Rent-Extraction, Liberalism, and Economic Development

Abstract

This paper argues that liberalism helped the West escape from their long-standing rent-extracting regimes and created institutional sources of comparative advantage in trade and economic development. It does so by providing connections between three different literatures: the constitutional political economy literature, the rent-seeking literature, and the economic development literature.

The rent-extraction model of the state predicts that mercantilist policies will be adopted, rather than free trade. The rent-extraction model of the state also implies that the politics of economic liberalization tends to be problematic. This allows liberalization, once adopted, to be a nearly permanent source of comparative advantage that affects long-run trade flows and patterns of international development. Export-led growth, however, is an area of reform that can be politically feasible within rent-extracting regimes, which makes it the most likely first step in economic and political liberalization.

Keywords: liberalization, rent extraction, rent seeking, economic development, public choice

JEL Classification: H11, D6, F1