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

This paper analyzes why contemporary third-world countries have been prevented from repeating this form of development of modern states and making progress, taking into account the differences as well as the similarities between seventeenth-century England and many parts of the world currently embroiled in Hobbesian anarchy (Levi, 2006; Tilly, 1992). I argue that those countries that achieved independence in the mid-twentieth century, despite following a similar mercantilist policy to that of European countries, came up against an international system marked by the cold war and foreign aid, which involved a different use of violence. In other words, the two conditions that had previously enabled a political order in which growth was promoted were now lacking: the military imperative (their proclamation as sovereign nations reduced the possibilities of armed conflict), and the economic imperative (the abundant sources of finance that led to foreign aid reducing the incentives to generate wealth). This dual reason derived from a different relationship between the political elites and citizens, and reduced the incentives to create “liberal” institutions (Bates, 2004: 77-81). To be sure, wealth is created when individuals choose to engage in productive activities instead of predation (Olson, 1993), and also when there is a political order in which the state can use its coercive power to safeguard property rights and promote wealth creation instead of predation (Bates, 2004).

The new institutionalists’ view of colonization develops along two lines, which Coatsworth (2008: 16) has defined as the “political economy of conquest” and the “political economy of economic failure.” The “political economy of conquest” is a view that the feasibility of settling somewhere influenced the colonization strategy, and that the various types of colonization policies created different groups of institutions (from extractive states, which transferred resources from the colony to the colonizer, to “new Europes,” or settlement colonies that developed democratic institutions and markets). The Europeans implemented extractive-type institutions where they could not establish settlements due to unhealthy living conditions and where a numerous population existed that could be directly exploited, recruited or abusively imposed upon. The colonial state and institutions persisted after independence, and in extractive colonies the former institutions were occupied by the local elites most favored under colonial rule. These facts would explain the idea of the “investment of wealth”: in the richest areas (highest levels of urbanization and largest populations), extractive institutions were established to hinder their subsequent development; in the poorest ones, market institutions were created that promoted it (Acemoglu et al., 2002, 2005).

For the “political economy of failure,” the key to income distribution and to the institutions working in accordance with this pattern of distribution lies in the initial set of factors. Inequality of distribution was most pronounced in plantation areas, where high levels of slave labor or numerous indigenous workers enabled coercive recruitment and exploitation of the workforce. The institutions served the interests of a small elite. In areas with few indigenous inhabitants and where conditions were more suited for family farming operations, more democratic institutions were created as guarantors of property rights (Engerman & Sokoloff, 1997, 2005).

New institutionalism, as Smith noted in his analysis of colonies, compares English institutions –more conducive to wealth– with those controlled by Spain's “violent and arbitrary” government. And just as before, today the Spanish presence in America continues to be cited as an example of a colonization model that has negative effects on development. Spain failed to make use of its good fortune in possessing a rich extractive economy; it neither developed a manufacturing industry nor expanded trading companies within its European empire (Anderson, 1984: 56-63). But its political involvement was, if anything, more important: the wealth extracted from the mines in America replaced internal taxation and governors thus largely avoided having the type of negotiations which led to the creation of citizens’ rights and limited the state's prerogatives (Tilly, 1992: 147). The lack of incentives to promote productive enterprises, caused by political control over the economy and privileges, hindered economic growth and civil and political liberties, and led to decadence. (North, 2007).