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Development and Good Government. Lecture 25 Don J DeVoretz. Some Questions. 1. Is Democracy a necessary and sufficient condition for development ? India: One person-One vote China: One person-No vote Which country has greater rent seeking ? Which country has more efficient markets ?
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Development and Good Government Lecture 25 Don J DeVoretz
Some Questions • 1. Is Democracy a necessary and sufficient condition for development ? • India: One person-One vote • China: One person-No vote • Which country has greater rent seeking ? • Which country has more efficient markets ? • Which country has greater equity ? • Which has higher GDP or GDP growth ?
Theories of Good Government • Libertarian: minimal state is most effective • John Locke: “Social Treatise on Government” • People have natural rights prior to gov’t • right to life, liberty and property • Minimal State is the most extensive state that can be justified • Justification: State must prevent the use of force by citizens against one another. • Example: Hong Kong
Pareto and tests of Good Gov’t • Good government is defined as a set of policies that: • 1. Improve the welfare of all without reducing the welfare of at least one individual • 2. Theory of the second best: • What if two imperfections in society • monopoly • tariffs and quotas on international trade • Will reducing one bring you closer to perfection ?
Gov’t Actions for First Best • Preconditions: • 2 goods X and Y • 2 People • Pareto Superior Line: • Move on will improve at least one person and not harm another • on this contract curve any further movement along this line will make one person better off at anothers expense
Gov’t reduce price controls or supply restrictions • Initially at M and N • Excess Supply due to controls • Relax controls and move to HERE • Miracle: • No excess demand or supply • Both person 1 and 2 are better off
History, Institutions and Growth • Douglas North: • Role of government emerged in a Lockean sense in 15th Century in Europe to reduce transactions costs of trade. • Problems:Transactions costs were too high • International trade was risky; • Brigands • insurance • payment
Government and Externalities • Externalities Removed by gov’ts creating • Crown Monopolies :reduce uncertainities • Armies: Land transport • Banks and Insurance schemes:finance trade • Navies: Sea transport • Roads: reduce tolls • Property rights: insure investment
Socio cultural Preconditons today • Trust (banks, insurance companies) • Law and order (enforcement of contracts) • Security of Persons and Property • Honest govt • Social mobility • Free flow of Information
Specifics for Market Driven Development • Property Rights • Commercial Law and Courts • Stable currencies and banking for transfers • Public management of externalities • Stable monetary and fiscal policies • Do we democracy for the above ?