Archive for August 8th, 2007

Raghu Rajan’s solution for Failed States

August 8, 2007

These days most economists are focusing on growth and development – Michael Spence (got nobel for work on role of information in markets; now heads the growth commmission) , Avinash Dixit (a leading contender for nobel every year; for his work on International trade, I have reviewed his thoughts on the development subject here) are some famous ones.  Raghu Rajan (who focuses on financial markets)  has also been working on the same agenda for a while. He has written a fantastic paper on why underdevelopment persists which I have reviewed here.

I just came across this short piece written by Rajan where he has a solution for states/countries that continue to fail despite all possible ways to reform them. He begins right away:


The scenario is depressingly familiar in some parts of the world. A civil war ends. The battling warlords, having exhausted their resources, agree to elections. The people, having endured years of rape and pillage, go wild with joy. But their choice in the United Nations-monitored election is really between parties set up by former warlords, because no one else has the money, the muscle power, or national recognition to compete with the two. One wins, and then proceeds to destroy the few state institutions that curb his power even while he uses the instruments of the state to pick off his opponent. Once that is done, he proceeds to loot the country under one-party rule until an opposition eventually organizes. Since elections have now become a farce, the opposition has to resort to force to overthrow him, and the whole cycle resumes. The people get poorer and poorer, kept from starving only by handouts of international aid. The lucky leave while the unlucky endure.

Why does this continue?

As we know you need a sound economic environment to fucntion properly which means you need right kind of institutions in all possible activities affecting human life.

Now how do you build that? For this we have some research which saus it depends on whose colony you were? If you were colonized by British which had common-law system compared to French which had civil you would be better-off.

Now what explains the difference in performance of US and India whuch were both colonized by British? The research answers that it depends on the population level and mortality rates. Where population levels were low and mortality was less (like US) the colonizer set better institutions and where it was not it set up extractive institutions which continue to haunt these countries till today.

This is clearly unacceptable. As it means the countries cannot do anything as all the deternminants of growth were laid by the colonizers. Read Avinash Dixit’s humourous paper on the on the same.

And as Rajan points out that countries like Liberia had everything right still it continues to fail.

Rajan says development happens when people have economic power through their property holdings or human capital. When that is widespread people want better institutions that protect these rights and the erstwhile powerful are controlled. You have countries like Japan and Germany which changed their basic authoritarian structure to democratic and managed to grow spectacularly.

So how do you provide basic rights i.e proporty, human capital etc to people?

You need effective governance to begin with. How do you get it when the powerful keep making a comeback first in elections and ever after by removing most opposition and creating institutions that support them.

So, what is Rajan’s solution?

Let a foreigner (a trained bureaucrat) run the country alongwith his team for a while till he cleans the system and warlords are not as powerful.

The solution would probably not be liked at all by anyone. He says a bit of it is already happening as in most failed states UN, NGOs etc already provide much of the infrastructure and run it.

He says let the UN decide whom the foreign leader could be (choose two for competition) and let the electorate decide his credentials. He should given a mandate under which he has to perform and would be evaluated.

He asks will people accept? He is hopeful:


…… modern times a significant portion of the world’s population have accepted rule by outsiders in preference to rule by their own – we call this voluntary choice immigration. Instead of people voting with their feet to where governance is enabling, I am advocating a process of moving governance to where the people are.

For more details read on. Nice food for thought. 🙂 !

Assorted Links

August 8, 2007

1. The factor most world looks at, Fed Futures rate has been maintained by Fed at 5.25%. Inflation continues to be a concern.

WSJ Blog says Fed mentions global factors (Fed says US economy would grow at moderate pace on account of robust global economy) after a long time. See various Economists’ reaction.

2. Dani Rodrik reviews his latest paper on Industrial Policy. He has always believed in a bit of government and this is what he seeks to address in this paper.

Just as economists think about how to improve market institutions, they can devote their talent to improving the institutions of government.  The informational and rent-seeking costs of government intervention can be ameliorated through appropriate institutional design.

3. Free Exchange criticises Rodrik’s support for Import Substitution strategies.

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