Like Crabs in a Bucket by Raghuram G. Rajan

What's holding up progress?

Globalist Perspective > Global Development Like Crabs in a Bucket
By Raghuram G. Rajan \| Friday, October 27, 2006

Why do poor countries remain stubbornly underdeveloped? Growing consensus indicates that poor countries lack the necessary institutions — or worse, have the wrong institutions for economic growth. The IMF's Raghuram Rajan argues that citizens in poor countries all too often become like crabs in a bucket — preventing each other from getting out.

he conundrum in development is why, especially after the advent of democracy, the large numbers of the exploited in poor but democratic

In development, the answer "fix the political institutions" is probably incomplete — if at all correct. "Fix the constituencies" is probably more on the mark.

countries don't combine to vote out the elite who exploit them. Why don't they change the system to provide opportunities for all?

The easy but incorrect explanation, in my view, is that most democracies are sham democracies, where the exploited are easily fooled, have little money and can't push for their own interests.

Instead, I believe that many poor countries are so riddled with inequality that no reform path commands obvious support — and that the status quo persists despite being extremely inefficient. Let me offer a stylized example of what I mean.

Defining the problem

Consider a society with three "constituencies." A monopolist who owns all the factories, the educated middle class who occupy such professional jobs as factory managers, architects and doctors — and the uneducated poor who work in the factories.

Suppose any two groups who vote for a reform can push it through. Like all democracies, this is imperfect, with the rich having power because of their money and the poor having power because of their numbers. Consider two reforms.

Negating reform

First, pro-market reforms allow anyone to open a factory in competition with the monopolist. Only the educated, however, can draw up the

Citizens in poor countries, fearing that the advantage gained by one group may come at the expense of the meager rents of the other, become like crabs in a bucket — preventing each other from getting out.
business plans and get the finance to take advantage of this opportunity. Second, education reforms allow everyone to get an education.

Clearly, the monopolist will oppose pro-market reforms because he will face competition that will reduce his profits. And the educated will oppose education reforms because they will also experience competition — from the now-educated masses — for the lucrative jobs they currently occupy.

But will either one get support to vote down the reforms they dislike? The answer could well be yes. The monopolist would prefer to educate the poor, for that would give him a larger labor pool to pick managers from, thus reducing salaries he has to pay.

Beggar thy neighbor

However, the monopolist also knows that if he votes to expand education, he will have a workforce — the formerly uneducated and the formerly educated — that is united in interests. This enlarged constituency will then push for pro-market reforms.

To forestall the greater loss from pro-market reforms, the monopolist will align himself with the educated against expanding education. If education reforms are unlikely to be enacted, the uneducated may reject pro-market reforms, preferring the status quo instead. Although pro-market reforms expand opportunities for the educated, they also have a dark side for the poor.

The cycle

Given that the educated have greater business opportunities, those among

Underdevelopment can persist with the full connivance of the exploited — even with reasonably well-functioning political institutions.
them who choose to continue providing services such as health care can demand higher fees.

The uneducated, whose job opportunities go up only a little, if at all, may face a substantially higher cost of living because of the opportunities the educated now have.

They may side with the monopolist in voting against pro-market reforms. Even in a society where political institutions ensure that citizens' preferences matter, initial inequalities — in education and wealth — may be self-perpetuating.

People problem?

Citizens, fearing that the advantage gained by one group may come at the expense of the meager rents of the other, become like crabs in a bucket, preventing each other from getting out.

Finally, while stylized, the example is consistent with the evidence that far too many poor economies, like India, have underemphasized universal education while overemphasizing higher education — and that the poor and uneducated in a number of countries in Latin America have turned against (partial) economic liberalization because they see few of the new opportunities while bearing additional costs.

The lack of human capital

What lessons does this suggest for development? Clearly, the answer "fix the political institutions"

Why don't the large numbers of the expoited in poor but democratic countries combine to vote out the elite who exploit them?
is probably incomplete, if at all correct. "Fix the constituencies" is probably more on the mark, but how?

A number of development successes, like Korea, undertook serious land and education reforms prior to their takeoff, as have a number of the fast-growing Indian states.

It seems that reforms reducing inequalities in factor endowments — like land — and those improving access to education and finance can strengthen the constituencies for broader economic liberalization.

The problems of development

That is, the free-access economy may be a necessary stepping-stone to the free-enterprise economy. I should not, however, minimize the difficulty of enacting such endowment-spreading reforms in highly unequal societies.

The bottom line is that development is likely to be a complex political process in which the people themselves must do much of the heavy lifting. The outside world can help at the margin but only if the people have ownership. And ownership — even of something as beneficial as development reforms — can't be taken for granted.

Editor's note: Adapted from "Crabs in a Bucket," in Finance & Development, June 2006, Vol. 43, No. 2, published and copyrighted by the International Monetary Fund. Reprinted with permission by Finance and Development.

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