1. Development Clusters

"Little else is required 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"

Adam Smith, 1755.

Almost all economic analysis presumes the existence of an effective state. Specifically, economists invoke the existence of an authority which can tax, enforce contracts and organize public spending on a wide range of activities. We then study concepts like market failure and the state's response to it, the provision of public goods, and optimal taxation to fund state activities. But many of the major developments in world history have been about creating this starting point. Arguably, the situation presumed by economists is relevant only to the past 100 years of history for a fairly small group of rich countries.

The effective state is not only of historical interest. A tour of the developing world today rapidly confirms that the existence of a state capable of taxing, spending effectively and enforcing contracts remains a huge challenge. Weak and failing states are a fact of life and a source of human misery and global disorder.

This book offers an approach to studying weak or fragile states, taking a first step towards bringing them into mainstream economic analysis. It is the hallmark of mature science that existing ideas should be expanded into new domains.We proceed in this spirit by usingmore or less standard ideas and methods to study the basics of state building. A key issue is to understand what creates effective states.

Central to our approach is the idea of complementarities. As shown below, almost all dimensions of state development and effectiveness are positively correlated. Also, historical accounts demonstrate vividly that state authority, tax systems, court systems and democracy coevolve in a complex web of interdependent causality. Simplistic stories that try to paste in unidirectional pathways are thus bound to fail.

This introductory chapter lays out many of our main ideas in brief but accessible form. It is also an opportunity to review some of the historical evidence and discuss some narrative accounts of development that shape our thinking. But in neither case do we intend our review to be exhaustive. Our primary aim is to bring out a strong link between our work, with its clear roots in mainstream economics, and research within other disciplines and less mainstream approaches.