I

FOUNDATIONS

PART I DEVELOPS FOUNDATIONAL concepts for the remaining argument in this text. Chapter 1 sets the stage for interactions of agency and structure. It addresses the difficulties of achieving cooperation among individuals, noting two basic types of collective-action problems (CAPs). It proceeds to develop the contextual concepts of informal and formal institutions, noting links to bounded rationality. It proceeds to the larger-scale concepts of institutional systems, social orders, and political settlements, with attention to implications on resolving CAPs. Chapter 2 addresses the following multifaceted concepts: economic development, with attention to growth, distribution, and foundations of productive and other economic capabilities; political development, with attention to capacities, rules, accountability, social mobilization, and legitimacy; various dimensions of political and economic inequality; and how inequality and development interact.

1

Collective-Action Problems and Institutional Systems

Institutional failures, weak accountability mechanisms, and missed opportunities for cooperative problem solving constitute the running themes of our story of economic underdevelopment. The institutional framework of an economy defines and constrains the opportunities for individuals, determines the business climate, shapes the incentives and organizations for collective action by local communities in resolving their common problems, and encompasses the structures of commitment and accountability that the political authority of a society provides.

—Pranab Bardhan, Scarcity, Conflicts, and Cooperation: Essays in the Political and Institutional Economics of Development (2005)

ZAMBIA ACHIEVED INDEPENDENCE from Great Britain in 1964. The new government adopted nominally open institutions that prescribed broad political and economic access. Yet, Europeans retained the best jobs, 60–70% of marketable agriculture, and ownership of valuable copper mines. Despite the shift in political control, rents remained principally in the hands of the preexisting elites, with their control over those rents supported by the bequeathed economic institutions (Levy 2013, 119). Moreover, lacking a shared concept of national purpose and identity, the pre-independence unity of the anticolonialist coalition that had formed the new government quickly fragmented. Regional and ethnic conflicts emerged, and organized labor, especially the miner’s union, staged multiple strikes. For the 11 years between 1961 and 1971, Zambian GDP per capita grew at an average annual rate of 0.3%. In 1972, the United National Independence Party (UNIP) consolidated its power, forming a one-party state (Ibid., 120). Even though the new regime provided some stability, it could not adapt to declining copper prices and other economic problems. For the next 18 years, GDP per capita declined at an average annual rate of −1.84%.¹ Over these years, the UNIP government presided over crisis, response, backtracking, and deeper decline (Ibid.).

The post–World War II Philippines faced similarly daunting problems. Gabriella R. Montinola elucidates:

From 1946 to 1972, the country was dominated by a coalition of elite families and foreign capitalists who controlled access to economic and political power. The major source of wealth at independence was agricultural land, but this source was soon augmented by industrial policy-induced rents. The ruling coalition used these rents to secure loyalty and to defuse periodic violence from non-elite groups. The strategy was unsustainable, however, because the rent-creating policies did not produce enough resources to satisfy the increasingly restive non-elite groups. The threat of disorder and violence enabled Ferdinand Marcos to install himself as dictator in 1972. (2013, 149–50)

Why did Zambia’s initially open political and economic institutions fail to generate reasonably shared substantial economic growth and democratic institutions? Why was the Philippines unable to create more accessible and responsive institutions?

Many approaches to economic development stress the rate of growth of GDP per capita as the single most important developmental variable. Some proceed to focus on proximate causes of economic growth, such as physical capital, human capital, and technology, with attention to immediate antecedents. Associated policy prescriptions might then include promoting savings, research and development (R&D), and enacting policies aimed at protecting property rights or encouraging the free movement of labor and capital. In this text, however, I strive for a deeper and more comprehensive approach. As a work in political economy, this text addresses both political and economic development, with attention to their interactions, overlaps, conflicts, and complementarities. Its broad concept of development—namely, sustained widespread improvement in human economic and political capabilities—focuses attention on both barriers and opportunities. Using a set of related developmental hypotheses, this approach moves beyond proximate causes of growth and their policy or institutional antecedents to deeper interactions between collective action, cooperation, coordination, and sources and exercises of power that shape institutional development. At a yet deeper level, this text’s conceptual framework addresses how distinct configurations of understandings and arrangements for restraining the organized use of violence—that is, political settlements—influence prospects for achieving some balance of political and economic conflict, competition, and cooperation that may then foster accessible and accountable political participation, along with broadly distributed economic capabilities, growth, and access.

Accordingly, this book addresses three intertwined themes. First, economic and political development requires resolution of underlying CAPs. CAPs arise whenever individuals, pursuing their own interests in given contexts, generate undesirable outcomes for one or more groups. Crime and pollution are examples—as is providing for physical, educational, technological, and health infrastructure; achieving reform; and forging arrangements that can settle disputes without resorting to violence. Widespread improvements in human capabilities thus require removing barriers posed by CAPs, including sources of deprivation, in addition to the more traditionally considered routes to opportunity. Development thus entails interacting economic and political components, including sustained improvements in living standards; widespread provision of public goods and services such as health care, education, and basic infrastructure; continuously strengthening institutional arrangements that protect economic, political, and civil rights; and simultaneously fostering widespread economic and political access and participation. CAPs permeate myriad efforts toward such achievement.

Second, a society’s prospects for resolving fundamental CAPs—and therefore its potential set of developmental trajectories—depends critically on the underlying political-economic context. Such contexts involve power relationships and institutional configurations, which themselves emerge from previous attempts to resolve CAPs—notably those related to constraining the use of organized violence among parties with such potential via some form of mutually understood political settlement.

Third, inequality infuses the relevant processes—doing so as an outcome, an impetus, and an impediment to development. Multiple inequities emerge from economic and political processes—whether conducive to development or not. Concurrently, unequal distributions, relationships, and access shape the basic characteristics of developmental CAPs, as well prospects for resolution. Although political and economic inequities sometimes offer impetus for action, they also underlie multiple deprivations that serve as barriers to development; and excessive inequity fosters political instability. Inequality generates its own set of developmental CAPs.

Turning to specifics, this chapter discusses the core concepts of CAPs, institutions, institutional systems, and political settlements. Section 1 addresses CAPs in more detail, distinguishing first-order CAPS of free riding from second-order CAPs of arranging mechanisms (or relations) of coordination and enforcement that render agreements, which (in principal) could resolve first-order CAPs, credible, implementable, meaningful. Second-order CAPs often pose subtle and difficult political and economic barriers to development as they merge and intertwine the political and economic components of development processes, beginning with micro-level exchange agreements. Institutions can facilitate resolution. Section 2 discusses institutions (rules), organizations (a type of actor), and institutional systems (mixes of both). After defining institutions, the discussion turns to micro-level underpinnings, using concepts of bounded rationality and cognition that draw attention to the importance of mental models (conceptual frameworks), noting that institutions are in fact a type of shared mental model. Discussion proceeds to three key channels through which institutions condition behavior (motivation, information, and cognition) before more fully addressing distinctions between institutions and organizations. Complementary combinations of both entities form institutional systems, which then coordinate understandings and activity across multiple agents—what we later call social choreography. Section 3 addresses how institutions and institutional systems both resolve and create CAPs. It discusses how informal and formal institutions interact, with attention to manners through which institutions and organizations jointly foster social coordination (choreography) that tends to follow a punctuated equilibrium dynamic—resolving some CAPs and creating others in the process. Moving to foundations, Section 4 introduces the concept of political settlements—the chief component of this text’s conceptual framework. As shared understandings and arrangements that limit organized exercises of violence, political settlements underlie the formation of institutions and institutional systems. They establish requisite conditions for economic and political development. In their absence, development does not occur. Because the social bases and configurations of authority within political settlements condition developmental CAPs, precise specification of these relationships provides a conceptual framework for analyzing the political economy of development. Section 5 presents the plan of the book.

Section 1: First- and Second-Order Collective-Action Problems

A society’s prospects for development depend on its ability to resolve multiple underlying CAPs. CAPs arise when the pursuit of individual inclinations and self-interest, within given social contexts, leads to socially undesirable outcomes for one or more groups.² Relevant groups include nations, cities, communities, tribes, clubs, companies, nonprofit and religious organizations, colleagues, friends, and combinations or subsets therein. Examples of CAPs include the difficulties of achieving cooperation among individuals or groups related to the following types of issues: addressing climate change at international, national, and local levels; reducing international conflict; deciding who makes the coffee at work or who washes dishes at home; reducing crime, pollution, and traffic jams; providing basic public services such as potable water, roads, parks, disease control, R&D, and adequate education and health care; resolving disputes; and achieving political reform.

CAPs are ubiquitous in human social interactions. Indeed, the concept of CAPs offers a relatively simple, intuitive lens for analyzing myriad complex social problems. Because they permeate developmental processes, CAPs serve as a unifying analytical concept for this book. There are two basic types: first-order and second-order.

First-order CAPs involve multiple manifestations of free riding and social conflict related to the provision of public goods, promotion of positive externalities, reduction of negative externalities, and limiting the use of common resources—all broadly defined. For example, adjudication of disputes is a type of public good, as are the social benefits of opposing repressive regimes; excess conflict generates negative externalities; and within organizations, such as government agencies and private firms, managerial time is a common resource. Developmental first-order CAPs include how to provide and arrange for transportation, communication, health care, and educational infrastructure, and related social services; how to reduce pollution or ameliorate its effects; and how to provide for public safety.

In principle, resolving first-order CAPs involves forging implicit or explicit arrangements—among parties whose interests usually differ—for distributing the associated costs and benefits. Here, specific parties often bear the costs, such as time, effort, risk, and money; whereas benefits, such as a reduction of disease prevalence, are frequently nonexcludable (publicly available). Even so, the Coase Theorem asserts that, in the absence of transaction costs, affected parties can negotiate agreements about distributing costs and benefits, and that any associated distribution does not affect efficiency.³ Yet, effective agreements require credibility, and perceived inequities within agreements often foster conflict. Indeed, many conceivable arrangements that, in principle, could resolve CAPs—and even imply Pareto improvement—never emerge, or they unravel under the stress of anticipated or ensuing conflict. Will the relevant parties have sufficient motivation, ability, information, and understanding to honor their side of a possible agreement?

Second-order CAPs involve arranging the coordination and enforcement that renders possible agreements, plans, or promises to resolve first-order CAPs credible—and hence implementable.⁴ In fact, the anticipation of problematic coordination or enforcement often undermines the will to negotiate or even consider any resolution—and so impedes economic and political development. Second-order CAPs themselves arise from a combination of divergent interests and incomplete information. This mix creates opportunities for strategically manipulating information, via selective revelation, distortion, or outright lying. Indeed, these second-order coordination and enforcement CAPs—rather than simpler matters like costs of transportation to meetings—are the chief source of the ever-present transaction costs of forging credible agreements.⁵

Generally speaking, information-bound second-order CAPs may operate either before parties negotiate agreements, implying problems of adverse selection, or afterward, implying problems of moral hazard.⁶ Adverse selection arises from a tendency of parties to withhold or misrepresent private information concerning the attributes of items, services, or persons (including themselves) that affect the nature or value of a subsequent exchange or agreement. For example, sellers of used cars may overstate a car’s true value; job seekers may exaggerate their qualifications; potential employers may fail to reveal workplace hazards; borrowers may exaggerate their creditworthiness; and potential coalition partners may overstate their desire to cooperate or their political influence. Involved parties thus encounter obstacles to credibly communicating or discovering information about relevant characteristics of, say, used cars, job applicants, or potential coalition partners. Unless they devote resources to credibly providing or adequately discovering relevant information, potential exchange partners will lack potentially important information related to appraising the desirability of possible agreements or exchanges.

Adverse selection thus imposes transaction costs, such as those related to offering warranties and acquiring job credentials, and its existence influences exchange prospects and outcomes. Some purchased used cars actually are lemons; some new hires or elected officials are just not qualified. More fundamentally, the presence of high costs to signaling or screening and/or the possibility of undesirable outcomes can preclude potentially beneficial exchanges and agreements. Because they cannot credibly signal quality worthy of a good price, sellers of good used cars may withhold their vehicles from the market (Akerlof 1970). Brilliant graduates from third-rate universities may not even apply for sophisticated jobs. Potentially viable coalitions do not form. Development suffers.

Referring more specifically to second-order CAPs, adverse selection undermines coordination among potential parties to exchanges and agreements. For economic exchanges, the relevant markets cannot sufficiently match quality-conscious buyers and sellers. Market failure ensues because the parties lack a full understanding of the de facto property rights subject to exchange. Does a certain price entitle a buyer to a