The role of the stateLSE400: Thinking like a social scientist

Professor Tim Besley (Economics) School Professor of Economics and Political Science

Professor Paul Kelly Chair, LSE

The Role of the StateTim Besley

Economics Department LSE 400

Context

• The 20th century saw a radical change in the role of the state around the world• Increases in tax raising from around 10% of GDP to around 40% in some

countries• Expansion of public programs

• Health care• Pensions• Education

• The same period saw more or less sustained increases in material living standards (economic growth)• Much debate about whether the state is a drag on growth.

• But much more about the form than the level of intervention

Issues

• How should we think about the role of the state?• market supporting role

• Regulation• Contract enforcement• Competition policy

• market augmenting role• Health care• Education• Social security

Approaches

• Economists have traditionally approached this as a technocratic problem• theory and data combine to advise how to intervene and in what way

• cost benefit at the heart of policy advice• this has given economists a seat at the policy table • The perspective is shamelessly normative

• The grand Utilitarian tradition

• But recent approaches have shifted this perspective relying in some cases on taking a broader perspective• greater focus on policy implementation• debating the role of politics

• not just as a nuisance

• paying more attention to determinants of state capacities and where they come from• requires looking at history and broad comparisons

This Presentation

• Discuss the standard technocratic approach and its influence• Reasons for pushing back on the approach• Reframing the issues through thinking about state capacities• Concluding comments

The Case for Intervention

• The dominant view looks at problems of market failure• example: basic sanitation• observation that markets do not automatically result in investments to manage clean water and

disposal of waste• problem of externalities since benefits accrue partially to others• requires a state to "fix the problem"

• could be subsidies or direct provision

• How much provision?• what is the cost of sanitation projects?• how to value the benefits?

• willingness to pay?• or could be indirect measures of economic benefits (e.g. evidence from asset markets)• evidence from randomized trials

• Core approach used by the World Bank and UK Treasury for a variety of public projects

Example of Evidence from an Asset Market

Concerns

• Measurement• how effective is the quantification?

• some aspects very hard to measure and then not taken into account?• are valuations universal?

• how context specific and how immutable?

• Implementation• Can quantify benefits of an ideal project.

• but is there any guarantee that projects will be implemented?• what if there are corruption problems?• how can projects respond to new evidence and developments?

• It is tempting to believe that this should make us more cautious about intervention• but can projects shift the political equilibrium (Bolsas Familias)

The Idea of State Capacity

• Three dimensions1. Legal capacity2. Fiscal capacity3. Collective capacity• Such capacities vary greatly across economies and over time • The twentieth century saw a transformation in state capacities

Where do state capacities come from?

• Economic determinants• Common factors that drive growth and prosperity

• Human capital• Inequality• Fractionalization

• Political determinants• Institutions which affect

• Use of power• cohesiveness

• Acquisition of power• Stability

• Cultural determinants• Norms of cooperation

Where do state capacities come from?

Crude Quantification

Fiscal Capacity in the 21st Century

Inequality and State Capacity

Why useful?

• Begins by asking about the role of the state based on what states actually do and how they do it• (positive economics)

• Uses this to think about what states ought to do but respectful of the need to have effective state action• (normative economics)

• Blending insights from history and wider disciplines• "when we pass ... to problems of taxation, or problems that concern the relations of the

State with trade and industry, or to the general discussion of communistic and socialistic schemes -- it is far from being the case that economic considerations hold the field exclusively. Account must be taken of the ethical, social, and political considerations, that lie outside the sphere of political economy regarded as a science." (John Neville Keynes [1891, page 55], The Scope and Method of Political Economy)

Reflections on Policy Debates about State Intervention

• Enhancing state capacity lies behind many policy debates about state intervention:• Affects thinking about foreign aid

• Does it enhance or compromise building state capacity?• Thinking about supra-national action

• Fiscal and collective capacity beyond the nation state• International pressure to to enhance state effectiveness (TI, EITI, Benchmarking)

• Do they lead to more state capacity?• Decentralized versus centralized states

• Debates about devolution in the UK are about the locus of state capacity• Link to state building and political violence

• How states establish and maintain law and order can influence state capacity building.

Is politics a nuisance?

• Largely ignored in most policy economics• Exception was the public choice tradition (highly normative)

• Second best theory of politics• Politics should be studied so that we can navigate around it

• First best theory of politics• Politics is why things happen (for better or worse)• Study politics and incorporate it into policy analysis to understand how make

things work better• Leads to a natural focus on institutions and structures that influence policy choice and

policy implementation• Expands the scope of economics even further!

Thank You

The role of the stateLSE400: Thinking like a social scientist

Professor Tim Besley (Economics) School Professor of Economics and Political Science

Professor Paul Kelly Chair, LSE