EFFECTS OF POLITICAL MONOPOLY ON ECONOMIC DEVELOPMENT

doi:10.1111/j.1468-0106.2007.00341.x

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Wiley InterScience

Pacific Economic Review

Volume 12 Issue 1, Pages 69 - 78

Published Online: 6 Feb 2007

Published on behalf of the Hong Kong Economic Association

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EFFECTS OF POLITICAL MONOPOLY ON ECONOMIC DEVELOPMENT

Wai-Man Liu ¹* and Xiaokai Yang ²

¹ University of New South Wales
² Monash University

* Address for correspondence: Wai-Man Raymond Liu, School of Banking and Finance, University of New South Wales, Sydney, NSW 2052, Australia. Email: wmr.liu@unsw.edu.au. I would like to acknowledge Yingyi Qian's discussion on a comparison between good and bad capitalism which stimulated our efforts for this paper and Paul Migrom's discussion on the monopoly power of merchant guilds in Medieval Europe. I also wish to thank James Buchanan, Ke Li, Yew-Kwang Ng, Russell Smyth, Guang-Zhen Sun, Ian Wills, two anonymous referees and seminar participants at the University of Hong Kong, the International Symposium of Economics of e-Commerce and Networking Decisions at Monash University, the economic workshop on 'Increasing Returns and Inframarginal Economics' at Monash University and the Buchanan Workshop at Virginia Polytech and State University for helpful comments and suggestions. Part of this research was conducted while I was affiliated to the Department of Economics at Monash University. The usual disclaimer applies. The basic idea of this paper was suggested by Xiaokai Yang who passed away in July 2005 and hence could not write the paper jointly. I wrote the paper based on his idea.

ABSTRACT

Abstract. This paper has two objectives. First, it presents a survey of the literature surrounding the relation between political monopoly and economic development. Second, it offers an analysis of how commoners' high degree of tolerance towards unfair inequality of income distribution between theirs and the monopolizing ruling elites leads to poor economic development. We assert that free migration between states causes monopoly rent to shrink because it poses a threat to the ruling elites due to fiscal competition between states. The shrinking in monopoly rent implies a higher level of division of labour, which results in a greater extent of the market and higher aggregate productivity.

DIGITAL OBJECT IDENTIFIER (DOI)

10.1111/j.1468-0106.2007.00341.x About DOI