Two Extreme Views: “Rational Development” and Public Choice Theory
Implicit in much of the policy discussion in the past have been two
extreme views of policy interventions. One is based on the premise of
“rational development”: all that is required is to provide individuals in
the economy with information about the consequences of different policies,
and Coasian rationality will ensure that the parties will make use
of that information to arrive at an efficient solution. To be sure, there
may be market failures, but social institutions arise spontaneously to
address them. Thus, only lack of information could lead to “inefficient
outcomes.” (In some variants of this view, government appears as a
benevolent dictator outside the economy, with the ability to act freely
on it. Thus, all that a policy analyst needs to do is to find out which
policies maximize social welfare and transmit that information to the
government, and it will be acted on.)
Few today hold to that view. If the adviser shows that there is an
optimal set of tariffs and encourages the government to put in place a
highly differentiated tariff structure, the advice might be followed. The
tariff structure, however, will depend not on the subtle deadweight-loss
arguments of the policy adviser but, rather, on the corrupting influence
of special-interest groups trying to seize the opportunities afforded by a
differentiated tariff structure to increase protection for their industries.
To be sure, they may even follow the “rules of the game,” hiring economic
analysts to show that an industry satisfies the conditions stipulated
for higher tariff protection. But of course, both they and the
government know that these are simply arguments needed to satisfy
public demands for probity.
The second polar view is the extreme public choice view: as social
scientists, we can just watch and interpret the playing out of the development
drama—we cannot change policies. In this view, political forces
produce an equilibrium set of policies. There are no degrees of freedom
for normative intervention—a situation that has been called the
determinacy paradox (Bhagwati, Brecher, and Srinivasan 1984).
We—and we dare say most development economists—reject both of
these extreme views of the role of outsiders’ advice. Conditional on the
information available, equilibria are often not Pareto efficient. Institutions
that arise in response to a market failure may not only fail to cure
it but may actually make matters worse, as we saw in the previous
sections. Outsiders can, however, have an effect on outcomes—and in
ways other than simply changing the information sets of participants.
But our understanding of the processes by which interventions do affect
outcomes is seriously incomplete, and many of the failures of the
past can be traced to naïveté in intervention strategies.
For instance, there is mounting evidence that the practice of conditioning
foreign aid to a country on its adoption of policy reforms does
not work, at least in the sense of leading to sustained changes in policies
that increase growth and reduce inequality and poverty. One cannot
“buy” good policies (World Bank 1999a). There are good reasons
for this: it is widely recognized today that successful policies need to
have the country’s “ownership”—not only the support of the government,
but also a broad consensus within the population—to be effectively
implemented. Policies imposed from the outside will be
circumvented, may induce resentment, and will not withstand the vicissitudes
of the political process (see Bruno 1996; Stiglitz 1998c).
Theories of the Ineffectiveness of Government Intervention
The issue raised by the public choice school is whether an adviser can
influence policy. A second, distinct issue is whether, in a market economy,
government intervention can promote good outcomes. There is a long
tradition in economics that the only proper role for the government is
to define and enforce property rights and to provide public goods. Beyond
that, government interventions are likely to be—in the extreme
versions, inevitably will be—ineffective, unnecessary, or counterproductive.
The fact that most of the “success” cases of economic growth have
involved heavy doses of government intervention provides a strong
counterweight to these general allegations. For instance, in the United
States the government has, since 1863, played a role in financial market
regulation. Evidence that since World War II downturns have been
shallower and shorter and expansions longer is consistent with the
hypothesis that better macroeconomic management does work. Even
in industrial policies, the United States has a credible history—from
the founding of the telecommunications industry, with the first telegraph
line between Baltimore and Washington in 1842, to its most
recent contribution to that industry, the creation of the Internet; from
the support of research and dissemination in the dominant sector of
the 19th century, agriculture, to support of research in the dominant
high-technology industries of today. Still, it is worth disposing quickly
of the major theoretical arguments underlying the ineffectiveness of
Government is unnecessary: anything the government can do, the
private sector can do better. The fact is that government is endowed
with powers which the private sector does not have, and these powers
are essential in addressing the public good and externality problems
that are rife throughout the economy. Coasians are simply wrong in
arguing that private parties by themselves, with given, well-defined property
rights, always resolve these issues.
Anything government does will be undone by the private sector. Although
there are specific models for which this assertion is true (see, for
instance, Lucas 1973; Lucas and Prescott 1974), it is generally not true—
for example, when government changes relative prices through taxation.
Still, there is an important moral to these models: the actual
consequences of government policies can be markedly different from
the intended ones.
Government is always captured by special-interest groups (Stigler
1971). To be sure, there are incentives for producer special-interest
groups to try to capture, for instance, the regulatory process. But there
are countervailing incentives for other groups. Stigler does not explain
why in some states it is consumer groups that capture, say, electricity
regulation, while in others it appears to be producer groups. In this,
too, there is an important moral: political processes are critical, but the
outcome of political processes is more complicated than simple theories
of capture would suggest.
A variety of interventions can affect outcomes i.e.
– Interventions to solve coordination problems,
– Information as an intervention,
– Interventions to change the dynamics of the political process, and
– Interventions to change the distribution of wealth.