Growth, poverty and asset allocation: The role of the state

This paper studies the consequences of certain widespread policies for the quality and sustainability of growth. These policies cause economic inefficiency, environmental destruction and increased poverty. The paper develops a political economy model to show why the existence of such policies is not likely to be the fruit of errors or miscalculations by policy-makers. A key characteristic that distinguishes this analysis from other political economy analyses is that it allows for an essential asymmetry in the political lobby, with the wealthy having the ability to influence governments through bribes and political contributions while the poor are unable to do so. The key consequence of this is that the policy setting tends to perpetuate or even worsen an initial level of concentration of wealth. Policies are biased in favor of those who can afford to lobby and pay bribes, thus generally preventing policies that improve the initial wealth distribution. At the same time these resulting policies are likely to be detrimental for growth in the long run. We illustrate some of these ideas with a formal general equilibrium model of an agrarian economy with emerging capitalist sectors, where the allocation of land between peasants and capitalists takes place via a political equilibrium instead of via market mechanisms. We show that the resulting land allocation not only reduces the income of peasants but is also inefficient and contributes to environmental degradation of the land left with the peasants. At the same time the model shows that in the early stages of capitalist accumulation wages are likely to fall while peasants' income continues to decline throughout all stages of capital accumulation.