Failed States, Vicious Cycles, and a Proposal Raghuram G. Rajan Abstract Rajan examines the problems of failed states, including the repeated return to power of former warlords, which he argues causes institutions to become weaker and people to get poorer. He notes that economic power through property holdings or human capital gives people the means to hold their leaders accountable. In the absence of such distributed power, dictators reign. Rajan argues that in failed states, economic growth leading to empowered citizenry is more likely if a neutral party presides. He proposes a unique solution to allow the electorate to choose a foreigner, who would govern for a fixed term. Candidates could be proposed by the UN or retired leaders from other countries; they would campaign on a platform to build the basic foundations of government and create a sustainable distribution of power. Rajan emphasizes that this is not a return to the colonial model—the external candidate (like all the others) would be on a ballot and the electorate would choose whether he or she was their best chance to escape fragility. Working Paper 243 March 2011 www.cgdev.org Failed States, Vicious Cycles, and a Proposal Raghuram G. Rajan Raghuram Rajan is the Eric J. Gleacher Distinguished Service Professor of Finance at the University of Chicago’s Booth School of Business. CGD is grateful to its funders and board of directors for support of this work. Raghuram G. Rajan. 2011. “Failed States, Vicious Cycles, and a Proposal.” CGD Working Paper 243. Washington, D.C.: Center for Global Development. http://www.cgdev.org/content/publications/detail/1424879 Center for Global Development The Center for Global Development is an independent, nonprofit policy 1800 Massachusetts Ave., NW research organization dedicated to reducing global poverty and inequality Washington, DC 20036 and to making globalization work for the poor. Use and dissemination of this Working Paper is encouraged; however, reproduced copies may not be 202.416.4000 used for commercial purposes. Further usage is permitted under the terms of (f) 202.416.4050 the Creative Commons License. www.cgdev.org The views expressed in CGD Working Papers are those of the authors and should not be attributed to the board of directors or funders of the Center for Global Development. Foreword I am delighted to sponsor this paper by Raghuram G. Rajan, Eric J. Gleacher Distinguished Service Professor of Finance at the University of Chicago’s Booth School of Business, and an economic advisor to the prime minister of India. Rajan’s work provides insight into the vicious cycles of leadership in failed states and offers a unique proposal to jumpstart a country which has emerged from conflict or natural disaster. Rajan examines the problems of failed states, including the repeated return to power of former warlords, which he argues causes institutions to become weaker and people to get poorer. He notes that economic power through property holdings or human capital gives people the means to hold their leaders accountable. In the absence of such distributed power, dictators reign. Rajan argues that in failed states, economic growth leading to empowered citizenry is more likely if a neutral party presides. He proposes a unique solution to allow the electorate to choose a foreigner, who would govern for a fixed term. Candidates could be proposed by the UN or retired leaders from other countries; they would campaign on a platform to build the basic foundations of government and create a sustainable distribution of power. Rajan emphasizes that this is not a return to the colonial model—the external candidate (like all the others) would be on a ballot and the electorate would choose whether he or she was their best chance to escape fragility. This paper provides a novel solution to the problem of failed states; one that is worthy of serious consideration by policymakers. Rajan does not condemn states to failure, rather he proposes that the people can govern themselves if they are provided with conditions that would create stable institutions. Past international interventions and traditional dialogue have yielded few results. This proposal by Rajan provides much- needed innovative thinking and a radical solution for states stuck in the cycle of failed leadership and extreme poverty. Vijaya Ramachandran Senior Fellow Center for Global Development The scenario is depressingly familiar in some parts of the world. A civil war ends. The battling warlords, having exhausted their resources, agree to elections. The people, having endured years of rape and pillage, go wild with joy. But their choice in the United Nations-monitored election is really between parties set up by former warlords, because no one else has the money, the muscle power, or national recognition to compete with the two. One wins, and then proceeds to destroy the few state institutions that curb his power even while he uses the instruments of the state to pick off his opponent. Once that is done, he proceeds to loot the country under one-party rule until an opposition eventually organizes. Since elections have now become a farce, the opposition has to resort to force to overthrow him, and the whole cycle resumes. The people get poorer and poorer, kept from starving only by handouts of international aid. The lucky leave while the unlucky endure. The world rightly believes it should do something. But what can it do, some ask, if people are incapable of governing themselves? The premise of this question, I will argue, is wrong. It presumes there is something wrong with the people. Yet studies indicate that there is little in a people’s ethnicity or religion that makes their countries succumb to conflict. The problem has far more to do with economics. A comprehensive World Bank study finds that ―if a country is in economic decline, is dependent on primary commodities, and has a low per capita income and that income is unequally distributed, it is at high risk of civil war‖.1 Why might there be a link between these economic conditions and the failure of governance? And how can the outside world break the vicious cycle where countries are trapped in conflict – where a country that ends a civil war has a 44 percent chance of returning to conflict within five years?2 The role of the economic environment Recent research in economics indicates that more than culture or ethnicity, a good institutional environment, which protects the contractual rights, opportunities, and the property of the individual against the powerful is key to explaining how countries attain a path of long run sustainable economic growth. Since the absence of constraints on the powerful also characterizes failed states, it should not be surprising that poverty and the failure of states have common roots. But then where does a good environment come from? One answer is that it is simply a matter of design: there are certain systems of government that bring out the best in the rulers and the ruled, while there are others that are poorly designed. For example, a number of studies have shown that former colonies that inherited an English Common Law tradition from their colonial masters seem to have better 1 institutions of governance today than countries that inherited a French Civil Law tradition. Though there is much controversy about the inferences drawn from these studies, the notion is that Common Law somehow does a better job protecting the rights of the ruled. A different but not unrelated view is that it is not so much the colonial origins of a country’s laws that matter but the attitude of the original colonizers: if a colony’s hospitable environment attracted a large number of Western settlers, they adopted rules of governance that treated everyone equally. But when they settled only in small numbers because of the inhospitable unhealthy environment or a large pre-existing native population, the colonizers adopted an exploitative form of government. According to this view, the nature of government initially adopted has carried over to today – typically democratic and nurturing in the temperate parts of the world while authoritarian and exploitative in the tropical, disease prone, areas of the world. One way of interpreting these studies is that certain ―blueprints‖ adopted in the past – whether they be laws or wider institutions of governance -- are better than others and influence the quality of government today. Perhaps then, all failed states need is to adopt the right blueprints – the best constitution and institutional forms -- much as firms adopt best practices from their competitors. Yet the history of Liberia suggests blueprints are not enough. The 1847 Constitution of Liberia was based on the ideals of the American Constitution of popular sovereignty, separation of powers, and limited government. In some ways, it was more progressive in that it protected women’s rights and abolished slavery. Yet a League of Nations report in the 1930s found that Liberia ―represents the paradox of being a Republic of 12000 citizens with 1,000,000 subjects‖. It deplored the unsanitary conditions under which much of the tribal African population lived, termed its financial situation ―tragic‖ and its monetary system ―confusing‖. Despite some improvement in the middle decades of the twentieth century and massive infusions of foreign aid, Liberia has not been a model state to put it mildly. This suggests that we need something more than the right blueprints. There is something overlaid on the blueprints that gives them the force to constrain rulers in some situations and makes the blueprints completely irrelevant in others. One candidate is tradition. Perhaps the original blueprints, seasoned with age, become much more binding. Yet after World War II, Germany and Japan overcame their authoritarianism and became market democracies.