Political Losers as a Barrier to Economic Development

Per capita income in many sub-Saharan African countries, such as Chad and Niger, is less than 1/30th of that of the United States. Most economists and social scientists suspect that this is in part due to institutional failures that stop these societies from adopting the best technologies. A particularly interesting historical example comes from the diffusion of railways in the 19th century. While railways are regarded as a key technology driving the Industrial Revolution, there were large lags in their diffusion. For example, in 1850 the United States had 14,518 km of track, Britain 9,797 km, and Germany 5,856 km; in the Russian and Hapsburg empires there were just 501 km and 1,357 kim, respectively (all data from Brian R. Mitchell [1993]). Why do societies, as in this example, fail to adopt the best available technologies? One answer is that existing powerful "interest groups" block the introduction of new technologies in order to protect their economic rents, and societies are able to make technological advances only if they can defeat such groups. Economic monopolies may be one example. A monopolist might wish to block the introduction of a new technology by a rival that will capture the market. This idea, which we call the "economic-losers hypothesis" was discussed by Simon Kuznets (1968), developed at length by Joel Mokyr (1990) in the context of technology adoption, and formalized by Per Krusell and Jose-Victor Rios-Rull (1996) and Stephen L. Parente and Edward C. Prescott (1997). Related ideas are widely discussed in the literature on international trade policy with many formal models (e.g., Gene M. Grossman and Elhanan Helpman, 1994). There are problems with this story, however. First, despite the intuitive appeal of the idea, there are relatively few instances where major economic change was blocked by economic losers. Mokyr (1990) emphasizes the attempts of many skilled artisans to block the introduction of new machines. The most famous example is the Luddites, skilled weavers who were thrown out of work by mechanization. Interestingly, however, many of these groups, including the Luddites, were ultimately unable to block economic progress. Equally important, the economic-losers hypothesis relies on the presumption that certain groups have the political power to block innovation. But if so, why not use this power to simply tax the gains generated by the introduction of the new technology? This might be because there are limits on the nature of fiscal instruments, though it seems plausible that groups with sufficient political power to block innovation would be able subsequently to lobby effectively for redistribution. A more important reason, however, may be that the introduction of new technology, and economic change more generally, may simultaneously affect the distribution of political power. We argue that the effect of economic change on political power is a key factor in determining whether technological advances and beneficial economic changes will be blocked. In other words, we propose a "political-loser hypothesis. " We argue that it is groups whose political power (not economic rents) is eroded who will block technological advances. If agents are economic losers but have no political power, they cannot impede technological progress. If they have and maintain political power (i.e., are not political losers), then they have no incentive to block progress. It is therefore agents who have t Discussant: Gene Grossman, Princeton University.