Transcript Slide 1

The Political Economy of
Underdevelopment
Bernardo Mueller
Department of Economics
University of Brasilia - Brazil
In a Coasean world
there would be no
underdevelopment.
Motivation
• Is growth an exogenous inexorable process? …
Are poor economies incipiently catching up in
regular ways with those already richer?
(Danny Qua, 1996, European Economic Review)
• Will relatively poor economies remain poor for
many generations? Will the rich countries of the
year 2100 be the same countries that are
relatively rich today?
(Sala-i-Martin, 1996, Economic Journal)
Convergence hypothesis
• Forces pushing for convergence:
▫ Diminishing returns to capital.
▫ Poorer countries have higher rates of return
leading capital to flow from richer countries.
▫ Second mover advantages.
Real Gross Domestic Product per Capita
$45,000
$40,000
USA
$35,000
Australia
Great Britain
Netherlands
France
Sweden
Germany
Japan
$30,000
$25,000
$20,000
Argentina
South Africa
Mexico
Brazil
Botswana
Egypt
Indonesia
Zimbabwe
Bangladesh
$15,000
$10,000
$5,000
Source: Penn World Tables.
04
20
01
98
20
19
95
19
92
19
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19
83
80
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19
77
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71
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68
19
65
19
62
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59
19
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53
19
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19
50
$0
 - convergence
X.X. Sala-i-Martin 1996. The Economic Journal.
 - convergence
Robert J. Barro. 2000. “Rule of Law, Democracy and Economic Performance”in Heritage Foundation, 2000 Index of Economic Freedom.
Conditional  - convergence
Barro. 2001. AEA Papers and Proceedings.
• “...the speed of convergence has been estimated
to be within a narrow range centering on 2 % per
year (p=0.02). Although this is a very robust and
strongly significant finding, I would like to
emphasize that a speed of 2 % per year is very
small. For example, it suggests that it will take
35 years for half of the distance between the
initial level of income and the steady state level
to vanish. This is quite slow.”
Sala-i-Martin. 1996.The Economic Journal, Vol. 106, No. 437. (Jul.), pp.1034.
Corruption,
Bureaucratic
Efficiency,
Political Instability
Paolo Mauro. 2005.
“Corruption and Growth”
The Quarterly Journal of
Economics, Vol. 110,
No. 3. (Aug., 1995),
pp. 681-712.
Economic Freedom
Haan and Strum. 2007. “Handling Economic Freedom in Growth Regressions”
Economic Journal Watch, Vol. 4 No. 1, January:79-82.
Religion
Barro and McCleary,
2003. Religion and
Economic Growth
Across Countries.
American Sociological
Review, Volume 68,
Number 5, 1
October 2003, pp. 760
-781(22) .
Democracy
Feng, Y. 1997. Democracy,
Political Stability and
Economic Growth
British Journal of Political
Science, Vol. 27, No. 3.
(Jul., 1997), pp. 391-418
Democracy
Helliwell, J.F. 1994. Empirical
Linkages between
Democracy and Economic
Growth British Journal of
Political Science, Vol. 24,
No. 2. (Apr., 1994), pp. 225-248
Social Trust
Study
Published in
Controls
Growth effect
Studies using social trust
Helliwell (1996a)
NBER working paper
-
0%
Knack and Keefer (1997)
American Economic Review
Education, investment goods prices, initial
GDP
56 %
La Porta et al. (1997)
American Economic Review
Initial GDP
20 %
Whiteley (2000)
Political Studies
Investment, education, initial GDP
40 %
Schneider et al. (2000)
Eu. J. of Urban and Regional Stud.
Investment, openness, initial GRP
Neg.
Zak and Knack (2001)
Economic Journal
Investment price, education, initial GDP
60 %
Beugelsdijk et al. (2004)
Oxford Economic Papers
Robustness analysis
58 %
Beugelsdijk and van Schaik (2005)
Eu. J. of Political Economy
Investment, schooling, agglomeration,
initial GRP
0%
Bengtsson et al. (2005)
Working paper
Robustness analysis
36 %
Boulila et al. (2006)
Conference paper
-
16 %
Bjørnskov (2006b)
Working paper
-
54 %
Roth (2006)
Working paper
Education, investments, pop. growth,
initial GDP
Bjørnskov, C. 2007. “Social Capital and Economic Growth: A Survey”
-
The Troika of Social Capital (eds. Gunnar L.H. Svendsen and Gert T. Svendsen)
Social Capital
Stephen Knack; Philip Keefer. 1997. Does Social Capital Have an Economic Payoff?
A Cross-Country Investigation The Quarterly Journal of Economics, Vol. 112, No. 4.
(Nov., 1997), pp. 1251-1288
Ethnic Diversity
Alesina, Alberto F. and
La Ferrara, Eliana, "Ethnic
Diversity and Economic
Performance" (December
2003). Harvard Institute of
Economic Research
Discussion Paper No. 2028.
Legal Origin
Levine, R. 1998. The Legal Environment, Banks, and Long-Run Economic Growth
Journal of Money, Credit and Banking, Vol. 30, No. 3, Part 2: Comparative Financial Systems.
(Aug., 1998), pp. 596-613.
Foreign Aid
Rajan, R.G. and A.Subramanian. 2005 Aid and Growth: What Does the Cross-Country Evidence
Really Show? IMF Working Paper, June.
Governance
Olson JR. Sarna & Swamy,
2000. Governance and
growth: A simple
hypothesis explaining
cross-country
differences in
productivity growth.
Public Choice 102:
341–364.
Governance
Stephen KnacK, 2006. Governance and Growth, October 2006
What has been learnt
and what remains
to be explored?
“… the results leave unexplained a
good deal of the relatively weak
growth performance of countries in
sub-Saharan Africa and Latin America.
That is, the analysis does not fully
capture the characteristics of the
typical country on these continents
that lead to below-average growth.”
Barro, Robert J, 1991. "Economic Growth in a Cross Section of Countries,”
The Quarterly Journal of Economics, MIT Press, vol. 106(2), pages 407-43, May
Robert J. Barro. 1997. Determinants of Economic Growth: A Cross-Country Empirical Study, MIT Press, Cambridge .
Approaches to Understand the Political
Economy of Underdevelopment
• Stein, Tommasi, Echebarría, Lora and Payne. 2006. The
Politics of Policies: Economic and Social Progress in
Latin America, Inter-American Development Bank.
• Bueno de Mesquita, Smith, Siverson and Morrow. 2003.
The Logic of Political Survival MIT Press.
• Rajan, 2006. The Persistence of Underdevelopment:
Constituencies and Competitive Rent Preservation,
ECGI Working Paper.
Oliver Williamson. 2000. “The New Institutional Economics: Taking Stock, Looking Ahead” Journal of Economic Literature.
Transaction Cost Politics
• Extension of Transaction Cost Economics to
Politics and Policymaking.
• Transaction costs are characteristically more
pervasive in political processes than in economic
interactions.
• North. 1990. “A Transaction Cost Theory of Politics” Journal of Theoretical
Politics, Oct 1990; 2: 355 - 367.
• Dixit, A.K., 1996, The Making of Economic Policy: A Transaction-Cost
Politics Perspective, Cambridge, Mass.: MIT Press
The Politics of Policies (2006). IADB.
Characteristics
of
policy outcomes
(game of)
Policymaking
process
Characteristics
of the issue area
Working
of
political institutions
Basic
Institutions
and
History
The Politics of Policies (2006). IADB.
Characteristics
of
policy outcomes
Stability vs. volatility
Adaptability vs. rigidity
Public-regardedness
vs. private regardedness
Investment-like qualities
Quality of implementation
and enforcement
(game of)
Policymaking
process
Characteristics
of the issue area
Working
of
political institutions
Basic
Institutions
and
History
The Politics of Policies (2006). IADB.
Characteristics
of
policy outcomes
Stability vs. volatility
Adaptability vs. rigidity
Public-regardedness
vs. private regardedness
Investment-like qualities
Quality of implementation
and enforcement
(game of)
Policymaking
process
Characteristics
of the issue area
Working
of
political institutions
actors
preferences
powers
sequence
arenas
forums
frequency of interaction
Basic
Institutions
and
History
The Politics of Policies (2006). IADB.
Characteristics
of
policy outcomes
Stability vs. volatility
Adaptability vs. rigidity
Public-regardedness
vs. private regardedness
Investment-like qualities
Quality of implementation
and enforcement
(game of)
Policymaking
process
Characteristics
of the issue area
All policy areas
simultaneously
(same country)
Working
of
political institutions
actors
preferences
powers
sequence
arenas
forums
frequency of interaction
Basic
Institutions
and
History
The Politics of Policies (2006). IADB.
Characteristics
of
policy outcomes
Stability vs. volatility
Adaptability vs. rigidity
Public-regardedness
vs. private regardedness
Investment-like qualities
Quality of implementation
and enforcement
(game of)
Policymaking
process
Characteristics
of the issue area
Budgetary
process
Working
of
political institutions
actors
preferences
powers
sequence
arenas
forums
frequency of interaction
Basic
Institutions
and
History
The Politics of Policies (2006). IADB.
Characteristics
of
policy outcomes
Stability vs. volatility
Adaptability vs. rigidity
Public-regardedness
vs. private regardedness
Investment-like qualities
Quality of implementation
and enforcement
(game of)
Policymaking
process
Characteristics
of the issue area
Telecommunication
sector
(Levy and Spiller, 1996)
Working
of
political institutions
actors
preferences
powers
sequence
arenas
forums
frequency of interaction
Basic
Institutions
and
History
The Politics of Policies (2006). IADB.
Characteristics
of
policy outcomes
Stability vs. volatility
Adaptability vs. rigidity
Public-regardedness
vs. private regardedness
Investment-like qualities
Quality of implementation
and enforcement
(game of)
Policymaking
process
Characteristics
of the issue area
Environmental policy
Working
of
political institutions
actors
preferences
powers
sequence
arenas
forums
frequency of interaction
Basic
Institutions
and
History
Political Institutions in Brazil
• Executive Preponderance
• What are the President’s powers?
▫
▫
▫
▫
▫
Sets the agenda in Congress.
Line item veto.
Decree power.
Cabinet and 40,000 federal jobs.
Discretion over appropriation of budget
amendments.
▫ Upshot: high governability at low cost.
Political Institutions in Brazil
• Executive Preponderance
• What are the President’s preferences?
▫ Monetary stability.
▫ Economic growth.
▫ National macroeconomic variables.
Political Institutions in Brazil
• Executive Preponderance
• Why these preferences?
▫ Electorate and inflationary memory.
▫ Globalized financial markets.
Political Institutions in Brazil
• Congress
▫ Weak parties in the electoral arena, strong parties
in the legislative arena.
▫ Preferences for geographic redistribution.
▫ Result: exchange of pork for policies leading to
high levels of governability while still providing
checks.
Political Institutions in Brazil
• Other political actors and veto points
▫ Judiciary (independent but slow).
▫ Public prosecutors (independent, powerful and
active)
▫ Governors (no longer powerful at federal level)
▫ Constitution (highly amended)
▫ Bureaucracy (stable, high quality for Latin
America)
Four categories of policies
1. Stable and adaptable macroeconomic policies.
Primary Surplus - Brazil
7
6
5
% of GDP
4
3
Actual
Target
2
1
-2
Year
Source: Banco Central do Brasil, Boletim de Finanças Públicas.
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
-1
1990
0
Four categories of policies
1. Stable and adaptable macroeconomic policies.
2. Exchange of pork for policies. (Alston and
Mueller. 2006. JLEO).
Four categories of policies
1. Stable and adaptable macroeconomic policies.
2. Exchange of pork for policies. (Alston and
Mueller. 2006. JLEO).
3. Hard-wired policies (Earmarked revenue and
expenditures).
Evolution of Budgetary Earmarking, 1979-2003.
100
60
Earmarked
transfers to states
and muni.
Earmarked
revenues
40
De-earmarked via
DRU
%
80
Not earmarked
20
83
19
85
19
87
19
89
19
91
19
93
19
95
19
97
19
99
20
01
20
03
19
19
19
79
81
0
Year
Source: Brasil. Secretaria de Orçamento Federal. (2003) "Vinculações de Receita dos Orçamentos
Fiscal e da Seguridade social e o Poder Discricionário de Alocação de Recursos do Governo Federal“
- Volume 1, N.1, Brasília, SOF, pg. 6. This graph does not include revenues from government bonds or privatization.
Four categories of policies
1. Stable and adaptable macroeconomic policies.
2. Exchange of pork for policies. (Alston and
Mueller. 2006. JLEO).
3. Hard-wired policies (Earmarked revenue and
expenditures).
4. Residual policies – contingent on the fiscal
imperative and subject to political shocks.
“Impoundments” in Regulatory Agency Budget
2.5
R$ billion
2.0
1.5
1.0
0.5
0.0
2001
2002
2003
2004
ANATEL's Budget
ANATEL's Liquidated Expenditures
"Contingenciamentos"
Source: Pereira Filho (2006).
2005
2006
Upshot
•
•
•
•
High levels of governability.
Stability, fiscal discipline, gradual reform.
Persistent institutional strengthening.
Gradually translating into higher levels of
sustained growth.
Other Latin American Countries
•
•
•
•
•
•
Argentina
Venezuela
Bolivia
Chile
Ecuador
Mexico
Robert J. Barro. 2000. “Rule of Law, Democracy and Economic Performance”in Heritage Foundation 2000 Index of Economic Freedom.
Bueno de Mesquita, Smith, Siverson
and Morrow. 2003. The Logic of
Political Survival, MIT Press.
• The Selectorate Theory.
• Why do some political systems seem more prone
to policy failures than others?
• Dependent Variable: Leader’s choice between
providing public goods, private goods or her own
pocket.
The Selectorate Theory
• Claim: It makes no sense to classify regimes as
democracies or dictatorships, as presidential or
parliamentary.
• A better classification is according to the size of
the selectorate and the size of the winning
coalition.
The Selectorate Theory
• Selectorate: all those people in a country who
have an institutionally granted right or norm
that gives them a say in choosing the
government.
• Winning coaltion: those members of the
selectorate whose support is essential to keep
the incumbent leadership in office.
The Selectorate Theory
winning coalition
selectorate
disenfranchised
The Selectorate Theory
• The government taxes the citizens and uses
these resources:
▫ to provide private goods to members of the
winning coalition;
▫ to provide public goods that benefit all society;
▫ For herself (Swiss Bank accounts, lavish lifestyles
or pet projects).
The Selectorate Theory
• To hold on to power the leader must provide
sufficient benefits to the winning coalition so
that the least satisfied member still prefers to
support the leader than to defect to a rival.
The Selectorate Theory
• A defector from the winning coalition that
supports a rival for leadership faces the risk that
he will not be essential to the new leader and will
be left out of the new winning coalition.
• The probability of being essential in the
successor winning coalition is W/S.
The Selectorate Theory
Case 1: Large W/S
WC
Selectorate
Implication: Public goods and economic growth, low rate of survival in office.
The Selectorate Theory
Case 2: Small W/S
WC
Selectorate
Implication: Private goods, low growth, high rate of survival in office.
The Selectorate Theory
Case 2: Large W/S
selectorate
WC
Ideal situation for a dictator: very cheap and loyal winning coalition
Bueno de Mesquita, Smith, Siverson and Morrow. 2003. The Logic of Political Survival, MIT Press.
The Persistence of Underdevelopment:
Constituencies and Competitive Rent
Preservation, Raghuram Rajan, ECGI
Working Paper N0150/2007
The Persistence of Underdevelopment
• Most explanations of the persistence of
underdevelopment rely on a privileged elite
forcing sub-optimal policies on the rest of the
population through oppressive political
institutions (example Acemoglu, Johnson and
Robinson, 2004).
The Persistence of Underdevelopment
• However, underdevelopment has survived
emancipation, independence and even
democratization.
• “Why choose poverty?”
• This paper tries to explain the persistence
without appealing to oppressive political
institutions that give all the power to the elite.
Model
• Three constituencies:
▫ Oligopolists (or oligarchs);
▫ Educated (middle class);
▫ Uneducated (poor).
Model
• Oligopolists – owns a firm that needs managers
and laborers.
• Managers and laborers are complementary.
• There are diminishing returns in firm size.
• Only educated can be managers.
Model
• There are two types of policies:
▫ Pro-market reforms;
▫ Reforms that increase access to endowments, e.g.
education.
Model
• Each group has one vote on policy reform, that
is, an imperfect democracy.
Result
• Interesting result: there is no non-trivial
equilibrium where both reforms get enacted.
Result (intuition)
• The uneducated always vote for education reform.
• The educated vote against because it reduces their rents.
• The oligopolist likes education reform because it reduces
rents received by educated.
• But if education reform goes through the oligopolist will
face a united workforce of educated that will push for promarket reforms.
• So the oligopolist votes with the educated against education
reform.
• The poor oppose having only market reform because as
managers leave the firm the workers become less productive
and salaries fall.
Result (intuition)
• With only an elite and one constrained group, it is
puzzling when reforms do not take place under
different types of democracy.
• The only solution then is to destroy the power of
the elite.
• With multiple constrained groups, reforms affect
the rents of each constituency differently.
• Crabs in a bucket.