Development and Good Government

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Development and Good Government

• Lecture 25
• Don J DeVoretz

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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 ?

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Theories of Good Government

• Libertarian minimal state is most effective
• John Locke Social Treatise on Government
• People have natural rights prior to govt
• 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

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Pareto and tests of Good Govt

• 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 ?

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Pareto Improving
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Govt 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

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Govt 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

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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.
• ProblemsTransactions costs were too high
• International trade was risky
• Brigands
• insurance
• payment

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Government and Externalities

• Externalities Removed by govts creating
• Crown Monopolies reduce uncertainities
• Armies Land transport
• Banks and Insurance schemesfinance trade
• Navies Sea transport
• Roads reduce tolls
• Property rights insure investment

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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

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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 ?

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End of Show