DP894 | Interest Associations and Economic Growth. A Critique of Mancur Olson's `Rise and Decline of Nations'

Publication Date

30/04/1994

JEL Code(s)

Keyword(s)

Programme Area(s)

Network(s)

Abstract

The paper contradicts the thesis of Mancur Olson presented in `The Rise and Decline of Nations', using empirical evidence from studies on business interest associations and sectoral corporatism. We argue first that, unlike Olson assumes, selfish interest associations are not necessarily detrimental to economic performance and growth. Second, again in contradiction to Olson, it is not true that the more associations exist, the greater their political influence will be and hence the more they will tend to pervert public policy. By contrast, the greater the number of associations, the less their overall political influence is likely to be. Third, the number of associations does not increase over time. Instead, mergers tend to reduce the number again. War does not break up `distributional coalitions' as Olson assumes, but has rather tended to strengthen them. Hence, the overall argument that stability produces more selfish interest associations and increases institutional sclerosis, and thus diminishing economic performance and growth, does not hold.By contrast, interest associations can contribute positively to economic performance, even through measures traditionally considered detrimental to the optimal allocation of input factors, such as market entry-barriers and price cartels. We demonstrate this for the Dutch construction industry, which has such forms of self-regulation, but nevertheless scores high on indicators of static and dynamic efficiency compared to other European countries. At a more general level, long-term growth rates (1929<196>94) demonstrate that countries where such forms of sectoral corporatism are prevalent do at least not have lower growth rates than countries which frown upon sectoral self-regulation. The data indicates that there is a trade-off between flexibility and stability. Associations provide such stability in the market. Whether the positive effects of stability or the negative effects of rigidity dominate, depends on sectoral characteristics and problems, such as the strength of competition and the degree of shelter from international competition.