Sharing the Future: Financial Innovation and Innovators in Solving the Political Economy Challenges of Development

Abstract

It is a familiar story. A new leader assumes authority in a country that has recently discovered that it has fallen behind its neighbours in economic development. He brings in foreign expertise, announcing a series of modernizing reforms that adopt what is perceived as best development practice and promises much in the way of social benefits. These include the establishment of schools and competitive exams based upon a modern curriculum, the abolition of sinecure positions in government, and the expansion of a system of railways and banks. However the reforms threaten the interests of existing elites. Within four months of the start of the reforms, these elites stage a coup, imprison the executive and rescind the changes. The country faces years of political unrest, civil war and revolution, at great human cost, before reforms occur.

This is a version of a paper presented at the July 2011 International Economic Association World Congress at a session on ‘Institutions and the History of Economic Development’. I would like to thank Susan Athey, Jon Bendor, Michael Bordo, Gary Cox, Alex Debs, Jim Fearon, Avner Greif, Justin Grimmer, Steve Haber, Chad Jones, Keith Krehbiel, Timur Kuran, Philip Lipscy, Debin Ma, Helen Milner, Kris Mitchener, Dan Posner, James Robinson, Gérard Roland, Dick Sylla and Barry Weingast for very useful discussions. I am grateful to Nick Eubank and Fiona Wilkes for terrific research assistance.