All societies must deal with the possibility of violence, and they do so in diff er- ent ways . . . Most societies, which we call natural states, limit violence by politi- cal manipulation of the economy to create privileged interests. These privileges limit the use of violence by powerful individuals, but doing so hinders both economic and political development. In contrast, modern societies create open access to economic and political organisations, fostering political and economic competition. Douglass C. North, John Joseph Wallis and Barry R. Weingast (2009), Violence and Social Orders, p. 1
Max Weber argued that high density of population and scarcity of land in early modern Europe led to intense territorial competition amongst monarchs and feudal lords. Therefore, warfare for the control of scarce resources and land were extremely common and frequent. Taxation was used as the main instrument by small- and medium- sized states to fi nance their war expenditure. In other words, the symbiotic fi nancial relation- ship between the ruler and his or her subjects became ever more powerful during this time. This relationship, in Weber’s view, is fundamental to the formation of statehood and perhaps is at the heart of the construct of a modern state.
Recent research by economists and political scientists suggest that state formation and state capacity play a major role in economic develop- ment. Herbst (2000), using Weber’s thesis, also argues that state weakness explains the lack of development in Africa. As I discussed earlier, Herbst’s answer depends on the factor intensity of the continent. Historically, Africa is land abundant and labour scarce. As a result, property rights over land are weak and institutions to adequately tax land have failed
to evolve. African states survived for centuries without engaging in the institution building that facilitates tax collection, investment in defence, maintaining bureaucracy and providing the rule of law. The lack of these institutions made African states extremely fragile. The trend changed little during the colonial period and the Cold War. Hence the weak institutions in Africa continued to persist.
Besley and Persson (2008) and Besley and Persson (2009) also present theory and evidence on why the lack of state capacity may lead to poor development outcomes. They argue that a state’s institutional capacity to levy taxes and support markets are typically constrained by its history of investments in legal and fi scal capacity. States with weak legal systems and imperfect taxation institutions are unlikely to be capable enough to adequately levy taxes and support markets. In other words, state capacity would be fairly limited. This would lead to poor development outcomes.
They also show that investments in common interest public goods, such as fi ghting external wars, political stability and inclusive political institu- tions are all conducive to building state capacity. In contrast, civil war, internal confl ict and restrictive political institutions are all damaging to state capacity.
In a similar vein, North et al. (2006, 2009) also argue that the nature of the social order characterized by the nature of the existing state can explain the process of modern social development. Their framework sug- gests that in a natural state the actors use political power within the exist- ing political system to limit economic entry and create rents. These rents are then used to stabilize the political system and limit violence. However, restrictive economic entry and restrictive political institutions are not conducive to long- run economic growth as it suff ocates enterprise, the free market and innovation. They argue that this is the natural way most human societies are organized, even today, and hence the name natural state. In contrast, a handful of developed countries have developed open access social orders where open access to economic and political organizations facilitates competition and supports the market. In other words, social order in these states is sustained by competition and not rent creation.
The obvious question, however, is how the transition from ‘natural state’ to ‘open access state’ takes place. According to North et al. (2006), war and the threat of violence play a crucial role. In the event of an exter- nal war, the incumbent state requires more taxation revenue and support from its subjects in general. To increase revenue, the state resorts to increasing taxation in return for more widespread political rights. O’Brien (2001, 2005) also shows that in early modern Britain the state was bor- rowing heavily from its subjects to fi nance continental war in return for
political rights. This led to the development of an effi cient fi nancial system conducive to rapid economic growth.
In summary, one can argue that the development of the state has played a crucial role in prosperity. The factors that infl uence state development are taxation, legal institutions, external confl ict and internal confl ict.
Evidence suggests that external confl ict boosts state capacity, whereas the reverse is observed if the confl ict is internal in nature.
NOTES
1. Even geography is not truly fi xed as we are facing the challenge of climate change.
2. The idea of reverse causality is from Seymor Martin Lipset’s (1959) ‘modernisation hypothesis’ which says that institutional quality, education and health improve as countries develop. However, recent research in political science and economics shows that institutions diverge not in a systematic manner as outlined by Lipset (1959), but due to exogenous shocks at critical historical junctures as outlined by the famous work of Barrington Moore (1966) on institutions (see Thelen, 2000; Acemoglu et al., 2007;
and many others) . For a survey of ‘critical juncture hypothesis’, see Thelen (1999).
3. This argument, however, is not universally applicable. In particular, this does not apply to the cross- national studies that focus on a shorter time period and also use varia- tion in diseases that are not geography- based and can be infl uenced by public health intervention.
4. Herbst’s thesis is not stand-alone. Bates (1983) and Stevenson (1968) also provide some tentative evidence within Africa which is in agreement with the population density argument of the thesis.
5. The exceptions are the settler colonies of South Africa, Zimbabwe, Namibia and Kenya.
6. The Fertile Crescent spans a part of modern day Israel, Palestine and the Jordan valley.
For further reference, see map in Diamond (1997) p. 135.
7. Yang and Borland (1991) use a growth model to formalize Adam Smith’s notion of division of labour.
8. This is disputed by many if we consider the last 50 years. World income distribution has increased over the last 50 years, especially with the impressive growth performances of India and China over the last two to three decades, but the diverging trend certainly holds over a longer period.
9. Wacziarg and Welch (2003) improve the Sachs and Warner (1995a) measure and extend it to the 1990s. Their measure however is not free from the basic criticisms of Rodrik and Rodriguez (2000).
10. I have discussed the political power and institutions theory of Acemoglu et al. (2005a) and Acemoglu and Robinson (2000) in Section 3.5.
Before introducing the unifi ed framework in Chapter 5, let me start with a discussion of some of the empirical issues involving the root causes of economic progress literature. First, I introduce some rough correlations in the data (both diagrammatically and in tabular form). Then I report some of the issues relating to the appropriateness of the levels model in estimation. I follow it up with a discussion on identifi cation which is taken from my earlier work on this topic (see Bhattacharyya, 2009a). In Sections 4.5 and 4.6, I provide evidence on the role of diseases (malaria in particu- lar) in Africa. The main message is that the causal linkages between deep determinants of development and economic development are complex and multidimensional. They also vary across countries and continents. The cross-section regressions are useful in identifying correlation, but may not tell us much about the causal links. The unifying framework in Chapter 5 is an attempt to identify such causal links.