Chapter Abstracts of The Political Economy of Collective Action, Inequality, and Development

Why do some societies achieve high standards of living, relatively broad access to education and quality health care, serviceable infrastructure, predictable and largely impersonal legal procedures, and relatively accessible avenues to peaceful political expression, while others stagnate with guarded islands of extravagant wealth, surrounded by oceans of poverty, corrupt autocratic systems, and simmering conflicts—or even full-blown civil wars? Why, did South Korea, a dictatorship that faced devastating war from 1950-1954, and whose 1960 GDP per capita was half that of Mexico and twice that of India, have, by 2015, a per capita GDP that exceeded Mexico’s by a factor of three and India’s by a factor of 17—in addition to a largely peaceful transition to democracy? How might a society, trapped in stagnation, corruption, and repression, initiate and sustain processes of economic and political development?

Introduction: Towards a Political Economy Framework for Development Theory

How can social scientists address the complexity of the myriad interrelations between economic development, political development, inequality, and human ability to achieve cooperative collective action across groups and populations of individuals who hold widely divergent backgrounds, positions, interests, and perceptions? This book navigates the difficult terrain between universal-principle, one-size-fits-all frameworks on one hand, and approaches that insist that every society is unique. Using principles of political economy outlined in five core developmental hypotheses as well as a method for drawing distinctions between basic types of political-economic context, this book constructs a typology that relates distributions of power to specific configurations of institutional systems and social orders. Each component of the typology points to specific types of collective-action problems that condition a society’s ability to achieve economic and political development. Policy analysis should pay attention to such contextual influence. Additionally, this framework can spawn a large theoretical and empirical research program.

Chapter 1: Collective-Action Problems and Institutional Systems

A society’s prospects for development depend on its ability to resolve collective-action problems (CAPs). Resolution depends on underlying institutional contexts. Inequality permeates these interactions. This chapter introduces CAPs, institutions, institutional systems, social orders, and political settlements. CAPs arise when individuals, pursuing their own goals, generate undesirable outcomes for some group. First-order CAPs concern forms of free riding; second–order CAPs concern orchestrating the coordination and enforcement that render agreements to limit free riding credible. Discussion proceeds to distinguish informal and formal institutions (norms and rules) from organizations (structured groups of individuals that can take action). Institutional systems are complementary mixes of institutions and organization, where the latter play critical roles in resolving second-order CAPs. Social orders are large-scale institutional systems. Political settlements are mutual understandings that limit organized violence by addressing broad allocations of authority and benefits. Institutions and political settlements shape a society’s ability to resolve developmental CAPs.

Chapter 2: Economic Development, Political Development, and Inequality

This chapter augments Chapter 1’s foundations with detail on political and economic development, inequality, their interactions, and associated CAPs. Development entails sustained, widespread improvement of economic and political capabilities. Economic development includes steady growth in per-capita income, education, health care, and infrastructure, with attention to deprivation, poverty, broader inequities, and associated avenues and barriers to achievement. It also involves creating functional economic institutions. Political development entails steady augmentation of a state’s ability to provide public goods and services; protect economic, political, and civil rights; and create and enforce impartial rules (a rule of law). It also involves broad access to political decision making, limiting authority, mobilizing public participation, and enhancing the legitimacy of underlying procedures. Inequality has multiple dimensions (income, wealth, access); achieving equity along one dimension often compromises that for another. Multiple types of inequality are both outcomes of and conditions that shape development. Multiple CAPs ensue.

Chapter 3: Public Goods, Externalities, and Collective-Action Problems of Governance

This chapter addresses the book’s first developmental hypothesis and its relations to CAPs that complicate establishing functional governance: Development requires creating arrangements that deliver key public goods and services and concurrently mitigate important negative externalities. Externalities are either positive or negative impacts of economic or political interactions on the non-involved. Negative externalities include pollution and the spread of contagious disease; they arise from activities such as coal-powered electricity generation, crime, lack of sanitation, overuse of natural resources (e.g., deforestation), and excess conflict. Using game theoretic logic, this chapter develops a few simple models that illustrate the basic CAPs and more detailed models that address how the political and economic incentives of rival coalitions influence the ability and motivation of governments to develop, utilize, and broadly or selectively apply state fiscal and legal capacity. The chapter concludes by discussing capacity traps: self-reinforcing combinations of low fiscal and legal capacity.

Chapter 4: Economic Foundations of Unequal Development: Non-rival Knowledge, Social Imitation, Skill Complementarity, and Production Externalities

Development requires both ability and coordination, but the abilities and practices that facilitate coordinating production contribute decisively to inequality. The second hypothesis: inherent properties of knowledge transmission, the skill-matching requirements of team production, patterns of social imitation, and production interdependencies generate starkly unequal locational and sectoral agglomerations of production, knowledge acquisition, innovation, and growth. To illustrate these points, this chapter relates individual incentives to invest in acquiring skills and education to these influences. People in areas with high concentrations of knowledge and skill encounter strong incentives to work on acquiring knowledge—and vice versa. Additionally, developing sophisticated production techniques requires a critical mass of suitable firms in order to create viable markets and for skilled labor and sophisticated equipment. Difficult coordination CAPs lead to patterns of unbalanced growth. Finally, rural-urban migration often reinforces these locational dynamics. Unless policy successfully intervenes CAPs of inequitable access, unequal growth, and social conflict follow.

Chapter 5: Social Conflict: Power, Institutional Formation, and Credible Commitment

This chapter develops a social conflict theory of institutions. The third hypothesis posits that unequal distributions of power shape the creation, evolution, and demise of economic and political institutions. A background discussion defines power—a slightly slippery concept—and addresses key sources and manifestations of power. Unequal distributions of power then generate a series of CAPs associated with asymmetric influence on institutional construction and evolution. A flowchart model illustrates. To complicate matters, the fourth hypothesis posits that powerful parties cannot, left to themselves, credibly promise to avoid using their power for their future gain—often at the expense of others. Specifically, without institutional and motivational constraint, powerful parties may seize the gains from others’ investments in potentially fruitful economic and political activities. Functional development thus requires resolving multiple, largely second-order, CAPs related to credibly restraining powerful actors—when such actors, simultaneously, exert disproportionate influence over institution building.

Chapter 6: Policy Innovations Sometimes Relax Political Constraints

Development requires institutional change. This chapter suggests a ray of hope. Policy innovations can enhance capacities for resolving CAPs, relaxing political impediments to development—notably CAPs from the previous hypotheses. South Korea’s 1950s land reform policy established foundations for subsequent development. Innovations, however, emerge and spread within political contexts; institutional change presents formidable CAPs. Distinct individual as opposed to organizational capacities for information processing, combined with asymmetric distributions of power, typically generate relatively long periods of institutional and policy stability which occasionally succumb to rapid change: punctuated equilibria. Within such contexts, coalitions vie for influence, using policy narratives and images (mini ideologies) to legitimate their influence and discredit opponents. Yet, internal or external developments, such as technological change, shift shared perceptions and distributions of power, building up tensions so that relatively small focusing events may allow the entry of many new ideas, ushering in rapid change: punctuation, policy emergence.

Chapter 7: Alternative Typologies of Social Orders and Political Settlements

This chapter summarizes several approaches to categorizing social orders and political settlements on the basis of elemental political and institutional characteristics. A political settlement is a mutual understanding, held among parties with power, that they will primarily rely on politics rather than violence to resolve disputes. Discussion opens with a one-dimensional mapping of social orders, based on institutional strength and access—ranging from a chaos order through three types of limited access orders to an open access order. Societies can move in either direction. Next, a two-dimensional approach shows four combinations of institutional strength and competitive or dominant political settlements. A third approach offers three typologies. The first relates political settlements to institutional strength. The second denotes alternative distributions of power between included and excluded groups, and such distributions within included groups. The third addresses business power and capabilities. These conceptions inform Chapter 8’s approach to political settlements.

Chapter 8: How Context Influences Development: A New Typology of Political Settlements

Political settlements underlie institutional construction and thus a society’s prospects for development. Without some mutually understood method for settling major disputes though politics rather than organized violence, institutions cannot resolve CAPs that impede development. This chapter develops my approach to categorizing political settlements. It offers a framework that permits systematic inquiry into relationships between distributions of power, institutional evolution, and prospects for resolving a series of context-specific CAPs of achieving economic and political development. Political settlements differ fundamentally according to their social foundations—which groups are party to the settlement—and their configuration of authority among insider elites. A four-quadrant typology distinguishes between broad and narrow social foundations and coherent (unipolar) vs. disorganized (multipolar) configurations of authority. Additionally, the presence of resource constraints and mutually understood threats to elite political survival conditions motivations to create institutions. These distinctions imply context-specific CAPs that shape prospects for development in relevant areas.

Chapter 9: Business-State Interactions

This chapter extends chapter 8’s political settlement framework by addressing business-state interactions operating within specific types of settlements. Three levels of interaction follow. At the macro level, political settlements shape such interactions. At an intermediate (meso) level,
market configurations—that is their degrees of competitiveness and domestic vs. export orientation—affect the demands businesses place on the state. These dynamics influence the accessibility (openness) of micro-level exchange agreements (deals) as well as their credibility—specifically, the degree to which they are ordered, meaning honored and predictable, or disordered. A shift from disordered to ordered deals reflects resolution of second-order CAPs of enforcing agreements. Such a shift can prompt growth accelerations that facilitate escaping poverty traps. More substantial development, however, requires addressing Chapter 4’s complex coordination CAPs. Finally, the revenues that emerge from various market configurations feed back into distributions of power that may influence the longevity of particular political settlements.

Conclusion: A New Conceptual Framework for Development Theory

Development entails sustained enhancement of economic and political capabilities across a society’s members and groups. This text presents a conceptual framework, fully developed in Chapters 8 and 9, that addresses the social scientist’s dilemma concerning how to approach systematic inquiry into the myriad complexities of political-economic development. To address pertinent contexts, this framework systematically addresses interactions between asymmetric distributions of power and institutional evolution. It relates distinct types of political settlements to distinct sets of developmental CAPs that shape development. Related inquiry can then focus on how principles from the five core hypotheses operate in specific political-economic contexts. Such analysis can uncover how specific types of policy innovations relate to prospects for successful adoption within specific contexts. This framework can also underlie broad research programs with many theoretical and modeling extensions as well as multiple testable empirical hypotheses. Discussion closes with a few suggested extensions of this conceptual framework.

Endorsements for The Political Economy of Collective Action, Inequality, and Development

  • “Development failure is, at its root, a failure of collective action. This excellent book applies the tools of game theory to shed systematic light on circumstances that promote or hinder social coordination. One of its great strengths is the development of a broad typology of institutional settlements, permitting contextual analysis.”

—Dani Rodrik, Harvard University

  • “Collective action is an age-old human concern. In today’s world, which is an amalgam of globalization and fractiousness never seen before, it has acquired a new urgency. There is an awareness that not just development but human survival depends on society’s capacity to solve its collective action problems. William Ferguson’s superb new book draws on game theory, economics, and political science to present a state-of-the-art commentary on this important subject. This is a book that will be widely read by students, I am sure, and by policy makers, I hope.”

—Kaushik Basu, Cornell University

  • “Economic prosperity is always and everywhere a product of human cooperation. This accessible and fascinating book provides a treasure trove of insights into how cooperation succeeds or fails to bootstrap its way to the stable, effective institutions that are required for growth and development.”

—Eric Beinhocker, Executive Director, Institute for New Economic Thinking, University of Oxford

  • “Why do some countries see increases in standards of living and human development while others stagnate? Drawing from game theory, history, psychology and political economy, William Ferguson theorises that the roots of economic and social progress lies in how societies resolve collective action problems. The theoretical arguments are backed by carefully constructed country case-studies. In this important book, Ferguson provides an original and compelling answer to perhaps the important question in development economics.” 

—Kunal Sen, Director, UNU-WIDER and Professor of Development Economics, University of Manchester

  • “Cutting-edge scholarship on the political economy of development has accepted the need to go beyond the mantra of ‘institutions matter’ and to take power and politics much more seriously. Bill Ferguson’s new book offers the most coherent and rigorous statement of how this can be done and sets a new standard for the field. It is a tour de force.” 

—Samuel Hickey, Professor of Politics and Development, The University of Manchester