Friday, October 28, 2011

Collier on some of these political economy issues

I was listening to one of the Growth Week podcasts from the LSE site the other day. It was a discussion of state-building with Paul Collier, Tim Besley and a politician from Bihar. Since I found it interesting but at the same time had the feeling there was something missing, here is a quick summary....

Besley gave quite a simple exposition of state-building, based on the Weberian/historical interpretation of Western Europe, as states requiring taxes to fund wars (and now, a common cause of effective public spending), and then putting in place the legal structures required to go with it. According to his view, then, governments should be "investing in tax systems" and the expenditure system, and "investing in growth" through provision of a legal framework and security, purely on the basis of extracting more through taxation. So once you get a certain level of tax revenues, you improve the rest of your institutional structure, including property rights etc, and off you go. If they don't, this is because the pay-off from taxation is not enough, due to a lack of "institutional cohesiveness" and the lack of longevity of political actors (see here for the full underlying papers).

While that is an oversimplification, the point made by Collier was that sometimes those in power are not interested in state-building, so the investment-payback or the time-inconsistency issue of taxing now for longer-term payback are of less interest. There is plenty of evidence from plenty of places that this may be the case. This could be due to the escape route provided by natural resource rents, by aid, or simply be a minimal tax-base which can be reallocated according to the whim of the political class, meaning that according to the model they have no incentive to promote growth to raise revenues. So what does that mean for "state-building"?

According to Collier, the political instability which might lead politicians not to invest in tax etc, often comes from high unemployment among young men. This then implies a need to look at jobs.  And what are the jobs which might be appropriate in a poor country with a high-level of low-educated, urban unemployed? Construction! And construction of low-cost, basic housing in particular.

As an aside, this actually relates to a proposal I heard about quite some time ago from a Canadian economist named Lauchlin Currie. Based on a wide experience in Colombia but also elsewhere in South America, it also tied in with the kind of "leading sector" models advocated by "big push"-type theories of development (a la Rosenstein-Rodan). Get these low-skilled, urban migrants into construction, they create their own demand and off you go. But how to get started? Currie's plan was to use indexed mortgages and forced savings. That meant you could avoid the front-loading problem  caused by high interest rates on large loans, and provide the pool of money required. Obviously, it would also imply providing useful investments, particularly if construction also related to infrastructures. Collier also recognises the issue of the need for access to finance, but also housing standards that are too demanding which raises prices, and weak property rights.

Is Collier reinventing the Currie leading sector approach? Indeed, I have heard him advocating the need to study the construction sector more closely and the cement sector in particular (as a further aside, I recall that provincial budgets in Mozambique were often highly concentrated in 'building", whether it be residences for district administrators, prison walls, or schools, but often, there were very few construction companies actually around to do anything beyond petty construction, making these ambitious plans rather impracticable).

In any case, his second reason why the Besley investment model may not work is that a difunctional state may be what the government wants in order to make personal wealth appropriation easier (think Mobutu - and also the Chabal & Deloz book I talked about here), and the third is that poor public expenditures may mean weak incentives for taxpayers to comply.

On this latter point, this is something which is receiving more and more attention, relating to discussion of "fiscal legitimacy" and accountability. But what Collier also mentions is something about "effective organisations", and how civil servants often "haven't internalised the objectives of their institutions". From having spent some time in a civil service, this may indeed be the case, but I wonder if it is really to do with the civil servants, and not the leaders of government institutions who have sometimes not internalised the objectives of their institution, but rather imposed their own objectives on their institution. Indeed, one of the areas I want to look at on tax policy is how tax policy is affected by the lack of intra-government coordination on tax policy formulation which, to me, is all about turf wars, personal ambition at the head of a particular organisation etc.

How would that fit in with the above? Well, perhaps by breaking down "government" into its constituent parts, you can then also make the case that even if the ruler wants to "invest" in taxation, if the mechanisms for making that investment are disfunctional, if capacity is poor, if understanding of the implications of these things is limited, and some individuals at the heads of certain institutions do not want to promote this "investment", then it will fall apart. So I'm going with your last explanation Paul. With a slight twist...


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