an institutional view of ldc failure

An Institutional View of LDC Failure

Enrico Colombatto, Universita di Torino and ICER,Torino, Italy

The search for rent-seeking opportunities in democracy harms growth and may leadto political turbulence, thereby opening the way to the bureaucratic nomenclature or tototalitarian rule. In the former case, the priority goes to rent-extraction policies; in thelatter, the dictator tends to be short-sighted, or just a representative of a few, powerfulrent-seeking coalitions. Strong, “enlightened,” and wide-ranging coalitions could perhapsinternalize the costs of rent seeking. But this may not be realistic. More likely, poor policieswill be followed by other equally poor policies. 1998 Society for Policy Modeling. Pub-lished by Elsevier Science Inc.

1. THE LDC FAILURE TO DEVELOP

Why do developing countries find it so difficult to grow, upgradethe quality of their resources, and reach their potential consump-tion-possibility frontier within a reasonable amount of time? It isa fact that poor countries generally stay poor and rich countriesgenerally stay rich (or possibly get richer). Indeed, the gap betweenthe former and the latter may actually be increasing, rather thanfalling.1

The search for possible explanations dates back a long time.Adam Smith argued that this pattern is unlikely to be reversed,

1 See for instance Baumol (1986); more recently, Barro and Lee (1993) compared GDPper capita in developed and developing countries over the last twenty years: while it hasincreased significantly in the former economies, it has fallen in the LDC bloc. Cf. alsoGrilli (1994) for a historical perspective and for appropriate caution about the pitfalls ofaggregation.

Address correspondence to Enrico Colombatto, ICER, Villa Gualino, Viale SettimoSevero 63, 10133 Torino, Italy.

I am grateful to L. De Alessi, A. De Jasay, G. Clerico, H. Hochman, K. Leube, J.Macey, H. Manne, G. Scully, and P. Sgro for their comments on preliminary drafts of thispaper. A previous version has been discussed at the George Mason University School ofLaw, where I benefited from insightful comments by Ll. Cohen, B. Johnsen, and E. O’Hara.Financial support by the Italian Ministry for the University and Scientific Research is alsoacknowledged.

Received June 1996; final draft accepted November 1996.

Journal of Policy Modeling 20(5)631–648 (1998) 1998 Society for Policy Modeling 0161-8938/98/$19.00Published by Elsevier Science Inc. PII S0161-8938(97)00066-5

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unless a developing economy manages to reach some critical in-come level, which seems to be a necessary—perhaps sufficient—condition to ignite growth and development (see Elmslie, 1994).

Several other answers have been suggested in the literaturesince then, as clearly surveyed by Arndt (1987) in a much broadercontext. By and large, two main sets of theories have come to thefore. One stresses the (low) quality of policy making, the otherthe scarcity of what could be called the existing non-tradeablecapital—that is, infrastructure and the characteristics of the labourforce (the quality of human capital).2

We doubt that the traditional analysis of the development fail-ure can take us very far. Instead, we offer a public-choice interpre-tation of the persistingly disappointing performances of LDCs,and try to explain why most LDC stories are so likely to end upin catastrophe. The market for growth in different regimes istherefore discussed in Section 2. Section 3 emphasizes the need toendogenize institutional evolution within a public-choice context.Politicians’ behavior is outlined in Section 4, where the connectionbetween policy making and institutional change is clarified; theiractions regarding policy-making and institutional change are ana-lyzed in Section 5. Section 6 offers some concluding remarks ina positive perspective.

2. RENT SEEKING AND POLICY MAKING IN LDCS

2A. The Rent-Seeking Nature of a Stable Democracy

As regards the role and shortcomings of domestic policy makingand institutions, Grilli (1994, p. 9) has put it very clearly:

during the past twenty years the policy-performance nexus has becomean increasingly apparent and accepted factor in explaining differences incountry economic outcomes.

Recent “mainstream” papers on growth also acknowledge that

differences in growth rates across countries could . . . come from differencesin political institutions enforcing . . . property rights (Verdier, 1994; p. 757).

2 A third view, based on the importance of religion, cultural values, and ideology willbe ignored here, as the quality of its empirical support is still open to debate.

INSTITUTIONAL VIEW OF LDC FAILURE 633

Scully (1995) actually tries to quantify the role of institutions, andconcludes that they are the main explanatory factor for the failuresof most Third-World countries.3

It is also widely accepted that politicians in most poorly per-forming LDCs are particularly sensitive to rent-seeking coalitions.Thus, it is no longer surprising that policy makers do not opposethe birth of institutional distortions and inefficiencies, if in suchan environment agents are induced to organize, and try to acquirepossible rents or resist changes in policy making (when existingrents are to be protected). The most common outcome is the birthof a market for law making, where politicians maximize theirincome and power by selling pieces of legislation to the rent-seeking coalitions ready to pay for them.

It is therefore to be expected that when a market for policiesexists, general welfare and development prospects tend to beregarded as secondary issues,4 unless “popular” hopes are frus-trated and political survival jeopardized, as already maintainedlong ago by Tocqueville and Durkheim. Rather, there persists ahigh degree of unproductive activities, to the detriment of incomeand possibly growth. Income is depressed by the fact that a signifi-cant amount of resources is devoted to rent-seeking activities, bythe increase in transaction costs, and by the effects of such anincrease on efficiency. Growth prospects may be harmed in severalways. If the bargaining process does not yield stable results interms of law making, property rights are poorly defined, and evenmore poorly enforced. Policies are unpredictable; ceteris paribus,direct investment will be reduced. In addition, because rent seek-ing is aimed at distributing (or re-distributing) income, inefficienc-ies in the allocation of productive factors often ensue. A brain-drain effect may also be in place, so that the limited quantities of

3 Similarly to Menard (1995), institutions are here understood to be the “rules of thegame,” a set of rules “so as to implement and enforce patterns of behavior governing therelationships between separate social constituencies” (p. 167).

4 Cf. also Krueger (1993), according to whom LDCs usually do not have a developmentpolicy or, even in countries where such policies are in place, they seem to be playingagainst growth and development. In Krueger’s view this happens also if the policymakeris honest and does intend to pursue general welfare: for he would, nevertheless, fail increating an efficient bureaucracy—perfectly informed, omniscient, able to develop a systemof incentives without creating a system of potential rents. Similar points had also beenmade by Lal (1985).

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highly skilled workers are taken away from management, inno-vation, and research and development activities, toward rentseeking.5

Indeed, fast development in a context characterized by extensiverent seeking is not even desirable. For policy makers realize thatquick growth and economic shocks usually alter both the relativepower of the coalitions and the amounts of the rents distributed.6

Thus growth may be destabilizing and lead to a fight. Politiciansand bureaucrats who profit from their ability to strike and securea lasting balance between coalitions would lose credibility. Theirpower and privileges would be at stake. Hence, stability is trulythe top priority.

The above applies to politicians in a democratic regime, wherethey try to acquire personal wealth and maintain the relativeprestige which political office may entail.

2B. Politics Under Ruling and Fragmented Coalitions

A different situation occurs when the political leaders have noautonomy, and only represent the ruling coalition or the set ofruling (cooperative) coalitions. In this case, no bargaining takesplace. Politicians simply take orders from the ruling coalitions.

The consequences on growth remain ambiguous. In relativelysmall economies, it often happens that the public interest coincideswith that of the ruling coalition, at least to a significant extent.This does not mean that all citizens are equally happy, but thatmany are somehow involved in the actions of the winning coalitions.Most negative effects of rent seeking on economic growth are thusinternalized, and a long-run approach prevails. The little role playedby the opposition reduces the need to plunder and run away. Eco-nomic development is thus pursued by the coalition itself.

On the other hand, in relatively larger countries, or where thewinning coalition is just a small fraction of the economy (frag-mented-coalition rule), instability may be substantial, and hit-and-run attitudes more likely to occur. Private investment would bediscouraged by economic uncertainty, political instability andgrowth prospects compromised.

A particular case occurs when the winning coalition is the bu-reaucracy (bureaucratic rule), “collectively rational, a parasite

5 See Sturzenegger and Tommasi (1994), Murphy, Shleifer, and Vishny (1993).6 See Kimenyi and Mbaku (1993).


animal living on a host animal. It . . . has an optimum policy, withan optimum trade-off between bloodsucking today, and devel-oping the host animal for more bloodsucking tomorrow” (A. DeJasay, private correspondence). Should the economy be too frag-ile, the weight of the bureaucracy would then become unsustaina-ble and subject to attack by other coalitions or taxpayers. In turn,the bureaucracy has an interest in portraying itself necessary forstability, in emphasizing the adjustment costs of political change,and in showing its independence vis-a-vis the politicians. Bureau-crats are then pleased if the polity appears weak (and thereforegreedy), but with no chance to be replaced by better legislators.In this light, the only alternative would appear to be a shift ofpolicy-making powers from the politician to the bureaucrat.

It follows that slow growth serves the bureaucrat twice. It makespoliticians weak, and the perception of the stabilizing role of thebureaucrat stronger. In addition, the power of the bureaucratincreases further as the politician struggles for survival, and triesto create new incentives to induce the bureaucrat to work better.In this light, it is hardly worth mentioning that LDCs have oftenbeen characterized by remarkably skillful bureaucracies. Theyhave been able to make sure that their economies were strongenough for the survival of the bureaucrat himself, but disappoint-ing enough to cause political instability and weakness. That is,they have guaranteed “the maintenance of a harmonious rent-seeking equilibrium.”7 The visible outcome has therefore beeninstitutional stability, not growth.

2C. Politics Under Totalitarian Rule

The picture may change if the political regime is totalitarian.That is, if the ruling politicians are neither explicitly designatedby the electorate for a finite period of time at the end of whichthe population has an effective power of choice and change; norrepresenting one or more well-defined coalition(s).

Short-lived dictators would devote resources to prestige and/or military projects (as in many democracies), in order to secureor to justify the political survival of the ruling class. However, ifstrong enough, totalitarian leaders need not create a rent-seeking

7 See Kimenyi and Mbaku (1993, p. 387 and p. 385).

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game at all, for they would have no particular interest in devel-oping competition between coalitions. As a matter of fact, totali-tarian leaders can extract rents (when significant) or elicit personaltransfers almost at will, without creating a law-making bargain toreach the purpose.

In this light the overall impact of a truly totalitarian regime ongrowth is bound to be negligible, for the number of leaders to besatisfied is small, by definition. Surely smaller than that of theagents involved in the democratic decision-making process or inwhat Lal and Myint (1996) call a predatory-bureaucrat regime.Actually, growth may even be enhanced,

if dictators plan to stay in power for long and have family members asresidual claimants. For then they will want to preserve the value of theircapital stock rather than deplete it through short-sighted actions (J. Macey,private correspondence).

There is one important exception, though. For

the consumption of an autocratic ruler . . . is not limited by his personalcapacities to use food, shelter, or clothing. The main social costs of auto-cratic leaders arise mostly out of their appetites for military power, interna-tional prestige, and larger domains (Olson, 1993, p. 8).

If such appetites are too large, economic performance will beaffected. The leader’s authority may be weakened, and he willbe forced to rely on one or more coalitions to stay in power.Then the system would change from totalitarian rule to ruling- orfragmented-coalition rule. Stalin may have been the only relevantexception to this pattern, for the reasons explained in Olson (1993).

3. SOME RESEARCH AGENDAS RECONSIDERED

As mentioned in the introduction, the traditional recipes thathave been proposed to enhance development and reduce povertyhave turned out to be inadequate.

Orthodox economists would like to see no policies; in their view,stabilization and structural adjustment should make it possible toremove distortions. Hence resources would be allocated optimally,and the economy could exploit its comparative advantage. Growthwould follow as a matter of course. Unfortunately, one does notunderstand why LDCs don’t put their house in order if the solutionto their problem is so simple and straightforward.


The structural approach would rather recommend new and bet-ter policies, the difference between success and failure being de-pendent on the quality (i.e., the enlightenment) of the politicians,on their ability to pick the winning industries. Liberalization isnot ruled out, but has to be slow, to avoid disruptive redistributioneffects. In the real world, this view has turned out to be too goodto be true. It is difficult to believe that entrepreneurs, consumers,workers, managers are all imperfect economic agents living in aworld of uncertainty, whereas planners and government officialsat large are virtually omniscient individuals, deprived of personalinterests.

Finally, the institutional-economics approach—let us call it“Free Market,” for simplicity—takes distortions as the outcomeof deliberate political action. Liberalization is welcome, for gov-ernment failures are deemed to be worse than market failures.But it cannot be carried out effectively unless the institutionalevolution process is under way, and for the better. The problemwith institutional economists is that they offer no normative solu-tion, since policy making is considered to be endogenous, theoutcome of a given institutional situation.

Public choice offers a different view, in that it focuses on thefact that distortions are generated by the rent-seeking game in acontext of stable democracy or fragmented coalitions. The empha-sis is on constitutional law making, on framing the appropriaterules of the game. History and culture do matter, of course, andso does path dependency. But in most LDCs one needs not referto history and institutions in order to understand why income andgrowth remain low.

Policy makers usually have a personal interest in increasingthe degree of government intervention, which cannot be reducedeffectively by external controls. In particular, it is virtually uselessto try to persuade policy makers that government interventionshould be restrained, or to discuss about the quality of the differenttools available—after the orthodox and the structuralist views,respectively. Instead, it seems more promising to investigate thenature of the interaction between rent-seeking and economic per-formance, and endogenize institutional change.

4. POLITICIANS AT WORK

Once in office, a politician may affect the economy by carryingout policy making and by contributing to the changing of institutions.

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Regarding policy making, heavier government intervention usu-ally implies concentrated benefits (to the coalition) and widelyspread costs; the opposite is true for modest government interven-tion (concentrated costs and widely spread benefits). As a conse-quence, changes toward more biased policies are always relativelyeffortless. But changes toward more neutral policy action arerelatively smooth only if the economy is growing at a satisfactoryrate, so that the lost rents are compensated by higher overallincome (or income expectations).

What may be defined as a “policy drift” also plays a role, whichis indeed crucial, especially under a fragmented-coalition rule.Similarly to what has been argued in Langlois (1968), Bernholz(1992), and Setterfield (1993), coalitions engaged in the marketfor law making imply a predisposition for the economy to slidetowards biased policy making, even if institutions remain thesame.8 In other words, policy makers try to take advantage of allthe possibilities offered by a given institutional setting in orderto increase the degree of government intervention, the quantityand intensity of distortions, so as to alter the set of signals andincentives economic agents receive. Distortions usually call formore distortions, in order to compensate those damaged by agiven policy and those who complain since the grass has becomegreener on the other side. Even if policies remain the same andlosers have no chance to be compensated, these very losers willtry to enter the winning coalitions and devote more time to lobbyingand rent seeking. Resources will then be taken away from produc-tive activities and growth affected. The cost is paid by the publicat large. Such policy drift is obviously stronger in a “socialist”economy9 than in a free-market one, but seems to affect more orless all institutional arrangements, as the evolution toward moreand more centralized governments witnesses (see Vaubel, 1995).

However, institutions need not stay the same. In fact, an ad-verse-selection process in institutional evolution is usually at work.

8 See Scully (1995) for a different view: “the change in the efficiency of the rule spaceis determined [jointly] by time and by the change in the rate of growth of the rule space.”

9 The “socialist” case is here assumed to include command and heavily-regulated econo-mies, where distortions are allowed—if not encouraged—by the constitution. Of course,it has nothing to do with the true (but often forgotten) nature of a socialist country,which refers to a community where economic growth and consumption do not matter andindividuals form a society on the basis of other values and objectives (de Jouvenel, 1990;pp. 11–14).


For if the institutional constraints turn out to be too tight comparedwith the desired quantity and nature of policy making, then pres-sure develops to accomplish institutional change:

Historically, all constitutional safeguards have been eroded or removed,at least after some decades, by Supreme Courts, constitutional amend-ments, by reinterpretations and by changes of the written and unwrittenconstitution (Bernholz, 1992, p. 2).

In other words, rents depend on distortions; in turn, these dependon policy making and on the institutional framework within whichpolicy making occurs. If the amount of rents/distortion is lowerthan what policy makers desire, and cannot be increased signifi-cantly as long as the institutional framework remains the same,then institutional “reforms” will be solicited and eventually passed.

5. THE DEMOCRATIC SCENARIO COMPARED

Policy making in a socialist economy creates or maintains impor-tant distortions in production and consumption. A decreasinggrowth rate—possibly negative—is the consequence. On the otherhand, a free-market constitution leads to a stable or possiblyincreasing growth rate.10 To make things simpler, one may imaginetwo steady-state growth rates, one for a socialist and one for afree-market economy. In the former case, the steady-state growthrate is approached from above (growth falls over time); in thelatter, it is approached from below. In the intermediate cases, thelong-run growth rate is defined by constrained policy making,where the (soft) constraint is provided by the constitution.

5A. Policy Drift and Constitutional Change

The extreme cases—pure socialism and pure free market—willbe ignored, since they offer little scope to examine change.

Rather, it is deemed more instructive to consider an ideal devel-oping country, characterized by apparent political stability (i.e.,no hit-and-run behavior), a low but tolerable growth rate, weak

10 The idea that socialism is detrimental to development is now accepted in the literatureand need not be discussed here. As recently explained in Pejovich (1995; ch. 10), thechances for growth depend on the role attributed to private property, and on the capacityof the institutions to allocate property rights in a transparent and efficient way. Bothrequirements are satisfied in a free-market framework; neither under socialism.

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political cartels, an “intermediate” constitutional setting (some-where half-way between a socialist and a free-market framework)and a mildly distorted economy (again, halfway between a neutralattitude and a totally distorted one). This is close enough to thestable democracy defined earlier on. If politicians act as rent-seeking individuals, then stability prevails, but growth is neglectedto the benefit of rent-creating activities, unless political survivalis jeopardized by popular discontent.

Is such a situation sustainable? That is, can it remain unaltered intime without evolving toward some other institutional framework?

It has already been shown that unless major shocks occur, thepolicy drift leads to an increase in rent-seeking activities and toa worsening in the overall economic conditions, including thegrowth rate. Two “peaceful” scenarios can then be envisaged.11

Policy makers have a long time-horizon, and feel they will beevaluated according to their long-run performance. In this case,they will take action before the growth rate falls too much: institu-tions would then evolve toward the free-market ideal, so as toresume growth. In other words, the slowdown caused by the policydrift is checked and possibly reversed by institutional evolution.

A second scenario is defined by a situation where politiciansare not willing or able to offset rent-seeking pressures. Yet, ifelections were due relatively early in a country where wealthtransfers are looked upon with fear, it may be hard to reach anagreement and change the rules of the game (i.e., the constitution).In these circumstances, and if the institutional arrangements arestrict enough, the drift soon comes to an end, the country remainswithin safe limits and keeps developing, even if at a lower, butstill acceptable, pace. On the other hand, if the institutional contextcan be modified with relative ease, pressures for institutionalchange (so as to allow more rent-seeking bargains, to compensatefor lower growth) cannot be resisted. The political situation un-folds towards the fragmented-coalition paradigm, where morepervasive distortions are allowed, growth deteriorates further, andthe politicians adopt a hit-and-run behavior.

11 By “peaceful” we refer to a situation where there is no military threat. For otherwisepolicymakers may decide to go toward a free-market economy, in order to make it richerand thus more powerful militarily. As Bernholz (1992) suggests, this may explain theJapanese case in the 1860s, and, more recently, the South Korean and Taiwan miracles.


Figure 1. Interactions between policy making, growth, and institutional settings.

All this is illustrated in Figure 1 below, which describes theinteraction between institutions, policy making, and growth. Thevertical axis measures the growth rate, which depends on the typeof institutional framework (described as a continuous variablealong the horizontal axis, ranging from socialist to free market)and on the nature of policy making. In particular, the straight linethrough B1 and B3 describes the maximum growth rate compatiblewith a given institutional framework. On the other hand, the thickdotted line going through B2 describes the growth rate correspond-ing to the worst possible policies allowed by the existing institu-tional framework. Thus, at every moment in time, a country canbe located at a point within the cone, closer to the top-rightarea if the economy is constrained by a free-market constitutionalframework, or to the vertical axis in the socialist case. For eachconstitutional possibility, the degrees of freedom allowed for pol-icy making are therefore described by the height of the cone incorrespondence of each point on the horizontal axis.

Finally, let us recall that there exists a minimum growth rate,which depends on culture, history, and expectations, below which

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popular unrest is likely to become substantial, and may wellthreaten the survival of the ruling class. Such growth rate is indi-cated in the graph by the thick horizontal line going through B1

and B2.Let us now suppose that the economy starts from a stable-

democracy institutional framework defined by point E. Ceterisparibus, policy and law making affect growth, which may be ashigh as GE if the economy runs on its production frontier. But itmay also be as low as gE if distortions are pervasive. That wouldstill be acceptable, though, because it remains above the criticalthreshold (defined by the thick line above gF in the graph).12 Astime goes by, however, the policy drift pushes the economy closerand closer to gE, even if the institutional context remains constant.

Short-sighted policy makers cannot provoke excessive dam-age—growth cannot fall below gE—as long as the institutionalcontext remains the same. gE may not be high enough to allow catchup, convergence (or the solution of the development problems ofthe country), but it is still adequate. However, in order to stay ona virtuous path politicians must be long-sighted, and legislate soas to approximate B0, and force the economy toward a free-marketframework and higher growth. Following the earlier discussion,this is possible only under a new institutional framework, that iseither in a ruling-coalition or a totalitarian-rule situation.

Yet, the nature of the policy drifts induces institutional reformsin the opposite direction, from stable-democracy to fragmentedcoalition. In these circumstances, the economy is therefore led tothe left of E, toward F. More inefficiencies are then allowed,growth drops further (gF is smaller than gE), and the country headsfor trouble as it proceeds to the left and below B2—gF being belowthe acceptable growth rate. In the end, the ongoing worsening(let’s call it institutional slide) can be stopped only by a bureau-cratic-rule setting. Otherwise, the slide reaches the socialist ex-treme and ultimately catastrophe.

In other words, the development opportunities for a typicalLDC depend very heavily on whether pressures for more govern-ment intervention can be resisted—and possibly offset—by consti-tutional means,13 by the capacity to stop the policy drift through

12 The possibility of a negative real shock is of course ruled out here, for then thecritical-growth threshold (the thick horizontal line corresponding to a growth rate justabove gF) would shift upward, as people want to recover from the shock. Actual growthmay no longer be high enough and the system meets crisis.

13 As P. Sgro suggests (private correspondence), this goes against the advice of “endoge-nous growth” writers who would argue the exact opposite, similarly to the structuralist


appropriate legislation. But how realistic is it to believe that stable-democracy institutions can give way to a ruling-coalition or to atotalitarian-rule regime?

The opposite seems closer to the real world. It is plausible toassume that, by and large, most politicians in a democracy arenot long sighted. Elections tend to be frequent, and pressure by(fragmented) coalitions difficult to resist. In addition, backbench-ers know how easily they could be replaced or used as scapegoatsby the party leader(s). Negative shocks—or fears of negativeshocks—may also play a role, as they raise the demand for protec-tion, nationalism, and ultimately state intervention. The followingof the story is thus economic slowdown and its possible conclusionunequivocal crisis.

5B. The Epilogue of the Institutional Slide

It has already been argued that the standard outcome of aperverse institutional slide is bureaucratic-rule reform. This ismore likely to happen when there is no major pressure to removedistortions and no major shock has occurred, so that there is noimmediate need to accelerate growth or to change the distributionof wealth radically. The bureaucracy is relied upon and takespower in order to stop the hit-and-run behavior of the politicians.As it acts in such a way, it becomes the ruling coalition.

But when nationalism is in strong demand, because of interna-tional tensions or because of the desire to avoid possible drasticchanges in the distribution of income and wealth, a leader maysucceed in establishing a totalitarian regime.

The last possibility envisaged is that a large coalition takespower (as discussed in Section 2), perhaps after a historical acci-dent: a ruling-coalition reform would be the outcome.

Now, if the bureaucrats take power at the end of a “soft crash,”they maximize the opportunities created by the rent-seeking game,as long as the economy grows at an acceptable rate. Constitutionalchange will therefore be kept within the interval (B1, B2), and therules of the game will be exploited so as to keep growth justtolerable. On the other hand, in a totalitarian-rule context, thedictator may be interested in letting the people have a potentiallylarge welfare state in order to preserve consensus and to satisfy

school of thought. That is, you need “proper”—and possibly more—government interven-tion to achieve high growth and “catch up.”

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nationalism; but ordinary distortions may no longer be necessary,if only relatively small rents are to be transferred. The economywill therefore be located somewhere within the triangle definedby B1, B2, and B3—the exact position depending on the power ofthe leader and on the nature of consensus, which is dominatedby the trade-off between popular demand for social insurance andthe need for efficiency. Finally, if the country is ruled by a largeand solid coalition—long sighted by definition—the institutionalframework will easily move to the right of F, back to E and beyond,toward the top-right area of the cone.

5C. Preliminary Conclusions

To sum up, a typical LDC starting from a stable-democracycontext spontaneously tends toward low but sustainable growth,as long as domestic expectations are low or the initial institutionalframework is rigid enough not to allow intolerable inefficiencies.But negative shocks and/or weaknesses can easily provoke aninstitutional slide and push the country towards exceedingly lowgrowth. As a result, ordinary politicians are set aside. If they areeffectively replaced by bureaucratic rule, growth will stay at a verylow—but tolerable—level. If the economy is run by a totalitarianleader, then economic performance may improve substantially(this is probably the case for Singapore and Taiwan, for instance),or only marginally; it depends on how powerful and ambitiousthe leader actually is. Provided it is really a leader, of course: inmost cases the dictator is just a representative of the bureaucracy,including the military. Performance is also enhanced when thecountry is run by ruling-coalition institutions, whereby the winninggroups of interest cover enough industries to represent the wholeeconomy (as in the case of the South Korean conglomerates).

It follows that the chances for catching up on the so-called “richcountries,” or at least for convergence, are clearly minimal evenunder an apparently sound and acceptable political climate (stabledemocracy). Policy drift and institutional slide will make surethat the performance deteriorates to the ultimate benefit of thebureaucrats. Growth will be low and the opportunities for im-provement disregarded.

6. A FEW LESSONS

By considering that the rent-seeking game is the main drivingforce in policy making, this paper has put forward a different view


on why growth generally declines and stabilizes at relative lowlevels in most LDCs. Much of the growth potential tends to beabsorbed by coalitions fighting each other in the political arena, orstruggling to acquire new rents, to defend old privileges. Favorableshocks may indeed raise income and growth temporarily, and alsohave an influence on the tolerable-growth threshold. But thisthreshold is seldom high enough to allow development, let alonecatch-up. More frequently, the rent-seeking game pushes the econ-omy below acceptable growth rates, as a result of the policy-driftplus the institutional-slide effects. The door is then wide-open tobureaucratic rule or to totalitarian rule.

6A. Bureaucracies, Dictators, and Ruling Coalitions

In the former case, low growth is virtually assured. Dictator-ships, however, may be a solution in the short run only. For atotalitarian leader is such because he enjoys military support and/or widespread consensus. But if “widespread consensus” meanshigh expectations on economic performance, and these are to besatisfied for all coalitions, then promises will be reneged. In theend, the leader must look for support, often military. The totalitar-ian-rule regime comes to an end, and the dictator in fact representssomebody else. Nevertheless, if the consensus is based on non-economic grounds (say a guarantee for racial/ethnic equality, ornational independence, or ideological values), then the dictatormay well be “above parties,” and become the more or less con-scious key to economic success.

The other long-run political possibility open to LDCs is the“ruling-coalition” option, where the externalities typical of therent-seeking game are internalized. This institutional solution ismuch less frequent than the others, but may well be necessaryfor successful development. It is not sufficient, though, for suchcoalition(s) must have a long-term horizon. Externalities must beinternalized both across industries/agents and over time and thislatter constraint may be particularly difficult to satisfy.

It then follows that one should not be surprised if most LDCsend up under bureaucratic rule, the quality of which depends onhow far the rent-seeking game can be pressed without loss ofpower, to the benefit either of a strong coalition or of a temporarydictator.14 The phenomenon is of course not limited to LDCs.

14 Once again, it is worth emphasizing that presence of a dictator does not rule outthe fact that country is actually run by the bureaucracy—the dictator being a simplerepresentative, or the link between the administrative bureaucracy and the military.

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6B. Foreign Help and Advice

The ideas presented in this paper can also be applied to—andshed new light on—the role of international attempts in favor ofso many LDCs.

It is now commonly accepted that transfers often tend to encour-age the rent-seeking game, to the detriment of production. Thebenefits—if any—remain highly concentrated (within the top bu-reaucracy, in most cases) and short-lived; on the contrary, thedamages are widespread and possibly long-lasting.

The use of international pressure to force liberalization andmodernization is certainly more helpful. If successful, it leads toa reduction in the angle of the cone presented in the figure (Section5), so that the margins for the policy drift are reduced and theinstitutional slide reversed. But it is hard to see how liberalizationand modernization can be accepted in rent-seeking-prone econo-mies, unless compensation is provided by transfers (aid or easyloans, the drawbacks of which have already been mentioned);or without an immediate sharp socialist turn in the institutionalframework (justified, say, by the need to care for those employedin ailing industries). In this last case, of course, new opportunitiesto play the rent-seeking game would be created, and the promisesto stabilize or carry out structural adjustment quickly forgotten.It is plain that all such efforts are thus likely to end in a viciouscircle. The very fact that compensation must accompany the re-quest for liberalization undermines the chances of success.

6C. An Agenda for Future Work

This contribution suggests a more cautious attitude toward allattempts to engineer the most appropriate institutional frame-works, to design the most sensible advice and aid packages. Surely,import liberalization in developed countries may help small LDCswhere the bureaucrats are still weak and the policy drift limited.But for too many countries that is no longer true. In this respect,Western policy makers share a good deal of the responsibility,for Western protectionism has certainly been a major incentiveto stabilize the rent-seeking game in LDCs, and thus contributedto their inadequacies. The consequences of protectionism mayhave actually been greater than those provoked by the “wrong”specialization due to the LDC perverse trade regimes, as suggestedin the standard comparative-advantage literature.


Today drifts and slides are too strong to be stopped without amajor shock. One must realize that crises—and recurrent crises—are almost unavoidable, since institutions tend to evolve accordingto the needs of the rent-seeking market, where public choiceprevails, as suggested by the new institutional economics. In thislight, the focus should be on what should be expected at the endof the crisis. The bureaucratic-rule response is not exciting, butthat is where the emergence of fragmented coalitions eventuallyleads.

Can one stimulate the birth of (powerful) ruling coalitions ableto internalize the costs of rent seeking? Probably not, given thecultural and ideological opposition that proposals in favor of eco-nomic wide-ranging oligarchies would meet. In addition, acceptanceof such proposals would not be enough to guarantee successfulgrowth. The outlook for development remains therefore gloomy;for although poor policy choices are reversible, the incentives todo so remain weak. Poor policies are more likely to be replacedby other equally poor policies.

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