Rajan and Zingales (2006) — reasons to be optimistic about Bangladesh

Posted in development, economics, political economy by jrahman on December 1, 2013

Raghuram Rajan is as close to a Bollywood star an economist is ever likely to be.  He may have saved the Indian rupee from a collapse by simply showing up to work — okay, that’s a slight embellishment, but only just (see here for a more nuanced take).  Before that, way back in 2006, he said that the global financial system was at risk of being in considerable trouble — that’s the closest to predicting the global financial crisis anyone has ever been.  Months before that celebrated paper, he wrote a paper with his Chicago colleague Luigi Zingales that may give us some reasons to be optimistic about Bangladesh.

To be sure, Bangladesh is never mentioned in The persistence of underdevelopment: institutions, human capital, or constituencies? — not even once.  But their neat little model doesn have some strong relevance for the present day Bangladesh (and no — this post has nothing to do with the current political crisis).

Rajan and Zingales want to know why seemingly pro-growth (and pro-development) reforms don’t happen more often.  They stylise an economy with three groups:  oligarchs; educated middle class; and the uneducated mass.  Obviously, the oligarchs own the wealth, and would like to keep things that way.  Educated middle class would like to see reforms like increased competition, transparency, rule of law etc that would reduce the power of oligarch and set off economic growth and development.  But until that happens, they are employed by the oligarchs as managers/bureaucrats.  The uneducated masses, currently employed as unskilled labourers, would benefit most from education, as this would open new opportunities for them.  Clearly, reforms and education would mean that in the long run, everyone will be collectively better off.  Why don’t the reforms happen, or why aren’t pro-education policies taken?

Oligarchs don’t want reform as this will weaken their grip on the society.  They don’t want the masses to become educated because once the uneducated mass join the rank of educated middle class, the latter will become too powerful and force reforms on the oligarchs.  Meanwhile, if there is no reform, then the current middle class don’t want the masses to become educated — no one likes more competition.  So, the only way the uneducated can get more education is if it is coupled with reforms.

How likely is a broad anti-oligarch grand coalition of middle class and the masses seeking reforms and education?  Turns out, not as likely as one would like.  While a comprehensive programme of reforms and education would ultimately increase the welfare of both the middle class and the masses, the reforms’ effect might be more complex in the short term.  Depending on the gap between the middle class and the masses, reform might actually hurt the poor in the short term even as the middle classes benefit.  At the very least, inequality might widen as the middle class avails new opportunity, which the poor misses out on because of their lack of education.

So, depending on the endowments, the poor might actually form an anti-reform coalition with the oligarch where the latter finds it better to bribe the poor with populist subsidies than concede reforms to the middle classes.

Rajan and Zingales tell a pretty neat story.  At least, the story’s logic is internally consistent.  They tell us why an economy might be stuck in a bad equilibrium where good policies are not taken.  Further, they tell us when is an economy likely to break out of this bad equilibrium.  One way this might happen is through some external shock — nationalist reaction to foreign threat might, for example, lead to the oligarchs providing mass education, which then leads to reforms.  Plus, good policies are more probable if the oligarchs are competitive in the global market (in which case, they can maintain their affluence even if domestic classes become more equal) and/or where the gap between middle class and the masses are not too big (in which case it’s easier for them to make a common anti-oligarch alliance).

And this is where the authors give us reasons to be optimistic about Bangladesh.

Insofaras Rajan and Zingales abstract away from identity politics, relatively homogenous Bangladesh is a good fit for their stylised economy.  We have our oligarchs, but at least in the garments sector, they are globally competitive.  Arguably, there isn’t really that big a gap between our so-called shikkhito moddhobitto and fakinnir put classes — go back a few generations, and we were all rural East Bengali peasants.

This means that unlike many other countries (including our neighbours), we are more likely to witness pro-growth policies.

It’s hard to be optimistic about Bangladesh these days.  But Rajan and Zingales (2006) gives us some reasons to.


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  1. fugstar said, on December 3, 2013 at 10:05 pm

    “Arguably, there isn’t really that big a gap between our so-called shikkhito moddhobitto and fakinnir put classes — go back a few generations, and we were all rural East Bengali peasants.”

    Never underestimate the power of distinction brother and the denigrative practices of the Shorkari Officer.

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