RecentcontributionstothisempiricalliteratureincludeHallandJones1999Barro1999PerssonandTabellini2004AcemogluRobinsonandJohnson20012002andRodrikSubramaniamandTrebbi2004Accordingtothe200 ID: 298093
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1IntroductionThequalityofacountrysinstitutionsmatterforitsgrowthanddevelopment.Thisisapparentfromevenacursoryexaminationofnotjusttheinstitutionalwreckageinpost-TalibanAfghanistanorpresentdayCongo,butalsothepooreconomicperformanceofcountrieswithweakinstitutionsrangingfromArgentinaandVenezuelatoPakistanandKenya.Akeyissueisthenhowdoesonebuildbetterinstitutions.Indeedtherepeatedfailedinterventionsintheseandotherdevelopingsocietiessuggestthatensuringcomprehensiveinstitutionalchangeisdicult.Inthispaperwedevelopasimpleframeworktoexaminetherelationshipbetweenthequalityofpoliticalandeconomicinstitutionsandconsequentlytheimpactofpolicyinterventiononboth.Weaskwhetherrstorderchangesinpoliticalinstitutionssuchastheintroductionofdemocracy,willnecessarilyimproveeconomicinstitutionsandincome?Ifnot,candevelopmentpolicybeasuccessfulcatalystfordeliberatelyengineeringinstitutionalchange?Finally,weanalyzewhethersuccessorfailureatinstitutionalbuildingisaectedbythenatureofthepolicyinterventionitself,beitdevelopmentorsomethingmorecoercive.Policyinterventionwiththeaimofsuccessfullytransforminginstitutionshashadamixedrecord.OntheonehandwehaveafewsuccessstoriesfromtheclassicinstancesofpostwarJapanandGermanytothemorerecentongoingcasesofEastTimorandBosnia(Dobbinset.al.,2003).Incontrast,instancesoffailureininstitutionbuildingseemcommonplace,aswitnessedincountriesasdiverseasHaiti,Peru,SomaliaandKosovo.Perhapsmorestrikingly,eveninacountrywithrelativelystrongdemocraticinstitutionssuchasIndiathestructureofgovernanceinlargepartsofthecountry(suchasthestatesofBiharandUttarPradeshandmanyofthenorth-easternstates)remaincapturedbyanelite(Bardhan,1984).Similarly,accordingtoFox(1995)despitedemocraticelectionsinMexico,elitecaptureofthegovernmentpersistsinmanyregionsincludingtheChiapas,TabascoandMihoacan.Thusdemocratizationsfailuretocatalyzebroaderinstitutionalchangeanddevelopmentispuzzling,andalsoasourceofworry.Muchofthisconcernisbecausepersistenteconomicstagnationhasexacerbatedasenseofalienationanddisillusionmentwiththepoliticalprocessinmanyfragiledemocracies.Thisemphasizesthe RecentcontributionstothisempiricalliteratureincludeHallandJones(1999),Barro(1999),PerssonandTabellini(2004),Acemoglu,RobinsonandJohnson(2001,2002)andRodrik,SubramaniamandTrebbi(2004).Accordingtothe2003Latinobarometropoll,15of18LatinAmericancountrieswitnessedasignicanterosionofsupportfordemocracywithoverathirdofthepopulationclassiedasdissatiseddemocrats.Thisdissatis-factionwithdemocracywasstronglycorrelatedwithpessimismabouttheeconomy.Furthermore,over71%oftherespondentsfeltthatdemocracyhadbeencapturedbyspecialinterests.SimilarresultsarealsoobservedintheEasternEuropebarometer. politicalinstitutions.However,thereisasecondadditionaleectatwork.Inparticular,byencouraginginvestment,developmentpolicygivesrisetothespectreofalargelossineconomicrentsbytheelite.Thisprospectofanerosionineconomicrentsgivestheeliteanincentivetotightenitsgripanddeployadditionalresourcestocontroltheleversofgovernment.Throughthischannelofapoliticalcontrolect,developmentpolicymaythereforealsohavetheadverseeectofpotentiallyunderminingpoliticalinstitutions.InMexico,Fox(1994)citesthecaseofdevelopmentpolicyintheMihoacanprovince;thisincreasedpoliticalparticipationoftheendogenouspeopleintheregion.Inresponse,casesofelectionmalpracticesandboothcapturingbythelandedelitedramaticallyincreased.Thisdouble-edgedaspectofpolicyinterventionisworthemphasizing.Inourmodel,undersomecon-ditions,theincentiveeectisstrongenoughtoensurethatdevelopmentpolicyresultsinnotjustbetterprotectionofpropertyrights,butalsotransformsdemocracybyfreeinggovernmentfromtheelitesgrip.However,whenthepoliticalcontroleectoutweighstheincentiveeect,abenigndevelopmentpolicycanresultinanoveralldeteriorationofthecountrysinstitutions.Wefurthershowthatthereisanon-monotonicrelationshipbetweenresourcesallocatedtowardsdevelopmentanditseectivenessasatooltobuildinstitutions.Wheneithertheresourcesallocatedaretoofewortoomuch,developmentpolicyisineective,theformerduetoatooweakincentiveewhilethelattercaseisduetoatoooverwhelmingpoliticalcontroleect.Itisanintermediaterangeofresourceallocationthatmakesdevelopmentpolicyeective.Thisresultthusprovidesanimportantcautionarynoteintheuseofdevelopmentpolicyasatooltotransforminstitutions.Ofcourse,successfulcontrolofgovernmentpolicyiscostlyfortheelite,eitherdirectlyintermsofmonetarycostsorintermsofcomprisingonothernon-economicissues.Asdevelopmentpolicyraisesanincumbentgovernmentsrewardsfromaccountability,italsoincreasestheamountofresourcestheeliteneedtodevotetosuccessfullyinuenceeconomicpolicy.Weshowthatdevelopmentpolicymayalsohavethesecondaryeectofpromptingtheelitetochangetheirtechnologyclosertothefrontiersoastobelessdependentonaninsularinstitutionalsetupfortheirprots.Indoingso,theydiminishtheirownincentivestocontrolgovernmentpolicyonimprovinginstitutionsintheregion,andtherebyeliminatetheirowndefactopoliticalcontrol. Oneofthemainadvantagesofdemocracyasapoliticalinstitutionisthatitpromotespoliticalselectionofgoodqualitycandidates(foradiscussionseeBesley,2005).Aswillbeevidentlaterinthecontextofourmodel,greaterpoliticalcontrolbytheelitepreventselectionsfromeectivelysortingthegoodfromthebadpoliticians.Forinstance,Sachs(2005)(andBono)hasbeenarguingthatgreaterresourceallocationtowardsdevelopmentalpolicywillmakepovertyhistorybytransforming(amongotherthings)institutionsandgovernance.Thisnotionhasbeenadoptedinthe2005G8summitforincreasingresourceallocationsfordevelopmentalpolicytowardsthedevelopingworld. Onthepoliticaleconomyfront,ourpaperisalsorelatedtotheliteratureexaminingtherela-tionshipbetweeninstitutionalstructureandpoliticalaccountability.Thisliteratureexplorestheectofdierentinstitutionalsetups(e.g.democraciesversusautocracies(PerssonandTabellini,2000),thebasisofpoliticalpowerbroadornarrow(deMesquitaetal.,2003),etc.)onpoliticalaccountability,corruptionandrelatedphenomena.amongothers.Whilerelatedtothisliterature,ourcontributionalsoexplorestheeectofpoliticalaccountabilityontheinstitutionalstructureitselfandhowchangesinonecan(orcannot)bringaboutchangesintheother.Inourframe-workatransitiontodemocracyisnotnecessarilyaccompaniedbybettergovernancebecausetheincreasedpoliticalaccountabilityislargelysupercial.Thustheremayexistahighdegreeofin-stitutionalpersistence.Further,weemphasizethattheeliteunderminethequalityofdemocracybyinterferingwiththeprocessofpoliticalselectionthatisintrinsictothesuccessfulfunctioningofademocracyInlinewithrecentworkbyJonesandOlken(2005)andBesley(2005),ourframe-workemphasizestheimportanceofpoliticalselectionandleadershipforgoodgovernance.Weemphasizethatinimperfectdemocracies,politicalselectionisconstrainedandgoodleadersmaybepreventedfromemerging,despitefreeandfairelections.Therestofthepaperisorganizedasfollows.Inthenextsection,wedescribethebasicmodelofthepoliticalprocess,andcharacterizeitseectoninstitutions,andconsequentlyontheeconomy.Section3describesthemodelinthecontextoflandowningelites,andanalyzestheirincentivestomodernizeinresponsetovariousinterventionistpolicies.Section4explorestheconsequencesoferentpoliciesintermsofinstitutionalchange,bothonthepoliticalandeconomicfrontswhileSection5concludes.2DescriptionoftheModelWebeginbyoutliningasimplemodelofgovernmentcaptureanditseectonunderlyinginstitu-Investorsinaparticularregion/provincefearthattheiroutputorreturnsfrominvestmentmaygetappropriatedorstolen.Thus,theeectivenessofpropertyrightsandthelawandordersituationintheregionincrucialtotheirdecisiononwhetherornottoinvestinthisprovince.Now,lawandorderandpropertyrightsenforcementdependsonaction(orinaction)bytheregionalgovernmentintheirimplementation.Forsimplicityweassumethattherearetwopossiblelevelsofprotection:givestheprobabilitythataparticularinvestorcanreapthecompletereturnsfromhisorher Barro(1973)andFerejohn(1986)aretheseminalworksinthisarea. theoveralllevelofsecurity.However,byobservingwhetherornotinvestorshavedecidedtoputdowntheircapitalintheprovince,citizenscaninferthelevelofpropertyrightsprotection,andtherebyjudgetheabilityandpoliciesadoptedbytheincumbentgovernment(notethatinvestmentoccursonlyifthelevelofprotectioniswhichitselfispossibleonlywhenthegovernmentisofhighabilityeitherputsinresourcesintolawandorderorisexperiencedenoughinmattersofgoodgovernance).PoliticalStructure:Althoughitmaybearegionwithpoorlydevelopedpropertyrights,letusassumethatthisprovinceispartofalargernationinwhichthebasicstructureofdemocracy,namelyregularelections,getsimplemented.Asisoftenobservedindevelopingcountries,whilethecentralgovernmentmaynotbeabletodirectlyyieldinuenceoverthedaytodayactivitiesofprovincialgovernments,itmayatleastbeforcefulenoughtoupholdtheconductofregularelections.Wewillthusassumethatelectionsattheregionallevelgetconductedatxedtimeintervals.Attheendofeveryperiod,theincumbentgovernmentcomesupforre-electionatwhichstageitfacesarandomlydrawnchallengerinanelectionandtheregionalelectoratemaydecidetoretainitorchooseanewgovernmentintopower.Wefurtherassumethateachgovernmentcanremaininpowerforatmostperiods.Thepoliticalstructurehereissimpleandfocusesontheincumbentgovernmentsdesiretomaximizeitsoverallrents.Theserentscouldbethosefromremaininginoce,whichareassumedtobeorfrompayosthatinterestedagentsmaypaythegovernmentinordertoinuenceitspolicies.Theelectoratehereconsistsofidenticalagentswhoseobjectiveistochoosethegovernmentthatismostlikelytogainthemthemaximumwelfare.Themajorityoftheelectoratearewage-earnerswhobenetfrominvestmentoccurringintheregion.Sincethechancesofthishappeningarehigherwithahighabilitygovernmentinpower,theywouldliketochooseagovernmentwhoismorelikelytobeofabilityWhilecitizenscannotdirectlytelltheabilityofthegovernment,theycaninferitfromtheirobservationsaboutwhetherornotinvestmenthasoccurredintheAllincumbentsareassumedtobeex-anteidentical,andthatwithprobabilityitisofhighability,andwithprobabilitythatoflowability.Governancebeingacomplex,multi-facetedtask,thisisalsoassumedtobeunknowntothegovernmentitself.Thus,thestructurehereisthatofacareer-concernsframework(e.g.Holmstrom,1982),inwhichanincreasedallocationofresources,byraisingthechancesofahigheroutput,canskewthevotersperceptionofgovernmentcompetenceinitsfavorandthusenhancethegovernmentschancesofre-election.WemakethefollowingassumptionontheexperiencefactorThisensuresthatprovenhigh theelectoratewillthusreelectanygovernmentthatisabletodemonstratecompetencebybringingininvestment.Fromanewgovernmentsperspective,ifitdoesinputinethenwithprobabilityinvestmentoccurs,andthenitisre-electedforasecondtermduringwhichitearnsrentsThus,itspayofromputtinginhigheortisWeassumethatissmallenoughsothatthisvalueispositive.Ontheotherhand,ifitacceptsabribefromthetraditionaleliteandputsinnoeintopropertyrightsprotection,thenthelevelofprotectionisnoinvestmentcomesinanditgetsoustedfrompower.Thus,forthegovernmenttobeinuencedintoadoptingapolicyofnoprotection,itrequiresaminimumbribeleveloflqyFromtheelitesperspective,iftheydonotoerabribetothenewgovernment,itwillputinresourcesintopropertyrightsprotection,andthereforewithprobabilitylqyinvestmentwilloccuranditwillloseitsmonopolyrentsThus,theelitespayofromoeringnobribeisgivenby:qreulehK{qhz+(1whereisthevalue(totheelite)ofhavinganew,untriedgovernmentinpower.Intheeventthatinvestmentdoesoccur,theelitenotonlylosetheirrentsthisperiod,butalsotheprovenhighabilitygovernmentgetsre-electedforasecondterm,duringwhichitcannotbeinuencedbytheelite.Thedynamicstructureofthemodelbringsthissecondeectintoconsideration,andasweshowbelow,itwillbeimportantindeterminingtheoverallimpactofabetterinvestmentclimateonincentivesforthegovernmentindevotingresourcesintopropertyrightsprotection.Iftheeliteoerabribewhichtheincumbentacceptsandinreturnspendseonlawandorder,thentheoverallpayofortheelite,grossofthebribepaid,isgivenby:eulehThus,fromtheelitesperspective,thedierencebetweeninuencingthegovernmentandnotisgivenby:eulehqreulehK{qhzTherefore,themaximumbribethattheelitewillbewillingtopayisLetusconsiderastationaryequilibriumofthegameinwhichtheelitepayaxedbribetothegovernmenteveryperiod,andinreturnthegovernmentdoesnotputineortintopropertyrightsenforcement,noinvestmentoccursandthereforeeveryperiodanewgovernmentgetselectedtopowerreplacingthecurrentincumbent.Weconsiderconditionsunderwhichthis Figure1:Theregionwherebribingiseective.Corollary2Thereexistssuchthatfor?andforAandthereforetheeliteeectivelybribingthegovernmenttoimplementisastationaryequilibriumofthegame.Foror1>2]>democracyworkstoprovideenoughincentivetothegovernmenttoputineProof.Letusrewritetheconditionforeectivebribing(3)as: K{ K@theright-handsideoftheaboveinequalityisinniteandthusexceedstheleft-handside.Bycontinuity,when(whichisameasureoftherewardstogoodgovernance)isclosetheeectivecostofeortforthegovernmentisveryhigh.Insuchcases,theelitecanoalargeenoughbribetoinuencethegovernment.Thederivativeoftheright-handsideoftheinequalitywithrespecttoisgivenby: PK [1+K@ 2{ PK @+K@Thisisnegativeatclosetoandthenchangessignandbecomespositivebeyondacertainleveli.e.theright-handsideof(4)isU-shapedinasshowningure(1).Thus,eitherforverysmallorverylargevaluesofdoestheright-handsideof(4)exceedU>andthusonlyinthoseregionsdoestheequilibriuminvolveeectivebribingbytheelite. Achangeintheprobabilityofattractinginvestmentthroughimprovedpropertyrightsprotec-tionhastwoeects.One,bymakinggovernmentaleortmorevisible,itrewardsgoodgovernanceandthusincreasestheincumbentgovernmentsincentiveofputtingineThisistheincentiveeect,andservestoreducethemoralhazardprobleminherentinthepoliticalset-up.Atthesametime,byraisingthechancesofagovernmentofhighability(whohasputin=1)beingre-elected,anincreaseinservestoalsoraisetheecacyofthesysteminre-electingablegovernments.However,highabilitygovernments,oncere-elected,cannolongerbeuencedbytheeliteduringtheirsecondterminoce.Duetotheirexperiencefactorassumption1)theprobabilityofimplementingaregimewithgoodpropertyrightsishigherforsuchgovernmentsthanarandomlychosennewgovernment.Thiscouldbeduetopersistenceinthetypeofframeworkthathasalreadybeendeterminedbysuchagovernmentduringitsrstterminoce,whichmaybelinkedtothetypeofbureaucratsandotheradministrativesetupthatitmayhavechosentoenforcegoodpropertyrightsintherstplace.Asincreases,thisfearoftheincreasedchancesofre-electionofahighabilityuninuenceablegovernmentcausestheelitetoraisetheirbribebeyondtheleveloftheirone-periodlossinmonopolyrents.Thus,theeliteseektopreventthepoliticalgamefromproceedingtothesecondperiod,whereitwouldbebeyondtheirsphereofinuence.Thisisthepoliticalcontrolect,andservestoraiseAstheabovecorollaryshows,theincentiveeectdominatesforlowvaluesofwhilethepoliticalcontroleectbecomesmoreprominentforhighvaluesofThusforaprovincethatisinitiallynotaninvestment-attractingregioni.e.onewithalowanypolicythatlowersthecostofinvestmentorincreasesthegainsfrominvestmenti.e.byraisingcanservetoimprovemattersbychangingtheequilibriumfromonewithpersistentbribingandnopropertyrightstoonewherethegovernmentisuninuencedbythetraditionaleliteandmakesaconcertedeorttoimproveinvestorprotection.Whenisverysmall,thevisibilityofgovernmentpoliciestowardsprotectingtherightsofinvestorsisextremelylimitedandthissharplylimitsthegovernmentsincentiveatexpendingeorttowardssuchpolicies.Byraisingincentives,anincreaseinhasapositiveeectinsuchsituations.Ontheotherhand,forprovinceswitharelativelyhighlevelofanyfurtherriseinsometimeshaveanadverseeectonapreviouslywell-functioningpoliticalsystem.Whileincreasesincreasesincentivesofthegovernmenttoputineheretoo,atthesametimeitalsoraisestheelitesfearthathighabilitygovernmentsbeyondtheirsphereofinuencearemorelikelytogetrecognizedandthusre-electedbytheelectorate.Thiscausesanincreaseinthebribethattheelitearewillingtopaytopreventtherecognitionofsuchgovernments;atsuchranges,thepoliticalcontroleectdominates,andthusbeyondanyincreaseincanchangetheequilibrium wherethewageisdeterminedfromthelaborsupplyfunction:(ii)[labormarketclearing]withbeingthenumberofinvestmentopportunitiesdeveloped.Notethatthewageinthisprovinceintheabsenceofanyoutsideinvestmentisthisisthustheminimumwageintheprovince.Anywageabovethiswillindicatetotheelectoratethattheinvestmentclimateintheprovinceisgoodenoughtoattractinvestmentandsotheincumbentmustbeoneofhighability,andthereforeberewardedbyreelection.Now,investmentinthisprovincewilloccuronlyifthereturnselsewhereissucientlylow,specicallyif Assumingthatex-antethereturnstocapitalelsewhereisuniformlydistributedovertherangeange>X]>theprobabilityofinvestmentoccurringinprovinceinthepresenceofprotectionlevel Thisthusidentieswiththeparameterfromtheprevioussection.Consequently,fromanewgovernmentsperspective,ifitdoesinputinethenwithprobability 2=() investmentoccurs,andthenitisre-elected.Fromtheelitesperspective,theirtotallossinprotsconditionaloninvestmentoccurringis: max lqy 2 Thus,thiscorrespondsexactlytothemodeloftheprevioussectionwith beingequiva-lenttointheabstractmodel,and givingthelossinmonopolyrentstotheeliteinthepresenceofpropertyrights.Replacingbytheseexpressionsin(3)toseewhetherminlessorgreaterthanthusdeterminesifgovernmentpoliciesonpropertyrightsarecapturedornotbytheelite.Changesinthecapitalrequirementsforinvestment,Wheninfrastructureintheprovinceisbetter,lesscapitalisrequiredtostartaninvestmentprojectasnotallessentialservicessuchaselectricityetc.needtobeprivatelyprovided.Analyzingcorollary2inthiscontext,weseethatprovinceswithveryhighorverylowinvestmentreturnsand/orveryhighandverylowcostsofinvestmentaremorepronetocapturebythetraditionalelite.Asdiscussedintheprevioussection,inthelow/highregion,thisisduetotheprevalenceoftheincentiveeecti.e.governmentshaveverylowincentivestoinvesteortinbetteringinstitutions.Whileinthehigh maximizationislessthanwhichmeansthatitisoptimalforthelandownertonotmodernize.Withtheadventofdemocracy,elitesnowfacetheadditionalburdenofcostsrequiredtouencegovernmentpoliciesinordertokeepadditionalinvestmentoutandtherebykeepwagesatthelowlevelofCaseI:Considerrstthesimplestcasewheretheminimumbriberequiredtosuccessfullyuencethegovernmentisbeyondwhattheelitearewillingtopayi.e.thecaseofInthiscasetheeliterealizethatreelectionisapowerfulenoughtooltoinuencethegovernmentintoexertingeortintoensuringpropertyrights.Thusthereisahighprobabilitythatinvestmentwillgetattractedandconsequentlywageswillrise.Inthiscase,expectedwageintheprovinceisgivenby: max 2()2 whereistheexpectedincreaseinwages.Facingthesewages,theelitesproblemofchoosingtheoptimaltechnologyisthesameas(5),withThustheelitewillchoosetomodernizetoalabor-savingtechnologyornotaccordingas: 2()2 Theleft-handsideisaU-shapedfunctionintheinitialwagewhiletheright-handsideisaconstant.Itthusimpliesthatitisinregionswheretheinitialwageisanintermediaterangethatmodernizationislikelytotakeplace.Intermsofthecostofinvestmentintheregion(orinverseoftheinfrastructurefacilitiesthere),theaboveconditionshowsthatwhenislow,theelitearemorelikelytomovetoalabor-savingtechnologyasinsuchregionstheprobabilityofinvestmentoccurringishigherandthusthechancesofwagesgoinguparealsogreater.CaseII:Considerthealternatecasewhereminmaxanddemocracyispotentiallycapturedbytheelite.Inthiscase,whiletheelitedoensurealowlevelofpropertyrightsintheprovince(therebydefactokeepingoutinvestment)byusingabribemintoinuenceallincumbentgovern-ments,thisisalsothecostofcontinuingwithalabor-intensivetechnology.Whatiftheyinsteadadoptedatechnologythatwaslessdependentonlabor?Giventhatthebribelevelminisindependentoftheelitestechnologylevel,thisimpliesthatiftheelitewereevertoadoptanewtechnology,theywouldliketomovetoalevelwhereitdoesnotrequireabribetoprotecttheirinterests[ifatisstilllessthanmaxthentheywouldstilluseabribeoftoensurethatwagesremainatandatthatlevelofwages,(by oraninternationalagency.Thisexternalimpositionofelectionsresultsindefactopoliticalpowermovingoutofthehandsoftheeliteandtothemasses.Thequestioniswhetherornotsuchrstorderpoliticalinterventionresultsinanimprovementineconomicinstitutionsandincomes.Asdemonstratedearlier,thishappensiffreeandfairelectionsprovidestheincumbentgovernmentwithenoughincentivestodevoteresourcesintoimprovinginstitutions.Whenfundamentalsarestronginthattheunderlyinginfrastructureandeconomicconditionsarerelativelygood,themereintroductionofdemocracyissucienttoprovideleaderswiththerightincentives.Thegovernmentisunlikelytosuccumbtothepressuresofanorganizedinterestgroupsuchastheelite.ThisisthecasewhereAccordingly,propertyrightsareprotected,thepoliticalprocessremainsfreeofelitecaptureandincomesgoup.Theissueofwhethertheminorityelitemodernizetheirtechnologydependsonwhetherthe holds.Ifitdoes,thentheelitewillinglyincurthecostsofreorganizationandmovetoalabor-savingtechnology.Ontheotherhand,ifthesecostsaretoohigh,theeliteremaintraditional,buttheintroductionofademocraticpoliticalprocessremovesboththeirdefactoanddejurepoliticalpower.Thesearethusregionswhereonemaysaydemocracysucceedsinthesensethatensuringasystemofregularmasselectionsislikelytoleadtoimprovedeconomicoutcomes.Thepatterndescribedabove,whereintheintroductionofdemocraticelectionssetinmotionaprocessofinstitutionbuildingandeconomicprogresshasoftenbeenobserved.WiththecollapseoftheSovietUnion,freeandfairelectionsinmuchofEasternEuropebeitPoland,theCzechrepublic,SloveniaorHungaryweresucienttoeconomicallytransformtheseregions.However,despitetheseandotherinstancesofsuccess,suchinstancesofinstitutionbuildingarerelativelyinfrequent.(B)DemocraticConsolidationwithDevelopmentalPolicy:Morecommonisthescenariowherefreeandfairelectionscoexistwithelitecapture.Heretheintroductionofelectionsresultsinasupercialchangeinpower,butatamorefundamentallevelinstitutionspersist.Governmentpolicycontinuestoserveminorityeliteinterestsandthemajoritygroupsincomesremainlow.ThissituationariseswhenHeretheincumbentleadersincentivesarisingfromtheelectoralprocessaretooweak(representedbyalowminortheinterestsoftheelitearetoostrong(asindicatedbyahighmaxsothattheelitestillmaintaindefactocontroloverthegovernmentspolicyprocess.However,maintainingpoliticalcontrolcomesatacosttotheelite.Nowwhenthiscostofpoliticalcontrolishighi.e.whenminisclosetoitmaybepossibletoinducetheelitetochangetheirtechnologyandmodernize,therebyeliminatingtheirneedtospend unlikelytomakeadierence.Similarly,ifthebasicinfrastructureintheprovinceisverypoor(thuscreatingextremelyweakincentivesforgovernmentsatgoodgovernance),marginalchangesareunlikelytochangethepoliticalincentive.Therefore,insucharegiontheintroductionofdemocraticelectionsdoesnotbringaboutchangeandneitherdoestheuseofdevelopmentalpolicy.Insuchasituation,itappearsthatforciblemodernizationoftheeliteorremovingtheirsourceofmonopolyrentsisnecessaryfordemocracytowork.Inpractice,thiswouldrequiretheexternalpolicymakertousesomekindofcoercivepolicywhichresultsinalargescaleredistributionoflandandotherassets.Thenecessityofsuchcoercivepolicyisclearinmanyinstancesofnationbuilding-frompostwarGermanytoBosnia,KosovoandEastTimor(Dobbinsetal,2003).However,perhapstheclassicinstancewheretheuseofcoercivetechnologywasnecessaryandsuccessfulispostwarJapan.Inparticular,themilitarydefeatofJapanhaddiminishedtheabilityofthepoliticalandeconomicelitestoblockinstitutionalchange(Kawagoe,2000).AccordinglyGeneralMacArthur(andpolicymakersatSCAP)attemptedtotakeadvantageofthistemporaryweaknessofthetraditionalelite.Inanarrayofpolicymeasures,theyattemptedtorestructuresocietysoastodiminishtheinuenceofthetraditionalsourcesofpower.First,theyattemptedtobreakuptheholdofthetraditionalzaibatsuholdingcompanies-eightythreeoftheleadingzaibatsuwerebrokenupintotheircomponentpartsandantimonopolylawswerepassedtopreventtheirreestab-lishment(Dobbinsetal,2003).Further,laborwasgiventherighttoorganizeintounions,tobargaincollectivelyandtostrike.Contemporaneously,MacArthurhelpedpushthroughthemostsweepinglandreformbillthroughtheJapaneseDietandoversawitsimplementation.ClearlytoGeneralMacArthur,establishmentofavibrantdemocracymeanttacklingtheeconomicandpoliticalrootsoftraditionalelites.5ConclusionInthispaper,weexaminetheroleofpolicyinterventioninengenderingcomprehensiveinstitutionalchange.Politicalinterestsmaypotentiallyunderminebenevolentpolicyinterventionsandweshowthatimpositionofrstorderchangesinthepoliticalstructure(e.g.introductionofdemocracy)maybeaccompaniedbyinstitutionalpersistenceandnoimprovementinthequalityofgovernance. ThatinstitutionalchangewasrmlyonhismindisclearfromGeneralMacArthurspressreleaseonthedayofthebillspassage:...oneofthemostimportantmilestonesyetbyJapaninthecreationofaneconomicallystableandpoliticallydemocraticsociety.Itmarksthebeginningoftheendofanoutmodedagriculturalsystem...Thesecanbenormerfoundationforasoundandmoderatedemocracyandnormerbulwarkagainstthepressureofanextremephilosophy(quotedinKawagoe,2000). 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