Effective States and Inclusive Development

The Political Economy Determinants of Growth

Why there are such significant differences in living standards across countries is a central question in International Development. A limitation of the literature on economic growth is that it cannot adequately explain what triggers growth and why once growth is ignited in developing countries, it is rarely maintained. Existing research is also limited by focusing on average rates of growth per capita income. Countries may have the same average growth rates but completely different growth experiences. Most developing countries have stop-go growth episodes.

In this research we seek an understanding of the political drivers of economic growth through explaining the political dynamics around the transition from one growth phase to another – that is, the political determinants of growth collapses, maintenance and accelerations.

We have developed a conceptual framework to explain the episodic nature of growth and the shifts between success and failure in developing countries – This is a framework for understanding boom and bust growth. We have then used this framework to examine the growth experiences of countries in Asia and Africa that have very different institutional, historical and political contexts.

We use the framework to address two key questions:

  • What are the institutional determinants of igniting growth?
  • How are they different from the institutional determinants of maintaining growth.

 

We use three analytical tools  – our core variables – to develop this conceptual framework

  1. The type and nature of the political settlement – i.e. the balance of power between contending social groups and social classes on which any state is based.
  2. The rents space – i.e. the structure of economic opportunities in the economy
  3. Ideology / the cognitive maps of elites

 

We also use two intermediary variables which are:

  1. The deals space – the range of informal and personalised relationships between economic actors that aren’t a result of the application of an impersonal rule.
  2. The product space – the capabilities of economies to produce a diverse array of products

 

Findings

Towards a theory of boom and bust growth

 We have identified the political drivers of igniting growth and maintaining growth and found that the drivers for each are different.

  1. Growth is ignited when there is a movement in the deals space from disordered to ordered /honoured deals.
  2. A commitment to the ordered deals that bring about acceleration is more likely in dominant party political settlements than competitive settlements. This is because strong political leadership allows for the likelihood of deals to be honoured (ordered deals)
  3. However, a dominant political settlement in itself may not be enough to cause an acceleration of growth unless the ruling elite has an ideological commitment to and vision for long-term growth.
  4. The move from igniting growth to maintaining growth depends on the movement in the deals space from closed or disordered deals to open ordered deals and a move in the product space from less complex to more complex products (structural transformation)

 

The greater the strength of domestic and exporting firms that operate in competitive markets, the more likely that state capability will be built for better enforcement and there will be a move to open deals.