1. Development and Good Government
Lecture 21
Don J. DeVoretz

2. 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 ?

3. 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

4. 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 ?

5. Pareto Improving

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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 ?

12. End of Show