| Abstract: | This paper presents a formal model that characterizes the two faces of development—persistent poverty, and industrialization and rising incomes—and establishes that the interaction between politics and economics determines which path a nation travels. We demonstrate that political factors affect fertility decisions so that a one-time disturbance compounds across generations, impacting a country's entire development trajectory. Modeling strategic multiobjective policy-setting by the government, we derive a new concept of political capacity and prove that a sufficient amount of political capacity is necessary to escape a poverty trap and develop the economy. Empirical tests for a sample of 100 countries from 1960 to 1990 provide strong support for the predictions of the formal model. In particular, we show that both political stability and political capacity significantly influence birth rates. We conclude that politics can be either a stimulant or a barrier to economic development. |
