THE ECONOMIC-ROLE OF POLITICAL-INSTITUTIONS - MARKET-PRESERVING FEDERALISM AND ECONOMIC-DEVELOPMENT

Thriving markets require not only an appropriately designed economic s ystem, but a secure political foundation that limits the ability of th e state to confiscate wealth. This requires a form of limited governme nt, that is, political institutions that credibly commit the state to honor economic and political rights. This article studies how limited government arose in the developed West, focusing on the critical role of federalism for protecting markets in both England and the United St ates. Federalism proved fundamental to the impressive economic rise of England in the 18th century and the United States in the 19th and ear ly 20th centuries. The article also shows that federalism underpins th e spectacular economic growth in China over the past 15 years.