the political economy of underdevelopment bernardo mueller department of economics university of...

The Political Economy of The Political Economy of UnderdevelopmentUnderdevelopment

Bernardo MuellerDepartment of EconomicsUniversity 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

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

$45,000

ArgentinaSouth AfricaMexicoBrazilBotswanaEgyptIndonesiaZimbabweBangladesh

USA

AustraliaGreat Britain

GermanyJapan

Sweden

NetherlandsFrance

Source: Penn World Tables.

X.X. Sala-i-Martin 1996. The Economic Journal.

- convergence

- 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.

Paolo Mauro. 2005.“Corruption and Growth”The Quarterly Journal ofEconomics, Vol. 110,No. 3. (Aug., 1995),pp. 681-712.

Corruption,Bureaucratic Efficiency,Political Instability

Economic Freedom

Haan and Strum. 2007. “Handling Economic Freedom in Growth Regressions”Economic Journal Watch, Vol. 4 No. 1, January:79-82.

Barro and McCleary,2003. Religion and Economic Growth Across Countries.American Sociological Review, Volume 68,Number 5, 1 October 2003, pp. 760-781(22) .

Religion

Feng, Y. 1997. Democracy, Political Stability and Economic GrowthBritish Journal of PoliticalScience, Vol. 27, No. 3.(Jul., 1997), pp. 391-418

Democracy

Helliwell, J.F. 1994. EmpiricalLinkages betweenDemocracy and EconomicGrowth British Journal of Political Science, Vol. 24, No. 2. (Apr., 1994), pp. 225-248

Democracy

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

-

Social Trust

Bjørnskov, C. 2007. “Social Capital and Economic Growth: A Survey” The Troika of Social Capital (eds. Gunnar L.H. Svendsen and Gert T. Svendsen)

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

Social Capital

Alesina, Alberto F. andLa Ferrara, Eliana, "EthnicDiversity and Economic Performance" (December2003). Harvard Institute of Economic Research Discussion Paper No. 2028.

Ethnic Diversity

Levine, R. 1998. The Legal Environment, Banks, and Long-Run Economic GrowthJournal of Money, Credit and Banking, Vol. 30, No. 3, Part 2: Comparative Financial Systems.(Aug., 1998), pp. 596-613.

Legal Origin

Rajan, R.G. and A.Subramanian. 2005 Aid and Growth: What Does the Cross-Country EvidenceReally Show? IMF Working Paper, June.

Foreign Aid

Olson JR. Sarna & Swamy, 2000. Governance andgrowth: A simple hypothesis explainingcross-country differences inproductivity growth. Public Choice 102: 341–364.

Governance

Stephen KnacK, 2006. Governance and Growth, October 2006

Governance

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

Characteristicsof

policy outcomes

(game of)Policymaking

process

Characteristicsof the issue area

Working of

political institutions

BasicInstitutions

and History

The Politics of Policies (2006). IADB.

Characteristicsof

policy outcomes


process


Working of


BasicInstitutions

and History

Stability vs. volatilityAdaptability vs. rigidityPublic-regardednessvs. private regardednessInvestment-like qualitiesQuality of implementationand enforcement


Characteristicsof

policy outcomes


process


Working of


BasicInstitutions

and History

actorspreferencespowerssequencearenasforumsfrequency of interaction



Characteristicsof

policy outcomes


process


Working of


BasicInstitutions

and History


All policy areassimultaneously(same country)



Characteristicsof

policy outcomes


process


Working of


BasicInstitutions

and History



Budgetaryprocess


Characteristicsof

policy outcomes


process


Working of


BasicInstitutions

and History



Telecommunicationsector

(Levy and Spiller, 1996)


Characteristicsof

policy outcomes


process


Working of


BasicInstitutions

and History



Environmental policy


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.


•Executive Preponderance•What are the President’s preferences?

▫Monetary stability.▫Economic growth.▫National macroeconomic variables.


•Executive Preponderance•Why these preferences?

▫Electorate and inflationary memory.▫Globalized financial markets.


•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.


•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.

-2

-1

0

1

2

3

4

5

6

719

90

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Year

% o

f G

DP

Actual

Target

Source: Banco Central do Brasil, Boletim de Finanças Públicas.

Primary Surplus - Brazil



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.

0

20

40

60

80

100

Year

%

Earmarkedtransfers to statesand muni.Earmarkedrevenues

De-earmarked viaDRU

Not earmarked

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.




3. Hard-wired policies (Earmarked revenue and expenditures).

4. Residual policies – contingent on the fiscal imperative and subject to political shocks.

0.0

0.5

1.0

1.5

2.0

2.5

2001 2002 2003 2004 2005 2006

R$

bil

lio

n

ANATEL's BudgetANATEL's Liquidated Expenditures"Contingenciamentos"

Source: Pereira Filho (2006).

“Impoundments” in Regulatory Agency Budget

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.


•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.


disenfranchised

selectoratewinning coalition


•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).


•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.


•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.


WC

Selectorate

Implication: Public goods and economic growth, low rate of survival in office.

Case 1: Large W/S


WC

Selectorate

Implication: Private goods, low growth, high rate of survival in office.

Case 2: Small W/S


Ideal situation for a dictator: very cheap and loyal winning coalition

selectorate

WC

Case 2: Large W/S

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 pro-market 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.

the political economy of underdevelopment bernardo mueller department of economics university of...

Documents

economic journal slide

convergence slide

democracy slide

brazil slide

religion slide

political instability

index of economic freedom

economic freedom haan