Roger Myerson on political leadership & effective economic development

Nobel laureate, Roger Myerson, has argued in a 2014 paper (in the context of Aid to Africa) that 'a theory of economic development is incomplete without a model of how effective states are built by political leaders.'

This seems reasonable. The alternative to 'political leaders' building 'effective states' is that mercenary Corporations or self-interested coalitions do so. We may consider assisting the latter type of entity to be repugnant or in conflict with 'Alien Torts' type legislation in our own country.

Myerson states that 'a key to successful democratic development in a nation is to increase its supply of leaders with good reputations for using public funds responsibly.'

What if the country has an independent Civil Service and Judiciary and is empowered to prevent irresponsible usage of funds? Surely, this would have an ever better effect? Now, any and every leader, whatsoever her reputation, would be contributing to the supply of 'leaders who use public funds responsibly'.

However, it could be argued, a leader with a reputation for using public funds responsibly would be even more effective because 'multiplier' and 'mimetic' effects would be stronger thanks to Expectations being more responsive.

However, the opposite point could also be made. If leaders have a reputation for using public funds responsibly, then judicial and administrative checks and balances may grow weaker. In this case, it would be Muth Rational or 'Regret Minimising' to have sceptical expectations cashing out as a sort of 'Ricardian equivalence' such that no multiplier or mimetic effects remain. People assume that if more is done in the political sphere then less will be done in the voluntary or purely private realm.

Given Myerson's extraordinary brilliance and theoretical contribution to the subject, I think ordinary Economists will understand Myserson's statement thus- 'Good Leadership can do something mere Good Administration can't do. It can change the nature of correlated equilibria. It does more than affect Expectations, it changes Preferences. Thus the set of incentive compatible as well as that of allocatively efficient solutions changes in an eusocial manner.'

No doubt smarter economists will phrase this differently or add value in some other way, but when Myerson speaks- precisely because of his leadership role in our discipline- we hear much more than is said and, what's more, our spirits are raised in a marvellous manner.

Myerson next says

-But it is not enough to focus only on national leaders; local leadership is also essential. Economic investments depend on local security and other public services from local agents of government, while profitable relationships of inter-regional and global trade rely on transportation networks and legal protection at the national level

This may sound like common sense, but unfortunately, for many ordinary economists from the Global South, it sets off alarm bells.
Why?
It seems to presuppose an ethnically or otherwise homogeneous country. Such homogeneity is likely to be the effect of previous effective, if not exactly good, governance. In practice, if ethnicity itself evolves in 'shatter zones' for Imperial governance and is strongly linked to 'Zomia' type decentralisation, or incremental tribalization, of authority and norm enforcement, then it is unlikely that any 'successful democratic development' will arise because local leaders using exogenous transfers (or 'resource curse' revenues) will compete to destroy, not support, the fabric of the nation.

In order to benefit from Myerson- our 'leader' or 'Big Chief's'- paper we need to read between the lines and use our own local knowledge to flesh out the bare bones of his purpose- viz. to

 outline a general political theory based on leadership and trust and, from this theory, argue that the chances for successful economic development can be maximized by institutions of decentralized federal democracy. We begin in section 2 with a basic theoretical perspective on the foundations of the state, followed in section 3 by some historical perspectives on the role of local government in development. Then section 4 examines the role of leaders' reputations in constitutional change, and section 5 shows how local democracy can promote the competitive political leadership that is essential for successful democratic development. Section 6 concludes with suggestions of how political reform and development assistance can more effectively help poor nations to increase their increase their vital supply of leaders who have good reputations for using power responsibly in service to the public.

 Foundations of the State

 the state is a network of agents who enforce laws that sustain property rights and reduce moral hazard in other organizations of society

Suppose I am a Judge. I receive a transfer to the State Capital and so I rent out my house in the District Capital and move to my new official residence. The tenant does not pay me any rent and refuses to leave.  I file various motions but the tenant files other motions and I know from experience that it will take approximately 3457 years to resolve the matter legally. Thus, I pay the local Don to evict my tenants.
He does so for a nominal fee because he respects me as a law minded person who does not take bribes. The tenant, quite naturally, retaliates by charging me with rape, genocide and insult and atrocity to a particular religious or ethnic minority and the Free Press has a field day at my expense. I find that my hapless husband and myself are suddenly getting invited to the best parties.  A low budget, Regional language, film is made in which I am shown beating up hundreds of the Tenant's goons and then raping them one by one. Quentin Tarantino sees that film and praises it and 'Rapist Judge' becomes a meme in his oeuvre. Meanwhile my ex-Tenant lost his deposit in the local elections. People would not vote for an Harvard alumni, ex-Goldman Sachs, amateur cage fighter who got raped by an elderly grandmother who also happens to be a retired Judge.

Still, bien pensant public intellectuals have a duty to reflect on the manifest and manifold injustices perpetrated against vast subaltern classes- e.g. that of Tenants- by Rapist Judges, many of whom belong to the Majority Community. The practice of a truly Secular, Democratic process of Public Justification must concern itself with the multiple violations of Human Rights suffered by raped Tenants more particularly if these were carried out by retired Judges belonging to the supposedly 'fairer sex'.

On the other hand, many ordinary people would feel, this is a situation where Justice was done- that too in an exemplary fashion. But, the 'State' did not do that Justice. Rather it made Justice impossible to achieve through any legal means- even for a Judge. This does not mean that contracts won't be enforced nor that rapists won't be punished. It just means that the State, as defined by law or economics, is seldom 'a network of agents' enforcing anything 'law-like'.

Bearing this in mind, how can we read Myerson- our leader, who we know expends intellectual resources in a responsible manner- such that we ourselves can gain?

I suggest-

networks of agents who enforce laws that sustain property rights and reduce moral hazard in other organizations of society may have an incentive compatible relationship to the State even if that State is hell-bent on destroying incentive compatibility and constraining allocative efficiency iff Judges have to rely on the local Don to avoid being rendered homeless in their old age.

The Foundations of the State arise in networks of ontologically dysphoric agents who vicariously suffer at the hands of Rapist Judges of the above description.

Myerson says-

Agents of the state could profit from abuse of their powers, and so they must be motivated by the expectation of greater long-term rewards for good service. But promised rewards for good service become a debt of the state which its leaders might subsequently prefer to deny. So the motivation of agents in the government itself is also a moral-hazard problem, which must be solved by political leaders who establish the government (Myerson, 2011) 

This is clearly nonsense. The State does not revoke pensions- even to Rapist Judges. Moreover, 'good service' may involve prosecuting such Rapist Judges who, despite being grandmothers, nevertheless rape ex Goldman Sachs employees who are also amateur cage fighters. The fact that many witnesses heard this heartless and genocidal rapist, utter casteist slurs while violating the anal integrity of my client with her massive cock shows that the nature of Power in our Society is still firmly founded upon Racialist theories of Hegemony instrumentalized by Colonial Powers. Indeed, not till this foundational act of epistemic, Eurocentric, violence is addressed and redressed will we, as a Society, prevent our grannies raping their delinquent tenants while uttering casteist slurs  and offending their religious sensibilities.

An official who is 'law minded' gains a local reputational benefit- the local Don only charges a nominal fee for evicting their mischievous tenant- whereas one who is corrupt is himself kidnapped and has to surrender a portion of his accrued rents. Official pensions or other entitlements are a different matter. They may be subject to delay, but- in general- the class interest of the bureaucracy ensures they are upheld.

Amending Myerson, we may say that the foundation of the state is a network of agents with common values such that Rapist Judges become folk heroes.

We must similarly amend statements like the following-

The critical question of political economy, then, is whether property rights are securely protected only for a small elite who actively support the national ruler, or does the circle of trust extend more broadly to include people throughout the nation. 

The property rights of this small elite do not represent wealth- they are not fungible and have no capitalizable value- unless much wider property rights exist of an essentially uncontested type.

Small elites are characterised by the arbitrage of capital flight of one sort of another. Assad has survived because of previous capital flight which, however, was not secure once the West decided to paint this Doctor and his London born Merchant Banker type Wife as genocidal tyrants. What was to stop the West from going the whole hog and expropriating that entire crew? Suddenly, the Alawi-Sunni elite needed to reassert its claim to what a Pakistani economist calls 'a geopolitical rent'. It is stuff like this which sustains States.

If the following had been written by anyone but Myerson, we would consider it the maundering of a fool- (my comments are in bold)

Members in the securely protected group require some legal and political power that could be used against a government official who failed to protect their rights.  Because 'being securely protected' does not mean being 'securely protected'. What Myerson means is 'members of the securely protected elite need protection against not being members of the securely protected elite. They can't have it. The thing is impossible. Louis Phillipe can become King but his Throne is no more secure than that of Charles X.  A broad distribution of such power to threaten the privileged status of government officials may naturally seem inconvenient to established national leaders, but people who have been admitted into this circle of political trust can invest securely in the state, increasing economic growth. Nonsense! A South Korean dictator forced corrupt people to invest their ill gotten gains in a particular way but this did not mean that any great decentralisation or broader distribution of power occurred. Rather, the reverse was the case- and this still has hysteresis effects. A fundamental fact of modern economic growth is that it requires decentralized economic investment by many individuals who must feel secure in the protection of their right to profit from their investments. Thus, modern economic growth requires a wide distribution of political voice and power throughout the nation. It needs an independent Judiciary which can take speedy action. Otherwise, there could  be a 'wide distribution of political voice and power' featuring pitched battles on the streets on every and any occasion. 

Myerson has a 2006 paper which presents a simple game theoretic model which shows that if corrupt leaders have no effective competition then there will be centralisation. However, decentralisation would have the opposite effect.

Even with free elections, a corrupt political faction could maintain a grip on power if the voters believed that other candidates would not be any better.

Why? A corrupt faction would be subject to factionalism. Suppose the Oil Ministry is easier to loot than the Foreign Ministry. The Foreign Minister will split the party claiming to combat the notorious corruption of the Oil Minister who is from such and such ethnicity or region or whatever.

Successful democracy requires more than just elections; it requires alternative candidates who have good democratic reputations for using power responsibly to benefit the public at large, and not merely to reward a small circle of supporters.

Nonsense! Successful democracies require corrupt bastards being arrested and locked up. This means an effective and independent Judiciary and Federal Vigilance Squad or Bureau of Investigation.

In a nation with a long tradition of democracy, there are typically many politicians who have such good democratic reputations.

Not necessarily. They may all be shite, or else there may be a parliamentary deadlock because of ethnic or other divisions- look at Belgium. What matters is if the Rule of Law prevails and administrators can get on with their jobs knowing 'rotten apples' will be removed, not promoted by corrupt politicians.

But in a new democracy, politicians with good democratic reputations are typically lacking.

Rubbish. The new democracy probably has more, not less, clean and competent people to choose from. Politics would not yet have become a repugnancy market.

Aspiring politicians who have no real power can make fine speeches about better government, but they cannot demonstrate any ability to allocate public funds and patronage in a way that provides public goods and services for the population.

Quite false! Aspiring politicians collect funds for propaganda and other similar purposes. Their talents or limitations as administrators would already be known. Thus, an impractical demagogue may be paired with a pragmatic deal-maker.

Voters may be reasonably skeptical of candidates' promises when they have no evidence of good public service in the past. Then voters would have no incentive to turn a corrupt incumbent out of office, if the alternative candidates were expected to be just as bad or worse. But if blatant corruption would not reduce the leader's chances of re-election, then he should have no incentive to prevent his supporters from enjoying corrupt benefits of power. In a simple game-theoretic model, I have shown (Myerson, 2006) how such failure of democracy can be a rational equilibrium for a centralized unitary state, but this bad equilibrium can be eliminated by decentralizing a share of power to independently elected local and provincial governments. The key is that local governments create independent opportunities for local leaders to begin cultivating good democratic reputations. Then, if political leaders at all levels of government were expected to be uniformly corrupt, a local leader who offered better public service could establish a good reputation with the voters that could make him a serious contender for power at higher levels of government.

This is all very well in theory but in a large heterogeneous democracy, a local leader who does well in one District may not do equally well at the State or Federal level.

All that matters is that the Law punish corruption and that the Administration be subject to independent Audit for competence and fitness for purpose.

Decentralisation may lead to overlapping jurisdiction- consider the case of Genoa, where a bridge has recently collapsed. The reason the place got into such a mess is that there are 5 different levels of decentralisation- from the EU which gave an infrastructure grant for repair, to the National Government, to the Provincial, to the Municipal authority.  One or more could always paralyse an needful initiative on the part of the others. Subsidiarity is all very well, but- as in the case of the bridge in Genoa which is part of a crucial commercial highway- the level at which the decision needed to be made was the European- which was releasing the required funds. Decentralisation meant delay and corruption.

This argument for decentralized democracy can also be derived from the basic economic  concept of barriers to entry. A successful system of democratic competition should reduce political leaders' ability to take corrupt profits from their positions as suppliers of government services.

Criminals can supply 'government services' like killing your daughter's rapist or kidnapping the bureaucrat who extorted your business and forcing him to disgorge his loot. In India, these Criminals disintermediated politicians in areas where the Government wasn't providing much in the way of services. Barriers to this sort of entry are low where the Police are not trusted or the Judiciary is dilatory.

Economists understand, however, that the expected amount of profit-taking in a competitive market equilibrium may depend on barriers against the entry of new competitors. By enabling more local politicians to prove their abilities to govern responsibly, federal decentralization and local democracy can reduce barriers against new entrants into the national political arena, and so can make national politics more competitive, thus sharpening the incentive for elected national leaders to provide better public services.

Alternatively, the young kid who rapes and murders his sister gets an education in juvenile home which helps him to set up as an extortionist. By the age of 30 he is a legislator. By 50 he may be Chief Minister. By 70 he may become PM in a coalition government.

In the United States, for example, many candidates for president have served previously as governor of a state (province). The interactions between local and national politics can go both ways. I have argued that local democracy strengthens national democratic competition as successful local leaders can become candidates for higher offices.

Right! George W Bush was a 'successful local leader'! The Governor of Texas actually runs the State. It isn't a decorative office at all.

But national democracy can also strengthen local democratic competition, as national parties can support alternatives to established local bosses. The risk of local government being dominated by an unpopular local autocrat can be countered by the participation of competitive national political parties in local elections. Local political bosses should know that, if they lose popular support, they could face serious challengers supported by a rival national party. Competitive national political parties played an important role in the successful introduction of local democracy in Bolivia as described by Faguet (2012). Crook and Manor (1998), Enikolopov and Zhuravskaya (2007), and Ponce-Rodriquez et al. (2012) find cross-national evidence that the benefits of political decentralization can depend on strong competitive political parties at the national level. 

Bolivia? That's a successful democracy? Evo Morales came up as a Trade Union leader and vocal champion of the indigenous people- the majority. Myerson makes it sound like he started as a Mayor of a small town who became Mayor of a larger town and then the Governor of a region before being elected to the top job. Opportunities for corruption have increased under Morales because State control has increased. Per capita GNP is lower than a generation ago. He may be a good man- a Chavez not a Maduro- but what matters is what happens after he dies.

What point is Myerson making? It is that International donors can better fuck up their victims by finding the Maduros of the future and subsidising them. He may not be aware that this has always happened.

donors could help to increase the nation's supply of leaders with good reputations

Osama bin Laden had a great reputation

by distributing some share of developmentassistance funds to autonomous leaders of provincial and local governments.

So they can kill their rivals and bribe the Judges

Donors could even consider funding some development projects for minority parties in the national assembly. 

So they can do ethnic cleansing in the districts they dominate

For this reputational goal, and to clearly distinguish foreign development assistance from covert efforts to achieve political influence, donors must also insist on transparent public accounting for all funds that are spent by political leaders at all levels.

Yes! They should be audited by KPMG or which ever auditing company is most in the pocket of the regional equivalent of the Gupta brothers.

The essential accounting here must be to the local population, however, not just to foreign donors who provided the funds. Local people must be able to learn what funds were spent by their leaders and must be able to monitor what public services were provided by these funds.

Even local C.P.A's would lack the time and resources to monitor any such thing. However an independent Auditor General backed up the Courts could do so.
Sadly, Rossi's Metallic Laws predict that such independent evaluation (e.g. by the Indian C.A.G) will show every program has zero or negative net impact. Cash transfers are the current panacea, but more than that is required.

A better approach is to catch bad guys the way the Tax man catches bad guys- i.e. focus on what the guys are spending and jail them for 'disproportionate assets'.

Doubtless, many will be seen to have wasted money on graft and corruption. But if the national government cannot achieve public benefits commensurate with the assistance funds that it has received, then other local leaders who are seen to do better with their assistance funds may be recognized as the new leadership that the nation needs. Such a mechanism may seem inconvenient to established national leaders, but it would provide an incentive for them to improve governance and eliminate corruption. 

Nonsense. Only Courts can catch and convict criminals. National leaders have no business doing so. One can always co-opt people with proven administrative or other skills and get them elected to Parliament- in India this happens through the Upper House- and then give them the top job. That's what happened to Myerson's fellow economist Manmohan Singh. Interestingly, Modi had never stood for election before being appointed CM of Gujarat. This sort of 'lateral entry' is just as good or better than Myerson's foolish proposal.