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Democracy and Data Dissemination:

The Effect of Political Regime on Transparency B. Peter Rosendorff, NYU

James R. Vreeland, YaleIPES, Princeton, November 2006

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Is transparency “incentive compatible”? Generally

Under what conditions do rulers act in the best interests of the ruled?

Representatives may divert resources Elections may act as disciplining devices –

retrospective voting Consumers/voters demand transparency When will policymakers supply transparency?

Is transparency incentive compatible?

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Key insights Policymakers have an incentive to be

more transparent whenSurvival in office depends on electoral

accountability (democratic polities)

Election outcomes are uncertain

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Policy Instruments Monetary base

Direct control Inflation

Costly to society Redistributive effects

Towards borrowers from lenders Tax on money holdings

Revenues accrue to the government Seignorage

"The amount of real purchasing power that government can extract from the public by printing money." -- Cukierman 1992

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Intuition: Incentive Compatible Transparency Monetary policy is made under uncertainty

Policymakers are uncertain about the aggregate state of the economy at election time

Electorate can’t distinguish between (exogenous) aggregate economic shocks

And the executive's excessive inflation tax (endogenous). For example

If voters observe high real income in any period Voters infer aggregate conditions were good, and executive has not been

excessively inflationary Voters inclined to reelect the incumbent

If voters observe low incomes Voters infer aggregate state was poor and/or The executive extracted/inflated too much Voters inclined to evict the incumbent

Possibility of “unfair eviction” Extraction was modest, but exogenous conditions conspired against the

executive.

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Accountability

Autocrats Executives are less accountable to the electorate Will extract more and worry little about eviction

Democratic Executives Sensitive to the will of the voters Will moderate extraction, but still under bad enough

shocks be kicked out of office Democrats are more likely to be subject to unfair

eviction.

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Transparency

Transparency in policymaking Voters can better (but still imperfectly) separate aggregate

shocks from policy Voters punish extractive behavior, not low incomes Smart policymaker

One that is subject to unfair dismissal – democratic executive May choose to relinquish opportunities for rent extraction In exchange for eliminating the risk associated with being unfairly

dismissed The autocrat – does not fear unfair dismissal

Will not be willing to relinquish rent extracting opportunities Hence those politicians sensitive to the electorate adopt

transparent modes of policymaking In order to enhance the possibility of remaining in office.

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Model Large number of identical consumers/voters Infinite horizon Voters choose savings and reelection rule Govt chooses inflation tax

Inflation redistributes and is a public bad. Non-Transparency, in each period

Payoffs: Voters: Government

1. Executive 2. Nature3. Voters4. Voters

Inflation Shock Savings Reappoint?

tt

tu Uts

2

1 21 12t

t t t tu u m s u m s

2

2t

t t tv m s

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Non-transparency Will of the voters: ex ante probability of voters

recommending reelection

Regime Type: The ex ante probability of keeping office

σ in [0,1] : the degree to which the sentiments of the voters are binding on the executive σ =1 : pure democracy σ =0 : pure autocracy

, Prt tU u U

, , , 1t tU U

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Executive’s Reaction Function

u

π

U

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Transparency

Voters do not directly observe π The policymaker announces ex ante a policy Credible source (WB, IMF, independent agency)

Announce if Sequence

Announcement and Policy Savings Signal Election

Nash

, , ,t s

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Transparency

Voters condition their reelection rule on the announcementAs before, If and

reelect, evict otherwise

Voters are weakly better off

ts s t

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Proposition

NE

Transparency is preferred by both players when the polity is sufficiently democratic

* * *2

*

*

/ 21If 1 1 1

/ 2

then and 1;

otherwise , 0, and 0.

s

s

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The Parameter Space

Transparency Preferred by policymaker

Non-transparency preferred

σ

δ1Sufficiently democratic executives prefer transparency.

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Evidence Transparency – take advantage of a hindrance

Missing data – World Development Indicators (World Bank) Inflation Unemployment

GDP growth Infant Mortality Rates

Regime Przeworski et al (2000) - Dichotomous measure

Key government offices (executive and legislature) are filled through contested elections

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Reporting of Data by RegimeFigure 1: Reporting of data by regime

0

0.2

0.4

0.6

0.8

1

Inflation Unemployment Grow th Infant Mortality Rate

Regime

Per

cen

tag

e o

f o

bse

rvat

ion

s w

ith

dat

a

Dictatorship Democracy

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But Democracies are… Richer (control for GDP/capita) Recent (use hazard model)

We also control for: IMF participation Country fixed effects Regional effects

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Controls: GDPPC and IMF

Inflation Unemployment Growth Infant Mortality Rates

The effect of Democracy 2.02** 1.65** 1.97** 0.24**

(Robust std error) (0.15) (0.11) (0.24) (0.09)

The effect of GDP/capita 0.0001** 0.0002** 0.00002 0.00001

(Robust std error) (0.00002) (0.00001) (0.00002) (0.00001)

The effect of IMF participation 0.82** 0.66** 1.41** 0.23**

(Robust std error) (0.09) (0.11) (0.16) (0.09)

Constant 0.31** -2.46** 1.67** -2.06**(Robust std error) (0.07) (0.12) (0.09) (0.08)

# of obs. 5,042 2,935 5,042 5,128

Log pseudolikelihood -1932.65 -1428.22 -1114.83 -2084.83

Table 2: The pooled effect of democracy on transparency controlling for level of economic development and IMF participation

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Controls and Country Fixed effectsConditional Logit

Inflation Unemployment Growth Infant Mortality Rates

The effect of Democracy 4.93** 1.96** 1.59* 0.60**

(Robust std error) (0.87) (0.64) (0.94) (0.10)

The effect of GDP/capita 0.0014** 0.0005** 0.0010* 0.0001**

(Robust std error) (0.00035) (0.00016) (0.00051) (0.00001)

The effect of IMF participation 2.73** 0.96** 2.45** 0.16*

(Robust std error) (0.43) (0.25) (0.49) (0.08)

# of ctries 65 73 34 169

# of obs. 1,806 1,306 915 5,101

Log pseudolikelihood -466.41 -477.21 -301.03 -1793.52

Table 3: The effect of democracy on transparency controlling for economic development, IMF participation, and country specific effects

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RegionalEffects,Controls.BasicLogit

Inflation Unemployment Growth Infant Mortality Rates

The effect of Democracy 1.87** 1.45** 1.57** 0.36**

(Robust std error) (0.16) (0.13) (0.30) (0.11)

The effect of GDP/capita 0.0001** 0.0001** 0.00003 0.00002**

(Robust std error) 0.00002 0.00002 0.00002 0.00001

The effect of IMF participation 0.87** 0.62** 1.40** 0.19**

(Robust std error) (0.09) (0.13) (0.17) (0.09)

Africa -0.88** -4.83** -2.82** 0.16(Robust std error) (0.26) (0.44) (0.72) (0.34)

South Asia -2.86** 0.09(Robust std error) (0.47) (0.39)

East Asia -1.49** 0.21(Robust std error) (0.32) (0.45)

S. E. Asia 1.20** -1.52** 0.17(Robust std error) (0.38) (0.43) (0.38)

Oceania -3.64** -3.31**(Robust std error) (0.58) (0.79)

Middle East -0.50* -2.88** -2.87** 0.10(Robust std error) (0.28) (0.43) (0.72) (0.36)

Latin America 0.33 -1.55** -1.31* 0.02(Robust std error) (0.30) (0.43) (0.78) (0.34)

Caribbean -1.18** -3.71** -0.71 -0.19(Robust std error) (0.30) (0.44) (1.01) (0.36)

East Europe -1.37** -1.57** -3.96** 0.38(Robust std error) (0.30) (0.44) (0.73) (0.36)

Industrial ctries -0.58 -2.22** -0.25(Robust std error) (0.53) (0.81) (0.36)

Constant 1.06** 0.93** 4.29** -2.21**(Robust std error) (0.25) (0.41) (0.72) (0.33)

# of obs. 4,013 2,935 4,762 5,128

Log pseudolikelihood -1775.38 -1083.57 -1025.76 -2078.72

Table 4: The effect of democracy on transparency controlling for economic development, IMF participation, and regional effects

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RegionalEffects,Controls.Duration Dependence

Inflation Unemployment Grow th Infant Mortality Rates

The effect of Democracy 1.30** 0.65** 0.62** -0.14

(Robust std error) (0.27) (0.30) (0.23) (0.18)

The effect of GDP/capita -0.00003 0.00004* -0.00003 -0.0001*

(Robust std error) (0.00006) (0.00002) (0.00003) (0.00004)

The effect of IMF participation 0.55** 0.42* 0.44** -0.29**

(Robust std error) (0.17) (0.24) (0.19) (0.14)

Africa -3.19** -2.51** -1.54** -2.53**(Robust std error) (0.25) (1.08) (0.38) (0.85)

South Asia -2.12** -1.48 0.05(Robust std error) (0.52) (1.18) (0.10)

East Asia -3.18** 0.36* 0.07(Robust std error) (0.38) (0.21) (0.11)

S. E. Asia -1.49** -0.81 -0.09 0.07(Robust std error) (0.30) (1.15) (0.21) (0.07)

Oceania -2.78* -16.10** -14.76**(Robust std error) (1.56) (1.06) (1.30)

Middle East -2.38** -1.46 -1.43** 0.24**(Robust std error) (0.36) (1.12) (0.45) (0.09)

Latin America -2.20** -0.29 -0.55** 0.43**(Robust std error) (0.41) (1.08) (0.27) (0.13)

Caribbean -3.31** -1.59 -0.44 -3.25**(Robust std error) (0.65) (1.09) (0.29) (0.95)

East Europe -2.26** -0.34 -1.85**(Robust std error) (0.39) (1.07) (0.52)

Industrial ctries -1.25** 0.57 -0.47 0.65**(Robust std error) (0.39) (1.14) (0.39) (0.23)

Constant 0.20 -2.23** -0.33 0.08*(Robust std error) (0.24) (1.08) (0.22) (0.04)

Duration dependence (ln p) -0.03 0.11 -0.05 0.30**

(Robust std error) (0.07) (0.08) (0.06) (0.15)

# of countries: 144 160 113 97

# eventually reporting: 126 103 110 95

# of obs. 998 1,431 457 270

Log pseudolikelihood -123.30 -162.24 -126.86 -107.12

Table 5: The effect of democracy on transparency controlling for duration dependence

Note: Coefficients not hazard ratios are reported.

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Conclusions Methodological Implications

Definition of democracy Minimalist definition of democracy actually covers more than

just elections Implies transparency too.

Missing Data Highly correlated with regime type Researchers interested in the consequences of regime type

cannot simply use the available data Must recognize the bias that emerges.

Modest attempts to separate out the oft conflated notions of democracy, accountability and transparency.