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Pillars of Prosperity

Book Description

"Little else is required to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice; all the rest being brought about by the natural course of things." So wrote Adam Smith a quarter of a millennium ago. Using the tools of modern political economics and combining economic theory with a bird's-eye view of the data, this book reinterprets Smith's pillars of prosperity to explain the existence of development clusters--places that tend to combine effective state institutions, the absence of political violence, and high per-capita incomes.

To achieve peace, the authors stress the avoidance of repressive government and civil conflict. Easy taxes, they argue, refers not to low taxes, but a tax system with widespread compliance that collects taxes at a reasonable cost from a broad base, like income. And a tolerable administration of justice is about legal infrastructure that can support the enforcement of contracts and property rights in line with the rule of law. The authors show that countries tend to enjoy all three pillars of prosperity when they have evolved cohesive political institutions that promote common interests, guaranteeing the provision of public goods. In line with much historical research, international conflict has also been an important force behind effective states by fostering common interests. The absence of common interests and/or cohesive political institutions can explain the existence of very different development clusters in fragile states that are plagued by poverty, violence, and weak state capacity.

Table of Contents

  1. Cover Page
  2. Title Page
  3. Copyright Page
  4. Contents
  5. Series Foreword
  6. Preface
  7. Chapter 1 - Development Clusters
    1. 1.1 Salient Correlations
    2. 1.2 The Main Questions
    3. 1.3 Fiscal Capacity
    4. 1.4 Legal Capacity
    5. 1.5 Political Violence
    6. 1.6 State Spaces
    7. 1.7 Development Assistance
    8. 1.8 Political Reform
    9. 1.9 Main Themes
    10. 1.10 Final Remarks
    11. 1.11 Notes on the Literature
  8. Chapter 2 - Fiscal Capacity
    1. 2.1 The Core Model
      1. 2.1.1 Basic Structure
      2. 2.1.2 Politically Optimal Policy
      3. 2.1.3 Fiscal-Capacity Investments
      4. 2.1.4 Normative Benchmark: A Pigouvian Planner
      5. 2.1.5 Three Types of States
      6. 2.1.6 Taking Stock
    2. 2.2 Developing the Model
      1. 2.2.1 Microfoundations for Fiscal Capacity
      2. 2.2.2 More General Models for Public Goods
      3. 2.2.3 Polarization/Heterogeneity
      4. 2.2.4 Income Inequality
      5. 2.2.5 Differences in Group Size
      6. 2.2.6 Tax Distortions
      7. 2.2.7 From Trade to Income Taxes
      8. 2.2.8 An Infinite-Horizon Model
    3. 2.3 Empirical Implications and Data
    4. 2.4 Final Remarks
    5. 2.5 Notes on the Literature
  9. Chapter 3 - Legal Capacity
    1. 3.1 The Core Model with Legal Capacity
      1. 3.1.1 Politically Optimal Policy
      2. 3.1.2 Investments in State Capacity
      3. 3.1.3 Comparative Statics
      4. 3.1.4 Taking Stock
    2. 3.2 Developing the Model
      1. 3.2.1 Microeconomic Foundations
      2. 3.2.2 The Genius of Taxation
      3. 3.2.3 Private Capital Accumulation
      4. 3.2.4 Predation and Corruption
    3. 3.3 Empirical Implications and Data
    4. 3.4 Final Comments
    5. 3.5 Notes on the Literature
  10. Chapter 4 - Political Violence
    1. 4.1 The Core Model with Political Violence
      1. 4.1.1 Model Modifications
      2. 4.1.2 Policy
      3. 4.1.3 Investments in Political Violence 179 4.1.4 Empirical Implications
    2. 4.2 Developing the Model
      1. 4.2.1 Asymmetries
      2. 4.2.2 Polarization, Greed, and Grievance
      3. 4.2.3 Anarchy
      4. 4.2.4 Conflict in a Predatory State
      5. 4.2.5 Investing in Coercive Capacity
    3. 4.3 From Theory to Empirical Testing
    4. 4.4 Data and Results
      1. 4.4.1 Data
      2. 4.4.2 Cross-Sectional Correlations
      3. 4.4.3 Econometric Estimates
    5. 4.5 Final Remarks
    6. 4.6 Notes on the Literature
  11. Chapter 5 - State Spaces
    1. 5.1 State Capacity in the Comprehensive Core Model
      1. 5.1.1 Equilibrium Political Turnover
      2. 5.1.2 Investments in State Capacity Revisited
    2. 5.2 Developing the Model
    3. 5.3 Empirical Implications
    4. 5.4 Putting the Pieces Together
    5. 5.5 Final Remarks
    6. 5.6 Notes on the Literature
  12. Chapter 6 - Development Assistance
    1. 6.1 The Core Model with Aid
      1. 6.1.1 Cash Aid
      2. 6.1.2 Technical Assistance
      3. 6.1.3 Military Assistance
      4. 6.1.4 Postconflict Assistance
    2. 6.2 Final Remarks
    3. 6.3 Notes on the Literature
  13. Chapter 7 - Political Reform
    1. 7.1 The Core Model and Political Reform
      1. 7.1.1 Political Reform under a Veil of Ignorance
      2. 7.1.2 Strategic Political Reform
    2. 7.2 Developing the Model
      1. 7.2.1 Micropolitical Foundations for θ
      2. 7.2.2 Micropolitical Foundations for γ
      3. 7.2.3 Constitutional Rules
      4. 7.2.4 Political Violence
      5. 7.2.5 Trust
      6. 7.2.6 Governance
    3. 7.3 Political Reform in Practice
    4. 7.4 Final Remarks
    5. 7.5 Notes on the Literature
  14. Chapter 8 - Lessons Learned
    1. 8.1 What We Have Learned
      1. 8.1.1 Answers to the Three Main Questions
      2. 8.1.2 Our Analysis and Traditional Development Research
    2. 8.2 The Pillars of Prosperity Index
      1. 8.2.1 Defining the Index
      2. 8.2.2 Predicting the Index
    3. 8.3 Where Next?
    4. 8.4 Concluding Remarks
  15. References
  16. Name Index
  17. Subject Index