DP5062 Political Predation and Economic Development

Author(s): Jean-Paul Azam, Robert H Bates, Bruno Biais
Publication Date: May 2005
Keyword(s): Economic Development, Political Economy, political predation, reputation
JEL(s): D82, H11, O00, O17
Programme Areas: Institutions and Economic Performance
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=5062

Economic growth occurs as resources are reallocated from the traditional sector to the more productive modern sector. Yet, the latter is more vulnerable to political predation. Hence, political risk hinders development. We analyse a politico-economic game between citizens and governments, whose type (benevolent or predatory) is unknown to the citizens. In equilibrium, opportunistic governments mix between predation and restraint. As long as restraint is observed, political expectations improve and the economy grows. Once there is predation, the reputation of the current government is ruined and the economy collapses. If citizens are unable to overthrow this government, the collapse is durable. Otherwise, a new government is drawn and the economy can rebound. Equilibrium dynamics are characterized as a Markov chain. Consistent with stylized facts, equilibrium political and economic histories are random, unstable and exhibit long-term divergence. Our theoretical model also generates new empirical implications on the joint dynamics of income inequality, output and political variables.