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Development
Author(s): Barry R. Weingast
Source: Journal of Law, Economics, & Organization, Vol. 11, No. 1 (Apr., 1995), pp. 1-31
Published by: Oxford University Press
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Introduction
The fundamentalpolitical dilemma of an economic system is this: A govern-
mentstrongenoughto protectpropertyrightsand enforcecontractsis also
strongenoughto confiscatethe wealthof its citizens. Thrivingmarketsre-
quirenotonlytheappropriate systemof propertyrightsanda lawof contracts,
but a securepoliticalfoundationthatlimitsthe abilityof the stateto confis-
catewealth.Farfromobvious,however,arethecircumstances thatproducea
political system thatplays one role instead of the other.
This dilemmais readilyapparentfor the case of economic reformin Eastern
Europe and the former Soviet Union. Economists focus on providingfor the
broadoutlines of a marketsystem, that is, on "gettingprices right" Unfortu-
nately, the economists' focus ignores politics and the possibility thatpolitical
forces might inteivene in the futureto halt the developmentof a marketsystem
or to redistributea largeportionof the wealth thus created. Not only do politi-
cal forces hold the potentialto destroya fragile, nascenteconomic system, but
theirprospectdetersthe economic activitynecessaryfor economic growth. As
economistshavelong realized,the absenceof secureprotectionfor the rewardto
effort detersinvestmentand, hence, economic development(Eggertson,1990;
North, 1981, 1990; Olson, 1982; Williamson, 1994).
The fundamentalpolitical dilemma forces us to ask what form of political
system is requiredso that a viable, privatemarketeconomy is a stable policy
choice of that political system? The answer concerns the design of political
institutions that credibly commit the state to preserving markets, that is, to
limits on the future political discretion with respect to the economy that are
in the interestsof political officials to observe (Levy and Spiller,.1994; North,
1993; Weingast, 1994a, 1994b; Williamson, 1994). The centralcomponentof
a crediblecommitmentto limited governmentis thatthese limits must be self-
enforcing. For limits on governmentto be sustained, political officials must
have an incentive to abide by them. This implies that designers of economic
reformmustpay attentionnot only to the reform'scontentbut to how the future
exercise of political discretionmight alterthatpolicy.
In the language of the new institutionaleconomics, providinga secure and
predictablepolitical foundationfor the marketsrequiresa form of governance
structure(Williamson, 1985, 1994; Weingast,1993b).' To understandthe po-
litical foundafionsof markets,we must begin with the constitution,conceived
here as the set of institutionsgoverningpolitical decision-making-that is, the
institutionsor rules governinghow policy choices are made, especially among
alternativespecificationsof the economic system. All societies possess a con-
stitutionin this sense, whetheror not they possess an explicit documentcalled
"theconstitution."2For example, Roeder(1993) describesthe operationof the
working constitutionof the former Soviet Union, as opposed to its nominal,
written constitution. Understandingthe relationshipsbetween constitutional
provisions and economic performancerequiresdevelopmentof a new positive
theoryof constitutionalismthatseeks to explainhow constitutionallimits work
and why some constraintsprove binding in practice.3
1.Notice thatthislogic directlyparallelsthatin the theoryof the firm. williamson (1985: 48-49),
forexample, arguesthatwhen transactionsare subjectto ex post problems,wise bargainingparties
will attemptto mitigatethese problemsex ante by creatinga governancestructure. See Milgrom
and Roberts(1992) for a recent and comprehensivestatementof the theory.
2. Nor does this requirethat the constitutioncontain provisions supportingdemocracy,repre-
sentation,or secure political and privaterights for individuals,thoughmiostWesternconstitutions
do so. Constitutionsin the developedWest are thus an importantspecial case of constitutions. In
contrastto the more generalrange of constitutions,those in the West possess a rangeof additional
(and generally thoughtto be desirable)attributes.
3. Recent work includes Hardin (1989), North and Weingast (1989), Ordeshook(1993), Or-
deshook and Schwartz (1994), Przeworski(1990), Riker (1982), and Weingast(1994a); see also
States. Part 2 focuses on the deeper question of what made federalism and
its restrictionscredible. Section 2.1 analyzes how federalism was sustained
in England, and Section 2.2 does so for the United States. Part 3 turns to
contemporarysettings of economic reform in the former communist states,
focusing on economic reformin China. My conclusions follow.
economiceffects,federalismmustalsohavethe third,fourth,andfifthcharac-
teristics.Thecentralgovernment's to makeeconomicpolicymustbe
authority
limited;thisauthoritymustbe in thehandsof thelowerpoliticalunits.More-
over,thelocal governments mustface hardbudgetconstraint.Thisconstraint
inducesproperfiscalmanagement(McKinnon,1994). Werelowergovern-
mentsbailedout of fiscalproblems,eitherby the centralgovernmentor via
accessto printingmoney,theywouldhavefarless reasonto worryaboutthe
fiscalconsequencesof theirdecisions.
Noticethatsomestateswill callthemselvesfederalalthoughtheyfailtomeet
theabovefivecriteria,whileothersmaynotcall themselvesfederalbutdomeet
thecriteria.Thus,asWilliamson(1994)observes,thereis adistinction
between
de factoandde jurefederalism.This suggeststhattraditional approaches to
federalismarebasedon formalor legaldistinctionsthatareirrelevant for the
questionsstudiedhere. In whatfollows,we studystatesthatmeetthe above
fivecriteriawithoutregardto whethertheycall themselvesfederal.
5. Forrecentresultsandsurveysof thisliterature,
see Aranson(1991),CasellaandFrey(1992),
Inman(1987),McKinnon(1994),Oates(1972),Rubinfeld(1987),andScotchmer (1994).
6. Heretoo, qualifications
to the generalresultshaveappeared;see Aranson(1991),Inman
(1987),andScotchmer (1994).
1.2.1 Federalismin England. Though the British do not use the labelfederal-
ism, by the criteriagiven above, 18th-centuryEnglandwas a de facto federal
system.8 First, the nationaland local governmentswere importantand distinct
sourcesof political authority.Second, by the beginningof the 18thcentury,the
9. These conclusions are shared by a range of scholars. Landes (1969: 18-19), for example,
emphasizesthat"acrucialelementin therise of industrialcapitalism[was] thespreadofcommercial
manufacturefrom the towns to the countryside... (Yet] the very unevennessof this development
... is testimonyto the fierce and successful oppositionit encounteredfrom privilegedinterestsin
the towns."
10. Indeed,the Stuarts'inclinationtowardthis formofregulation,parallelingsimilarinclinations
in absolutistFrance,underpinnedone group of the domestic opposition to them duringthe Civil
Warin the 1640s and the Glorious Revolutionin the late 1680s.
11. The commerceclause was by no means the sole clause designed for this purpose;another
example is the privilegesand immunitiesclause.
2. CredibleCommitmentto Federalism
Part2 discussestheprincipalconstitutional
mechanisms fed-
thatunderpinned
eralismin Englandandthe UnitedStates,focusingon whatmadefederalism
self-enforcing.
Acq
II %
Transgressagainstboth I
I
Acq/ I
/
I
sChall
Transgress.ag.A A I
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Chall
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2.1.1 The Model. We suppose there is a single sovereign, S, and two groups
of citizens, A and B. The groups of citizens have different views about the
legitimateboundariesof the state and hence what actions by the sovereign are
considereda fundamentalviolation of theirrights. In this game, the sovereign
needs the supportof at least one of the two groupsin orderto retainpower.
The sequence of actions in this game is shown in Figure 1. S moves first
and may choose to attempt to transgressagainst both A and B, against A
alone, against B alone, or against neither. After S moves, A and B move
simultaneously.14Each may choose to acquiesce or to challengethe sovereign.
Challengingis costly; moreover,each may challenge even if the sovereignhas
not transgressed. If both A and B challenge, the sovereign is deposed and
any transgressionattemptedby the sovereign is rebuffed. If only one group of
citizens challenges S, the challenge fails and any transgressionattemptby S
succeeds. Of course, if both A and B acquiesce, any attemptedtransgression
succeeds.
B
Acq Chall
TransgressagainstA (3,1,4)
Acq , (3,1,3)
A Chall (3,0,1) (0. 3,3) !
B
Acq Chall
Transgress
againstB
Acq i (3,4,1) i (3,4,0)i
B
Acq
Ac q(1,4,4) Chall
againstneither
Transgress (1,4,3)
A Chall (1,3,4) (0,3,3)
Summaryand Implications. The model shows thatit is costly for the citizens
to police the sovereignor government Policing limits on the staterequiresthat
citizens be willing to bear this cost when the state violates them. Yet if citizen
beliefs aboutthe appropriatelimits on the statedifferconsiderably,it is difficult
for them to react in concert to state actions. Indeed, this diversity allows
the sovereign to form a coalition with one group of citizens against another,
allowing the sovereign to transgressboundariesconsidered fundamentalby
othercitizens.
This approachmodels the problem of policing a state or sovereign as a
coordinationproblem. In this context, a constitutionserves as a coordinating
device, helping citizens to coordinatetheir strategy choices so that they can
react in concert and police state behavior.t6Anappropriatelychosen set of
public rules embodied in a constitution can serve as a coordinationdevice
because it provides each citizen with a similar way of judging and reacting
to state action. Of course, the availabilityof such a mechanismin principle
does not tell us under what circumstancesit may be used in practice. This
approachdemonstratesthata centralstep in the creationof limitedgovernment
is that citizens or their representativesconstructa mechanismthat solves the
coordinationproblem.
18. "It is an oversimplificationto see the Whigs as the party of business and the Tories of
seigneurialpower.... But one can safely contrastemphasis on commerce as a point in the Whig
profile, and emphasis on agricultureas a point in the Tory one. So, too, the Whigs tended to
internationalism.. while the Tory was inward-lookingand protectionist"(Carswell, 1973: 40-
41).
19. Jones (1972: 47) reportsthat of the 104 formerlyWhig strongholdsrecharteredbetween
1681 and 1685, only one returneda Whig to the next parliamentin 1685.
Thisis preciselythemechanismmodeledabove.Becausethenewboundaries
werebothexplicitandconsensual,theyfundamentally changedtheinteraction
betweenthecitizenryandthenewsovereign.Formanyof thecentralpolitical
issuesof theera,a singlesetof limitsonsovereignbehaviorhadbeennegotiated
byleadersof theopposingparties.Thisprocessresultedina setof sharedbeliefs
aboutwhatconstituted a fundamental by thestateandaboutwhat
transgression
citizensshoulddo in thefaceof thesetransgressions. Thesesharedbeliefsim-
pliedthatcitizenswouldreactin concertagainstanyfuturesovereigntransgres-
sion,thusensuringthattheirpoliticalandeconomicrightsweremoresecure.20
Buthow did thisnew coordinating mechanismtranslateintoprotectionfor
federalismin England?Giventhe distincthierarchyin Englishgovernment,
themainquestionas towhetherpost-Glorious RevolutionEnglandhadmarket-
preserving federalismconcerns thelimitson national
regulatoryauthority.
fromoverawingthestates?Theimmediateanswer-thattheConstitution pre-
ventedit-begs thequestion,forit ignorestheissuesof constitutional interpre-
tationandconstitutional adherence.
At the mostfundamental level, the answerto the questionis thatnot only
didtheConstitution proscribeintervention, butthevastmajorityof Americans
favoredthisoutcome.A nationalconsensussupportedthe limitedroleof the
federalgovernmentBecausethisviewwasso widelyheld,allthemajorparties
beforethe1930schampioned it (first,theFederalists
andJeffersonians,
thenthe
DemocratsandWhigs,andfinallytheDemocratsandRepublicans).23 National
partiesnot only promotedthe view of a limitedfederalrole, butcreatedand
maintained a seriesof institutional mechanismsdesignedto providea credible
commitment to limitedfederalgovernment
To see how theconsensustranslated intothe mechanisms of Constitutional
durability,considertheproblemduringthesecondpartysystem,roughly1828
throughtheearly1850s.Duringthistime,thenationwasdividedintofreeand
slavestates.Thisdivisionhada criticalinfluenceonAmericanhistory,notably,
on the interpretation of the Constitution, the threemajorantebellumpolitical
crises,andtheCivilWarandReconstruction.24
Mostcitizenswere deeplysuspiciousof the nationalgovernmentbecause
of its potentialto imposepoliciesfavoredby otherregionsor interests.Early
in the 19thcentury,beforethe rise of an integrated,interregional economy,
thesolutionwas simplyfor bothNorthandSouthto agreeto limitthefederal
government'sauthority,thus limitingthe abilityof eitherregionto impose
its will on the other. Althoughthe partisandebateinvolvedthe role of the
federalgovernmentin the economy,the rangeof involvementwas relatively
circumscribed, limitedto suchissuesas tariffsandinternalimprovements.
The "balancerule,"or the equalrepresentation of theNorthandthe South
in the Senate,servedas the principalinstitutionprovidingdurabilityto the
agreementbetweentheregions.Thebalanceruleaffordedeachregiona veto
overnationalpolicymaking.As I argueatlengthelsewhere,thisinstitution had
aprofoundeffectonnationalpolitics(Weingast,1994a;see alsoRoback,1994).
Themainimplicationforpresentpurposesis thattheset of concurrent vetoes
preventednationalpoliciesthatwereconsideredespeciallyinimicalby either
region.Thebalancerule'sdoublevetothusprovidedthepoliticalfoundations
for thepreservation of a slaveeconomyin theSouth,a freeone in theNorth,
anda limitednationalgovernment
As theeconomybecameinterregional, however,manypolicyquestionswere
no longerso easilydisaggregated. Forexample,shouldgrowthof interregional
23.Theonepossibleexceptiontothisunanimity wastheRepublicanpartyontheissueofslavery
andtherightsof thefreedmen.Thesepoliciesemergedonlywithinthecontextof theCivilWar.A
versionof theviewthatfollowsappliesto thebulkof thepoliciestheydevisedandimplemented
duringtheirperiodof politicalhegemony(1860-1932).
24. Otherpoliticaldivisionswerealso important, butin whatfollowswe concentrate on the
former.Fora discussionof the interaction of slaveryandotherissuesduringtheperiodof the
secondpartysystem,see WVeingast (1994a).
3. Implicationsfor EconomicReform
3.1 Federalism EconomicGrowth
Chinese-style: inModer China
Thecontrastbetweenthesuccessof economicreformin southernChinaandthe
troubledpathof reformin theformerSovietUnionandits satellitesnotonlyis
strikingbutappearsto reflectthelessonsof thisarticle.26
Beginningin thelate
1970s,Chinaembarked on economicreform.As oneof Asia'sfastest-growing
economiesin thepast15years,it hashadremarkable success,especiallyin the
south.
A rangeof factorshas contributed to China'seconomicsuccessrelativeto
the formerSovietUnion. Thesefactorsinclude,for example,the proximity
of SouthChinato foreigncapital,notablyfamilywealthof thosewho had
previouslyfledthecommunists to HongKongorTaiwan;therelativelylimited
initialscope of economicreform,perhapsincludingits focus on agriculture
whileignoringthelarge-scale publicenterprises; incontrasttotheformerSoviet
Union,China'srelativelyshorterexperience withcommunism, itsleaders'more
pragmaticandless ideologicalpursuitof socialisteconomicprinciples,anda
farless interdependent economy.Moreover,in contrastto the republicsand
satellitesof theformerSovietUnion,whichinheriteda rangeof economicand
fiscalproblemsfromtheirformerregimes,Chinainitiatedthereformsfroma
positionof relativelystrongfiscalhealth.
All of thesefactorscontributedto China'ssuccess.Andyettheseandrelated
factorsprovideaninadequate understanding of thatsuccess.A centralthough
26. TheseideasarepursuedatgreaterlengthinMontinola,
Qian,andWeingast(1995)andQian
andWeingast(1995).
Theeconomiccostsof these
27. Onenotableexceptionis thepresenceof internaltradebarriers.
provisionsareunknown.Mostof China'sgrowthhasoccurred in theareaswiththefewestbarriers
to theriseof anexporteconomy.
4. Conclusions
The main lesson of this analysis for contemporarydevelopmentand economic
reformis a varianton the now commonplaceobservationthat the benevolent
attitude of the government cannot be taken for granted:30Markets require
protection and thus a governmentstrong enough to resist responding to the
inevitable political forces advocating encroachmentson marketsfor private
gain. The fundamentalpolitical dilemma of an economic system is that a
state strong enough to protect privatemarketsis strong enough to confiscate
the wealth of its citizens. The dilemma implies that understandingeconomic
growth requires attention to the question of what guides the state down the
formerpath. As North (1993: 11-12) argues:
ment The Economist, for example, reportsthat they have been over 20 percentper year in some
areas. This is consistent with the view thatremovinga degree of political risk increasedexpected
economicreturns,thusenhancingthewillingnessofentrepreneursandinvestorstoundertakeactions
promotinggrowth. Similarly,since early 1992, Hong Konghas felt a new optimism. The increasing
ties of Hong Kong's economy to that of South China are one factorcontributingto the durability
of Hong Kong's economy. Unfortunately,as recent events remindus, it is not the only factor.
30. On the limits of assuming a benevolentgovernmentin the developing context, see, among
others, Camposand Root (1994), Ekelundand Tollison (1981), Krueger(1992), Levy and Spiller
(1994), North (1981, 1990), North and Weingast (1989), Przeworski (1990), Root (in press),
Weingast(1994a, 1994b), and Williamson (1994).
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