The Political Economy of Development,
Post-colonial Analysis and “Bad Samaritans”
Fernando López

The new institutionalist approach to development emphasizes the solid association between growth and institutions. The “new political economy of development” is based on studies relating to the origins and evolution of the Western world to project the European experience onto other spheres, and investigate why, in third-world states, the “paradox” of the formation of the European state did not occur, as referred to by Tilly (1992). More recently, new institutionalism has widened its focus to include the study of colonization and the persistence of the institutions that survived from that period, assuming that the institutional evolution is “path-dependent” (Shirley, 2005; Lavezzolo, 2008).

The new institutional analysis incorporates economic theory in the study of the emergence of the modern nation state and links Western Europe's economic development between 1500-1800 to the presence or absence of “good institutions.” The narrative on the political-economic development of Western societies begins when trade and industry went beyond the borders of the local kingdoms and the city, and the creators of this wealth adopted the idea that the private costs of protection could be reduced if assumed by a collective authority. The discussion is framed in terms of “balance,” where institutions are the price and result of the negotiation between the authority and the population by the necessary means for state activity; and the type of state depends on the negotiating strength of the monarch to offer representative bodies rights and privileges in return for revenue. Thus, subjects would to try to assume “constitutional” power to fix the price of the protection (taxes), while the sovereign would monopolize power to ensure greater revenue. Constant wars with other emerging states and fiscal crises played a central role in the economic and political changes (North, 2000, 2007; North and Thomas, 1990; North et al, 2002).

The “political economy of development,” linked to the new institutionalism of “Rational choice”, uses this methodology and investigates the role of violence as the source of prosperity (wellbeing), and institutional quality, based on its public or private provision, and the influence of predatory states on development (Olson, 1993; Bates, 2004). It is argued that violence contributed to the formation of the modern state in Western Europe, and that the institutionalization of power manifested itself in the gradual acquisition of the monopoly over means of violence. This thesis refers to the Leviathan called upon by Hobbes to overcome the labyrinth of the “natural condition,” and that fits into the Weberian concept of the state as an efficient solution, but one which demands the monopoly of coercion and violence.

It also derives from Schumpeter and Goldscheid's concept of the state as a defense-oriented and financial community, and from the idea that the immediate cause of the creation of the modern state was the financial need born of the increasing military costs that needed to be met through taxation (López and Lizárraga, 2006; López Castellano, 2007a, 2010; Prats, 2007). Research into the process by which “modern states” take their shape develops from the idea that the lack of military security to protect against outside threats and the need for public resources to finance defense made possible the creation of “liberal” institutions. This means that the conflicts between states, and preparing for them, affected the formation of the state and its organizational structure. Wars created a European network of nation states, and state organizations (treasuries, courts, administrative offices, bureaucracies) appeared as a by-product of the resources raised to finance them (Tilly, 1992; Levi, 2006).

To finance wars, the monarchy, with its monopoly over violence and motivated by the need for revenue, was forced to expand its tax base. This expansion of the tax base, from “real estate” to “personal property”, made taxation harder to enforce and easier to evade. Obtaining the cooperation of private property holders was essential and this was achieved by creating institutional channels through which to reach agreements. In other words, the monarchy opted for a “seduction” method, and established institutional channels to reach agreements. If we follow this line of argument, mercantilism could be seen as a type of “seduction” strategy to access new sources of wealth—a more effective strategy than predation—and institutions were created as a means of carrying this out. To this end, measures were taken to boost the urban economy, the import of finished goods was limited through tariffs and quotas, and the export of raw materials reduced. From this perspective, by ceding the subjects the right to self-govern in exchange for the payment of taxes can be seen as a profitable political investment for the sovereign, because it granted power to citizens to form economic organizations capable of promoting the growth of the urban economy and, therefore, the kingdom's revenue base. Ultimately, the economic imperative—the need for funds and the need to raise them within the kingdom—became a political imperative and shaped governmental institutions. These parliamentary forms of government created incentives for people to generate wealth, because the power was used to guarantee those with capital that the fruit of their investment, and, additionally, the increase in the nation's wealth, would not be appropriated by those who controlled the instruments of coercion. (Jones, 1997; Bates, 2004: 50-55 and 77).