The previous chapter investigated why societies often choose inefficient economic institutions and policies and consequently fail to take advantage of growth opportunities.
It emphasized the importance of social conflict between different groups and lack of commitment to future policies as major sources of non-growth-enhancing policies. Much of the discussion was in the context of a given set of political institutions, which shaped both the extent and kind of social conflict between different individuals and groups, and what types of policies were possible or could be committed to.
A natural conjecture is that political institutions will influence a society’s choices of economic institutions and policies and thus its growth trajectory. This conjecture leads to the following two questions: (1) do certain political institutions mediate social conflict more successfully, thus potentially avoiding nongrowth-enhancing policies? (2) why do different societies choose or end up with different political institutions.This chapter provides some preliminary answers to these two questions. I start with a brief summary of the empirical evidence on the effect of different political regimes and other political factors (such as political instability and civil wars) on economic growth. Section 23.2 then uses the baseline model in Section 22.2 from the previous chapter to illustrate that, once we take the existence of conflicting preferences into account, no political regime is perfect and each will create different types of costs and benefits associated with different losers and winners in the society. Whether a particular set of political institutions leads to growthenhancing policies then depends on the details of how it will function, on the technology and the factor endowments of the society, and on which groups will benefit from these institutions. Section 23.3 then turns to the dynamic tradeoffs between different regimes, emphasizing how democratic regimes might compensate for the short-run distortions that they create by long- run benefits, both in terms of avoiding sclerotic outcomes and by creating greater flexibility.
This section will also emphasize how different political regimes deal with the process of creative destruction, which, as we saw in Chapter 14, is one of the engines of modern economic growth. It will suggest that democracies may be better at taking advantage of the forces of creative destruction.Although Section 23.3 introduces the dynamics of economic allocations under different political regimes, it only gives us a few clues about how political institutions themselves
emerge and change. This is a major area of current research in political economy and largely falls beyond the scope of the current book. Sections 23.4 and 23.5 will therefore give a bird’s eye view of some of the main issues involved in the analysis of equilibrium political institutions and their implications for economic growth. Section 23.4 starts with a general discussion of what types of models we might want to consider for understanding the dynamics of political institutions and endogenous political change. Section 23.5 illustrates some of these general ideas with a specific example, which shows how we can construct dynamic models featuring changes in political and economic institutions, and how such models can shed light on the empirical patterns discussed in Section 23.1.
23.1.