Hausmann and the ‘Fitness Function’ of Economic and Political Systems

In plenary session I « Democracy (Open Society) and Economic Development: The Politics of Policymaking”, Ricardo Hausmann, Director of the Centre of International Development (CID) & Professor of the Practice of Economic Development at Harvard University, addressed the following question: “Economic Development and Politics: Where is the Connection?” Reflecting on this, Hausmann looked at the existing asymmetry between the economy, which has an incredible ability to figure out its problems and sort itself out, and the political system.

To identify the type of government required for development, Hausmann referred to Adam Smith: “Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism but peace, easy taxes, and a tolerable administration of justice: all the rest being brought about by the natural course of things.”

Hausmann pointed out the problem from his point of view: the market being deeply incomplete and requiring things that it cannot provide itself (among which property rights, contract enforcement, rules and their enforcement, public goods, goods and services that the political system decides to offer).  He provided as an example the real estate market. The market economy has governments providing an enormous set of different functions. Although the market economy has an automatic response mechanism, it needs information about what is working and what is not working, incentives to respond to that information and to mobilize needed resources. The important lessons to be drawn are that the institutional underpinnings of markets are quite complex, deeply interactive and motivated by the desire to lower the transaction costs.

Moreover, Hausmann reflected on how complex democratic institutions can be, by drawing on the Acquis Communautaire of the European Union, and the high number of lobby groups in the U.S. to prove his point.

The U.S. has a complex political process that has evolved, involving organizations at different levels trying to influence decisions. 500,000 people are elected in the US. While the congress has 228 committees and sub-committees, there are 22000 registered lobby groups which try to influence policies, and which also participate in funding the electoral campaigns. According to Hausmann, it is more likely for groups to be corrupted by powerful interests if these groups are limited in number.

The lesson learned is that the production requires many fairly specific and interactive inputs, among which some can be purchased in markets while others are provided by democratic institutions and human capital. Therefore, “if governments don’t provide micro inputs, production can’t take place” confirmed Hausmann. In order to have a functional political system, there is a need to open up the possibility for people to participate in democratic processes. In sum, there should always be room for the political marketplace and economic markets to accompany each other.

3 thoughts on “Hausmann and the ‘Fitness Function’ of Economic and Political Systems

  1. Pingback: ERF 17th Annual Conference: Report Plenary Session 1 « Economic Research Forum Blog

  2. Pingback: Institutional Development Key to Building Democracy Across Arab Region « Economic Research Forum Blog

  3. Pingback: Politics and Economic Development: Economic Research Forum (ERF) 17th Annual Conference – March 20-22, 2011 Antalya, Turkey « Global Development Network Blog

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