Institution Building and Political Accountability

• Date: 01 August 2015
• Author: SUMON MAJUMDAR,SHARUN W. MUKAND
• Published date: 01 August 2015
• DOI: http://doi.org/10.1111/jpet.12136

INSTITUTION BUILDING AND POLITICAL ACCOUNTABILITY

SUMON MAJUMDAR

Queen’s University

SHARUN W. MUKAND

University of Warwick

Abstract

The paper examines the role of policy intervention in

catalyzing institutional change. We identify two effects of

development policy as a tool for institutional change. By in-

creasing political accountability, it may encourage nascent

democratic governments to invest in good institutions. How-

ever,it also increases incentives o f the rentier elite to tighten

their grip on political institutions. Which of these effects

dominate determine if development policy will lead to

democratic consolidation and economic improvement or to

the worsening of existing institutions. If the elite are deeply

entrenched, then modernization may require combining

development policy with subsidies.

1. Introduction

There has been much emphasis on the importance of institutions and good

governance for development.1However, the adoption of new institutions

has had a rather mixed record. For example, introduction of democratic

1See, for example, Rodrik, Subramanian, and Trebbi (2004), and Acemoglu, Johnson,

and Robinson (2005).

Sumon Majumdar, CAGE and Department of Economics, Queen’s University, Kingston

ON K7L 3N6, Canada (sumon@econ.queensu.ca). Sharun W. Mukand, CAGE and the

Department of Economics, University of Warwick, Coventry CV4 7AL United Kingdom

(s.mukand@warwick.ac.uk).

For very helpful comments and suggestions, we would like to thank the editor and two

anonymous referees, and seminar participants at the 2011 CPEG meetings in Kingston,

Canada and the 2012 APET Workshop on Governance and Political Economy in Mysore,

India. Majumdar gratefully acknowledges financial support from the Social Sciences and

Humanities Research Council of Canada.

Received July 9, 2014; Accepted August 27, 2014.

C2014 Wiley Periodicals, Inc.

Journal of Public Economic Theory, 17 (4), 2015, pp. 504–527.

504

Political Accountability 505

institutions has failed to deliver a sustained economic improvement in many

countries.2Indeed, even within democratic countries such as India and

Mexico and in the Americas, there are large differences in the quality of

economic institutions across regions.3In this context, we ask when does

the adoption of democratic institutions improve economic institutions and

when may they get subverted by entrenched interests? In addressing this

question, we also throw light on the role of development policy in catalyzing

positive economic and political change.

We develop a model in which economic institutions, such as the degree

of property rights protection, enforcement of contracts, and so forth, are

influenced by the government’s deliberate effort at improving such institu-

tions within a region. While most countries have a federal constitution and a

legal system, local governments often have considerable authority in formu-

lating local laws or at least in their enforcement. Through their allocation

(or not) of resources toward these areas of governance, the regional govern-

ment can have a significant impact on the quality of economic institutions

that get realized, and consequently on investment and welfare in the region.

Our focus is on the forces that affect the government’s decision-making on

this important dimension. In our framework, there are two groups in this

region, with the majority group consisting primarily of wage-earners. They

stand to benefit from better economic institutions attracting investment into

the region, thereby resulting in a rise in their wages. The other group is an

economic“elite” that enjoys monopoly rents in the current (backward) in-

stitutional structure. Any change/improvement to the existing institutional

setup that may encourage other entrepreneurs to invest is likely to adversely

affect their rents. It is this potential for an adverse distributional outcome

that underlies the elite’s desire to control the political levers of government.

These two groups with conflicting interests seek to influence govern-

ment policy with respect to economic institutions such as property rights.

The citizens voice their favor or disfavor of the government at the polls by

either reelecting or ousting an incumbent. In contrast, the traditional elite

directly influence governmental decision-making through active lobbying

for the implementation of their preferred outcome, namely, that of a low

level of property rights protection. Whether in fact the elite can do so

successfully depends on the nature of the region’s economic and political

2See, for example, Barro (1997), Rodrik (1999). In Latin America, according to the

2003 Latinobarometro poll, 15 of 18 countries witnessed a significant erosion of support

for democracy. Over 71% of the respondents felt that democracy had been captured by

special interests. Similar results are also observed in the Eastern Europe barometer.

3Dash and Raja (2009) document big differences in indices of institutional quality across

Indian states. On a −5to+5 scale, for the property rights index, they find that it ranges

from a worst of −2.68 to a best of 5. Acemoglu and Dell (2010) find that (for the

Americas) within-country differences in labor income are larger than differences across

countries, and a significant portion of this disparity is due to institutional differences at

the subnational level.