Transcript Here - Dani Rodrik`s weblog

Distributive Politics
and Economic Growth
Alberto Alesina and Dani Rodrik (1994)
Macroeconomic Theory
Master in Economics
2010/11
Prof. José Tavares
NOVA SBE
Luís Fonseca – 425
Miguel Aguiar – 398
Distributive Politics
and Economic Growth
with
Motivating
 Why is this issue important?
 What are the consequences of the initial wealth distributions?
 How does inequality affect the political process?
 How does inequality affect economic growth?
 Explain differences in growth between countries
 Ex: Asian and South American countries after World War II
The Model
Key features:
 Individuals differ in their endowments
 Growth is driven by expanding capital stock
 Long run growth is endogenous
Growth Model

Growth Model

Growth Model

Growth Model

Growth Model

Factors
Capital Labor
 Perfect competition in factor markets
 Each factor is remunerated at its marginal productivity
Factors

Individuals

0
Pure Capitalist
Worker
Individuals

MPL
MPK - Tax
Individuals

MPL
MPK -Tax
Economic Growth
Economic Growth
What is the growth-maximizing tax rate then?
We have to analyze what are the effects of
the tax on capital on the growth rate!
Ba-a-a-art, come here!
Economic Growth
Easy, Lisa!
I’m here!
Economic Growth
With a 0% tax rate, there is no productive
government spending and so, no production and no
growth!
Economic Growth
When the government starts taxing capital, its
spending on services raises the productivity of
factors!
Economic Growth
But, there is a point at which we reach a maximum,
because…
Economic Growth
… then, the tax becomes too high and after-tax return
to capital decreases too much and disencourages
capital accumulation, the main driver of growth!
Economic Growth
A very high tax rate can really harm economic growth.
Economic Growth
Economic Growth

Very
l-l-l-low!
(Hic) High!
Economic Growth
Economic Growth
Why does he want that?
Well, Mr. Burns consumes exclusively out of his
capital stock, so, his welfare is maximized when
that capital stock grows at the maximum rate.
Excellent!!
Economic Growth
Economic Growth
Policy Choice
What tax rate shall I set? Mr. Burns
told me to set a low one… But
everyone else told me to tax him
more…
Policy Choice
My fellow citizens, thank you for electing me!
I promise I will choose a tax rate that will
maximize your welfare!
For Mayor Quimby to follow on his
promise, he needs to choose a tax-rate
that is closest to the preferences of his
voters.
Policy Choice
This implies that Mayor Quimby will not
choose the tax rate that maximizes
economic growth! Let us see why!
Policy Choice
Way to go,
Homer!
0
Homer Simpson is the median voter!
Inequality
But what would happen in Springfield if we had
different endowments?
For example, what if we had more inequality?
0
Groundskeeper Willie is the new median voter!
Inequality
0
Groundskeeper Willie is the new median voter!
Inequality
And what if we had a more equal Springfield?
0
Principal Skinner is the new median voter!
Inequality
He will prefer a lower tax rate than Mr. Simpson, leading
to higher economic growth for Springfield than before!
0
Principal Skinner is the new median voter!
Inequality
We can now see how different initial factor endowments
affect the political process and consequently, the growth
rate of an economy!
0
Principal Skinner is the new median voter!
Inequality
Let us now start from a perfectly egalitarian
society, where everyone has the same labor/capital
share.
Hey! That’s great! Homer would be as rich as Mr.
Burns!
0
Conclusions
So, the main conclusion of the model is:
The more unequal is the distribution of income
and wealth, the lower is the rate of growth of
the economy.
What can we do to have higher growth rates?
It all depends on the capital endowment of the
median voter! The more he has, the lower the
tax, the higher the growth!
Conclusions
An interesting question is:
can this majority voting rule
lead to the maximum possible
economic growth?
No! Maximum growth is attained only if the
median voter is equivalent to the pure
capitalist, like Mr. Burns. But there are always
workers with labor income which will prefer a
tax rate higher than the growth-maximizing.
Conclusions
Alesina and Rodrik also stress that this model can be
applied to democracies…
…and also to dictatorships, because their decisions too
are influenced by social demands and conflicts!
Empirical Applications
 Alesina and Rodrik used land distribution and Gini index data
 Found significant negative relationship between these and subsequent
growth
 Clarke (1993) has supported the robustness of these results
 With different inequality measures and specifications
 Democracies and non-democracies alike
 Persson and Tabellini (1991) argued that this inverse relationship
does not hold for non-democracies
Possible Extensions
 Allow for social mobility and stategic voting
 Effects of political pressure groups and elites
 Non-uniform endowments distributions