Transcript Political Economy of Productivity - Inter

DIA 2010
Productivity in Latin America
Chapter 13:
The Political Economy of Productivity
Prepared for presentation at RES Working Sessions. October 21st 2008
THE QUESTION

The rest of the report will tell which (extant or missing)
policies constitute key obstacles for higher productivity in
Latin America

While policies seem to be the main driver, there may be
also some politically induced economic actions which
may affect productivity
 E.g, Microsoft comes to DC

This chapter will attempt to explain the (political)
reasons behind those policies (and choices)

The ultimate objective of the chapter is to help the overall
report to produce recommendations that include (rather
than ignore) the politics behind the policies.
 (And to do that at the country level)
THE QUESTIONS (1)
 Some more specific questions the chapter will try to
answer (will be more comprehensible after the
framework)

How does the policymaking process affect productivity
related policy demands?

What is the role of the socioeconomic actors (business,
labor unions,etc) in the determination of public policy in
LAC?

How does the economic structure of the country affects
the articulation of the “real actors” in the policymaking
process?
THE QUESTIONS (2)

What is the role of different political institutions in the
articulation of the transactions between the political and
the “real” actors?

How much does the organization of interest groups
depends (or is affected by) the political/institutional
organization of the country?

What are the characteristics of the arenas in which
public policies are decided and how do they affect the
productivity-related policies?

What can we suggest in each case given all of the
above?
Inputs for the chapter

Parallel development of:
 A framework and a set of general and
comparative insights
• (started in Murillo, Scartascini and Tommasi)

8 country-case studies
• Argentina, Brazil, Bolivia, Chile, Colombia, Costa
Rica, Mexico, Venezuela


(hopefully) Externalities from other work for
the DIA
Work by (and with) associated researchers
• E.g., Ben Ross Schneider
This presentation

Format quite different from final chapter




Focus on what we are doing
How we are doing it / thinking about it
Pending (analytical and empirical) tasks
Only very tentative “empirical findings”
At this stage, the presentation may not yet be
crisp enough

Final chapter will have


More “empirical findings” using the country
studies
Recommendations
• (“political economy” caveat)
The Framework in a
Nutshell
THE FRAMEWORK
Socioeconomic
Structure
INTEREST GROUPS
“real” actors
Political
Institutions
The Policymaking Process (PMP)
POLICYMAKING
INSTITUTIONS
POLICIES
political (State) actors
Productivity
THE FRAMEWORK
Building Blocks

The framework uses a number of building
blocks

Some pre-existing ones
1.
2.
3.
Studies of the PMP and the features of policies
Role of political institutions in the determination of
policies
Models of interest groups behavior and rentseeking
•
•
4.
5.
A bit US centered
Some good applications in trade policy
Role of veto players in the reform process
Organization of “real actors” (businesses, unions,
etc)
THE FRAMEWORK
Socioeconomic
Structure
Political
Institutions
5
INTEREST GROUPS
”real” actors
3
POLICYMAKING
INSTITUTIONS 4
political (State) actors
2
POLICIES
1
Reduced form PI
Productivity
1.
2.
3.
4.
5.
PMP and the features of policies
Political institutions and policies
Interest groups and rent-seeking
Role of veto players in the reform process
Organization of “real actors”
THE FRAMEWORK
Building Blocks

Some we are developing further
 Especially the integration of these pieces
1.
Country-centered general equilibrium view
 Understand public policies as outcome of
general politico-economic equilibrium (please
don’t try Persson-Tabellini or Grossman-Helpman at
home).

Specific policies interpreted in the context of
the overall “vector of policies” and political
dynamics
• In some cases, some sectors may have to be
sacrificed for the greater good
• Consequently, it is not good idea to look only at
marginal policies and reforms (or lack thereof)
THE FRAMEWORK
Building Blocks
2.
Feed-back effects
 Most literature looks only in one
direction
• Interest groups affect policies (short run)
• Interest groups affect politics (very long
run)

Our approach is broader
• Here we look at these (also in the
medium term) and we also look at how
politics (and institutions) shape the
formation of groups
THE FRAMEWORK
Building Blocks
3.
The role of time
 Path dependence
•
•

Group organization
Past policies (from past politics) are the
status quo
Intertemporal considerations
•
Role of horizons
THE FRAMEWORK
Building Blocks
4.
Arenas
 Developed countries political
economy analysis takes as given
things that here are variable
• In developed countries, transactions take
place in institutionalized arenas (e.g., the
legislature).
• It is not always the case in LAC
• While in some countries they take place in
formal arenas they may also take place in the
streets and other informal settings.
• Different arenas imply different tokens of
exchange, different types of transactions,
enforcement mechanisms, etc.
THE FRAMEWORK


The determinants of policies
In real politics, policies are chosen for a
number of reasons/characteristics,
1.
2.
3.

(only) one of which is whether they are productivity
enhancing (Y+) or not (Y-)
Its temporality (how early benefits and cost accrue)
Its distributional features (who gains/loses)
We will see later how characteristics (2) and
(3) will interact with the features of the PMP,
and of the distribution of “real” power to
determine whether some Y+ / Y- policies are
adopted in equilibrium
THE FRAMEWORK
Socioeconomic
Structure
Political
Institutions
INTEREST GROUPS
POLICYMAKING
INSTITUTIONS
”real” actors
POLICIES
political (State) actors
Productivity
Lets look inside some of these boxes and arrows
before attempting to put everything together
THE FRAMEWORK
Socioeconomic
Structure
Political
Institutions
INTEREST GROUPS
POLICYMAKING
INSTITUTIONS
”real” actors
POLICIES
political (State) actors
Productivity
From PMP to (features of) Policies
(without details of specific socieconomic actors)
POLICYMAKING
INSTITUTIONS
POLICIES
political (State) actors



Previous work (such as the IPES 2006) analyzed
how the workings of political institutions in the PMP
shape the features of public policies (such as
volatility or credibility).
PMPs that favor inter-temporal transactions and
cooperative policymaking are characterized by good
government capabilities (e.g., long term horizons,
capable bureaucracies, enforcement technologies,
etc).
These characteristics may be associated with better
policies directly.
From PMP to (features of) Policies
(without details of specific socieconomic actors)
POLICYMAKING
INSTITUTIONS
POLICIES
political (State) actors



Also, PMPs that favor inter-temporal transactions
and cooperative policymaking tend to have better
policy features.
These features of policies (in themselves) might
matter for productivity:
 Volatility
 Adaptability
 Coordination
This (institutionally driven) “supply” will affect what
interest groups demand
The features of policies and
productivity


For example, let’s see a brief sketch on how
volatility affects policy demand
Interest group deciding to demand Y+ (“public
goods”) or Y- (“rents”)

Productivity enhancing (“public goods”) Y+
• Ports, infrastructure, healthy competition policy

Productivity decreasing (“rents”) Y• Inefficient barriers, subsidies that induce misallocation
of resources

Under some conditions
• Rents are a spot transaction
• Public good provides higher long term benefits

If policies are unstable in this polity, interest groups
might prefer to demand rents rather than public goods.
THE FRAMEWORK
Socioeconomic
Structure
Political
Institutions
INTEREST GROUPS
POLICYMAKING
INSTITUTIONS
”real” actors
POLICIES
political (State) actors
Productivity
The “Demand” of Public Policies
INTEREST GROUPS
“real” actors


POLICYMAKING
INSTITUTIONS
political (State) actors
The demand of public policies depends on the
interests of those that would be ultimately
affected by the policies
Caveat: “Demand” is a shortcut since
sometimes the arrow goes the other way and
groups and coalitions are put together by the
polity in order to extract political rents.

The extent of one or the other depends on
policymaking institutions
The “Demand” of Public Policies
INTEREST GROUPS
“real” actors


POLICYMAKING
INSTITUTIONS
political (State) actors
Who are the interest groups?
According to the specialized literature and the
country studies they are:


Different groups of voters
Different types of business actors
• Different levels of aggregations
• Business as firms, Business as sector, Business as
capital
• Different types of organization


Unions
Social movements, etc.
THE FRAMEWORK
Socioeconomic
Structure
Political
Institutions
INTEREST GROUPS
POLICYMAKING
INSTITUTIONS
”real” actors
POLICIES
political (State) actors
Productivity
The “Demand” of Public Policies

Socioeconomic
Structure
Different economic structures matter for demand

•


E.g., Multinationals needs are different than large
local firms which are different from the small firms’
Who has the stronger voice matters
•
INTEREST
GROUPS
”real” actors
Different groups have different demands
E.g., demand will be tilted towards the preferences
of the group with more power
Certain things can only be demanded if
coordinated
•
E.g., certain public goods may need coordinated
actions. How much do the economic or geographic
structure facilitates collective action may determine
demand.
The “Demand” of Public Policies

Interest groups preferences do not translate
directly into policy demands and policy
demands do not necessarily imply changes in
policies

It depends on:
Socioeconomic
Structure

How interest groups organize
• How many
• At what level
• Are they stable or not
INTEREST
GROUPS
”real” actors

How they articulate with the policymaking process
• In which arenas do they participate (executive,
legislature, street)
• What types of transactions do they engage in
THE FRAMEWORK
Socioeconomic
Structure
Political
Institutions
INTEREST GROUPS
POLICYMAKING
INSTITUTIONS
”real” actors
POLICIES
political (State) actors
Productivity
Articulation



Different ways in which interest groups link
with the political structure, has potential
implications for Y+/YLet’s look at two of them here.
Arenas of exchange
 Different arenas generate different outcomes
• In some countries transactions take place at the
legislature while they take place with the
bureaucracy or the president in others
• In some, negotiations take place at the federal
level. In others, at a decentralized one.
• Each one provides certain bargaining possibilities
and tokens of exchange
• In some arenas it may be easier to provide pork,
in another regulations, and so on.
Articulation

The electoral connection
 The characteristics of the party system may
matter for the stability of the relationship
• More stable relationships may provide possibilities
for internalizing certain demands
• It may also provide a more stable arena for
exchanges. For example, in Chile transactions
take place within the coalition instead of outside

Inclusiveness and representativeness of
electoral system
• Under some institutional conditions, the power of
the interest groups may be higher
• E.g, politicians have a lower electoral connection
so they can cater more freely to interest groups
Articulation

A brief note on public opinion



We are aware of the relevance of public opinion
The preliminary evidence in the country studies
shows that it matters
Politicians cater to perceived interests of citizens and
groups (and they build coalitions through messages
that affect those perceptions)
• Brazil’s demand for macro stability
• Argentina’s use of public opinion by the president

Previous work has captured part of the issue, which
makes us wonder how much time to spend on it.
• The Political Economy of Reforms (Lora, etc)
• IPES 2009
• Stokes (and others) on deliberative democracy
Putting everything together.
What would a model look like?

How could a model explain differences in the content of
policies (e.g., a higher demand for ‘public goods’ instead
of ‘rents’) based on the previous ‘pieces’?

Basically,
Policymaking
 Low government capabilities
 Volatility, low adaptability, lack of coordination
Economic structure
 High fragmentation, peak associations with low
survival rates, etc
Articulation (determinants of incentives)
 Loose electoral connections, institutional
fragmentation, lack of enforcement mechanisms, etc.




might tend to favor Y- over Y+
Putting everything together.
Conceptual messages

By moving from a fragmented view, some conceptual
messages arise (which are compatible with our
previous theoretical work)
1.
Taking a picture is not enough for
understanding the reasons behind productivity



Powerful actors today may not be powerful
tomorrow
Powerful real actors today may want to affect
political institutions in order to remain powerful
tomorrow
Politicians may want to alter institutions in order to
gain power and influence over the interest groups
Putting everything together.
Conceptual messages
2.
Looking at the partial equilibrium margin could
provide a distorted view of the vector of
policies.

In a country with a relatively good equilibrium, both
good and bad policies are possible
•
Politicians try to isolate certain sector or policy areas
from negotiation, put good institutions in place, and
so on.
•
•
E.g., fiscal or monetary policy. Regulatory framework
However, there may be some sectors or areas in
which they decide to let “politics play their role”.
•
They give the ministries to the coalition, they use those
areas for generating transactions, they buy votes with
pork, etc.
Putting everything together.
Conceptual messages
3.
The articulation of political and business
interests may not only happen at different
arenas but it may also change over time

In some countries, the articulation is stable
•

Interest groups know who to talk to and what is
their role (Chile)
In some others, it is not. Political actors
pick different alliances at different
moments in time
•
The president (or other powerful political actor)
may decide who to work with in order to extract
as much rents as possible. (Argentina)
Putting everything together.
Conceptual messages
4.
Some countries reach stability and cooperative
outcomes at certain levels (deep institutions,
policymaking transactions) while others do not

In some countries, the relationship between real
and political actors is sustained by the institutional
framework
•

In some countries, the relationship is independent
of the institutional framework (institutions change
but the outcomes are similar)
•

It may be the case in Mexico and Venezuela
In some countries, the relationship is unstable
•

E.g., Chile’s electoral system favors transactions
within the coalition
E.g., Argentina
In some countries, transactions have moved from
the institutionalized arenas to non-institutionalized
ones.
•
E.g., Bolivia
Putting everything together.
Conceptual messages
5.
It may also be the case that results are
different according to the level of government
at which transactions take place.


Some groups have a say at the national level (e.g.
finance sector), so they affect the policies that are
decided at that level (e.g., general macro policy)
Some groups have a say at the subnational level
(e.g., industries). Therefore, they ask for policies
decided there, such as:
•
•

Tax benefits (which may generate problems for tax
changes when coordination is necessary across state
lines)
Infrastructure (difficult to coordinate across states)
If interest groups and the political organization differ
in their level of aggregation, exchanges may
become more difficult (e.g., teachers unions in
Mexico)
The country studies
Very preliminary results





The preliminary work shows great promise
Country studies seem to cover the full range of
possibilities
It is important to note that we are not going to
concentrate on explaining variations in productivity at
the country level
We are going to be looking at the vector of policies
instead.
Basically, whether
ΣYc,i,t>0
c: country; i: sector; t: time, where Yc,i,t can take the
values Y+ or Y-
The country studies
Very preliminary results

Some rough approximation by comparing set of
countries shows the following characteristics

Stability in the PMP vs. PMP in flux


Capture: interests vs. political agents


Brazil vs. Colombia (or Costa Rica)
Institutionalized arena vs de-institutionalized


Mexico vs. Argentina
Decentralized vs concentrated role of interests


Chile vs. Bolivia
Brazil vs. Bolivia
Transactions in different arenas

Chile vs the rest
Putting everything together.
Practical messages
1.
2.
What are the main political/institutional
constraints that may limit the adoption of
policies that are productivity enhancing
Suggestions on how to put together public
policy packages that:



Are productivity enhancing
Take into account the desires of certain
key actors who may otherwise block the
reforms, or affect its implementation and
sustainability
Have a positive probability of being
implemented
Putting everything together.
Practical messages
3.
4.
5.
Suggestions to the Bank on how to
facilitate the conditions in 2.
Suggestions about potential institutional
changes that may facilitate the adoption of
a vector of policies that is more favorable
for productivity within the logic in 2.
Suggestions on pending work that may be
warranted to fully understand the full
scope of the phenomena.
Work ahead




Keep working on the general framework
Country studies: AR, BO, BR, CH, CO, CR, ME, and
VE
Synergies with other projects (e.g., PDP) and other
researchers (e.g., BRS, Galiani, etc)
The more information we get from the other chapters
(and the sooner) it may be easier for us to bring this
chapter to provide more fruitful results.
 We can help to explain why certain policies are
enacted only once we know who benefits and what is
their impact.
 We can only ask country teams to look into certain
issues only as long as we know that that is the
problem in the country.
DIA 2010
Productivity in Latin America
Chapter 13:
The Political Economy of Productivity