6 Apr 2004 20:46 AR AR215-PL07-11.tex AR215-PL07-11.sgm LaTeX2e(2002/01/18) P1: FHD10.1146/annurev.polisci.7.012003.104846Annu. Rev. Polit. Sci. 2004. 7:247–72doi: 10.1146/annurev.polisci.7.012003.104846Copyrightc 2004 by Annual Reviews. All rights reservedFirst published online as a Review in Advance on Feb. 2, 2004WHAT DOESPOLITICAL ECONOMY TELL USABOUTECONOMIC DEVELOPMENT—ANDVICE VERSA?∗Philip KeeferDevelopment Research Group, The World Bank, 1818 H Street NW,Washington, DC 20433; email: [email protected] Words presidentialism, property rights, interest groups, institutions■ Abstract This essay reviews how three pillars of political economy—collectiveaction, institutions, and political market imperfections—help us answer the followingquestion: Why do some countries develop and not others? Each advances our under-standing of who wins and who loses in government decision making, generally, butonly a subset of this literature helps us answer the question. The study of politicalmarket imperfections strongly suggests that the lack of credibility of pre-electoral po-litical promises and incomplete voter information are especially robust in explainingdevelopment outcomes. From the institutional literature, the most powerful explana-tion of contrasting development outcomes links political checks and balances to thecredibility of government commitments.INTRODUCTIONThe problem of underdevelopment is in substantial measure one of governmentfailure, and therefore political failure, in developing countries. A vast literature hasilluminated the roles of interest groups, institutions, and political market imperfec-tions in shaping the actions of government. However, there has been no systematiceffort to establish how the political economy literature answers the question, “Whyare some countries economically developed and others not?” This essay addressesthis question.Two government failures are the focus of this essay. One is the adoption ofpolicies that unnecessarily leave most people in society worse off.1The other is∗The findings, interpretations, and conclusions expressed in this paper are entirely thoseof the author and do not necessarily represent the views of the World Bank, its ExecutiveDirectors, or the countries they represent.1“Unnecessarily” in the sense that Pareto-superior policies, which would have made somebetter off without making others worse off, could in principle have been adopted.1094-2939/04/0615-0247$14.00247Annu. Rev. Polit. Sci. 2004.7:247-272. Downloaded from arjournals.annualreviews.orgby University of California - San Diego on 09/28/06. For personal use only.6 Apr 2004 20:46 AR AR215-PL07-11.tex AR215-PL07-11.sgm LaTeX2e(2002/01/18) P1: FHD248 KEEFERthe inability to make credible promises to refrain from opportunistic behavior.2The first, policy inefficiency, has been examined using each of the three pillarsof political economy analysis—collective action, institutions, and political marketimperfections.The theory of collective action rests on the hypothesis that organized groups ofvoters exert more pressure on politicians than do unorganized groups. This theoryexplains systematic policy failure in developing countries if special interests inpoor countries are particularly well organized and antagonistic to broader devel-opment objectives. The second pillar focuses on the institutions that structure howpoliticians gain and retain power and determine who can propose or must approvepolicy change. Institutional differences account for differential development if theformal institutions of poor countries yield greater inefficiencies in policy makingthan formal institutions in rich countries. Finally, policy distortions may be drivenby imperfections in political markets. These include the lack of voter informa-tion, the lack of credibility of pre-electoral political promises, the “all or nothing”nature of many political choices (such as the need to choose a single candidateto represent voter interests on multiple dimensions), and the polarization of theelectorate across politically relevant dimensions. If these imperfections are morepronounced in less developed countries, they can explain differential developmentoutcomes.The second government failure—the inability to make credible commitments—handcuffs governments in numerous ways, from monetary policy to their abilityto encourage investment. This literature tends to focus on the relative size andpower of economic interests in a country; formal institutions, particularly theextent of political checks and balances and the voting franchise; and politicalmarket imperfections, particularly the inability of politicians to make credible pre-electoral promises. Researchers in this area, more than in any other, attempt toexplain divergent experiences of economic development and argue explicitly thatgovernments in poor countries are less able to make credible commitments.This review sidesteps discussion of the determinants of policy efficiency inautocracies, simply because the literature on the political economy of democra-cies is far more advanced. However, the entire debate surrounding the sources ofgovernment credibility implicitly contrasts autocratic forms of government, whichhave no elections and no political checks and balances, with governments that ex-hibit these institutional features. Similarly, following the literature, the discussion2The two failures are linked, since government credibility influences policy choice. Govern-ments that know their promises regarding the future are not credible have less incentive toundertake policies that only bear fruit if citizens believe government promises regarding thefuture. A third significant category of government performance relates to redistribution andinequality. These enter the analysis below as a puzzle, because of the absence of massiveredistribution in highly unequal countries where the poor majority can and do vote; and asan explanation, because a significant literature attributes the failure of some countries todevelop precisely to initial conditions of significant inequality in society.Annu. Rev. Polit. Sci. 2004.7:247-272. Downloaded from arjournals.annualreviews.orgby University of California - San Diego on 09/28/06. For personal use only.6 Apr 2004 20:46 AR AR215-PL07-11.tex AR215-PL07-11.sgm LaTeX2e(2002/01/18) P1: FHDPOLITICAL ECONOMY AND DEVELOPMENT 249below relies heavily on cross-country statistical comparisons to