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Development and Good Government Lecture 22 Don J. DeVoretz 1 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 ? 2 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 3 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 ? 4 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 5 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 6 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 7 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 ? 8 End of Show 9