Growth, Debt, and Politics: Economic Adjustment and the Political Performance of Developing Countries

By Lewis W. Snider | Go to book overview

3
Institutional Credibility and the Political
Costs of Market Transactions

Introduction: The Political Costs of Market Transactions

If the heart of the adjustment problem involves redefining the role of the state in society and the economy, the direction of change must be from higher to lower costs in market transactions. Eventually this entails lowering uncertainty concerning the definition and allocation of property rights. The higher the level of uncertainty, the lower the level of investment. The lower the level of investment, the greater the inefficiencies in production and so the lower the rate of economic growth. If the credibility or formality of institutions is defined as the convergence of the functional with the constitutional, an obstacle to this convergence is an inadequate legal, political and regulatory framework. 1 Countries that enjoy above-normal extractive capabilities but have very low institutional credibility are unlikely to register very much success in whatever adjustment efforts they undertake, nor are they likely to achieve sustained economic growth for any length of time.

Uncertainty surrounding the definition and allocation of property rights has little to do with the distributive content of government policies. Countries with strong redistributive policies can offer high levels of security to property and contract enforcement and prosper as countries such as Sweden and Israel demonstrate. By contrast, Latin America and other Third World regions provide sufficient evidence that countries that do not pursue effective redistributive policies can still exhibit serious insecurity in the allocation of property and contractual rights, and their economies stagnate. 2 This distinction is not trivial. If redistributive policies per se are a serious barrier to economic adjustment, the government has very few options for bringing about needed structural changes without creating serious opposition to its policies by disturbing the distributional status quo. If, on the other hand, it is the insecurity of property rights and contract rights and non-credible policy environments (that contribute to exorbitant transaction costs),

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