The political economy of industrialisation

This paper analyses how incentives under different sets of political institutions map into policies that promote industrialisation. I set out an endogenous growth model with non-overlapping generations, where agents are heterogeneous with respect to wealth, skills and political power. The skills of the political elite play a crucial role for industrialisation to occur. It is shown that a flat wealth distribution and a skilled political elite enhance development the most in elitist regimes, while democracies perform as well as elitist regimes in terms of industrialisation. The theoretical results regarding elitist regimes are in line with evidence on the Industrial Revolution.     

The political economy of naturalization

This paper presents a political economy model in which self‐interested natives decide when citizenship and/or voting rights should be granted to foreign‐born workers. Native voters know that immigrants hold different ‘political’ preferences and would thus tend to postpone their enfranchisement as much as possible. They also consider, however, that a more restrictive naturalization policy may reduce the gains from immigration. We find that the optimal timing of naturalization depends on the quantity, quality (productivity), and preferences of potential immigrants, the political composition and the age structure of the native population, as well as the sensitivity of migration choices to the citizenship issue.     

The political economy of regionalism

We examine the incentives of regions to unite and separate. Separation allows for greater influence over the nature of political decision making while unification allows regions to exploit economies of scale in the provision of government. Our paper explores the influence of size, location and the diversity within regions in shaping this trade-off. We then examine the way in which alternative political institutions aggregate regional preferences and thereby define the number of countries.     

The political economy of seigniorage

While most economists agree that seigniorage is one way governments finance deficits, there is less agreement about the political, institutional and economic reasons for relying on it. This paper investigates the main political and institutional determinants of seigniorage using panel data on about 100 countries, for the period 1960–1999. Estimates show that greater political instability leads to higher seigniorage, especially in developing, less democratic and socially-polarized countries, with high inflation, low access to domestic and external debt financing and with higher turnover of central bank presidents. One important policy implication of this study is the need to develop institutions conducive to greater political stability as a means to reduce the reliance on seigniorage financing of public deficits.     

Robust political economy: The case of antitrust

The notion of robust political economy is applied to antitrust. It is argued that the universalizability of policy rules is crucial if both the knowledge problem and the incentive problem in antitrust are taken seriously. Policy recommendations of Williamson are compared with those of Hayek. It is further argued that the notion of universalizability is central not only with regard to antitrust but also with regard to a host of other policy areas. JEL Code B52, B53, D02, D80, K21, K40, L40. The author thanks his collaborators Lorenz Blume, Kim Eun Young, Janina Satzer and Michael Seebauer as well as Anne van Aaken for helpful comments and suggestions.     

The lesson and warning of a crisis foretold: a political economy approach

The financial crisis, which began in summer 2007 in the USA and then spread contagiously throughout the rest of the world, is systemic in nature. Indeed, it is not a local or regional crisis. It is the inevitable starting point of a process which for more than 30 years has changed at its very roots the financial way of being and doing, thus undermining the very bases of that liberal social order which is at the core of Western civilization. The nature of the causes of the crisis is twofold: those immediate, which speak of the specific characteristics adopted in recent times by the financial markets, and those remote, which blame aspects of the cultural matrix which accompanied the transition from industrial to financial capitalism. From the moment that epoch-making phenomenon which we call globalization began to take shape, finance not only constantly increased its quota of activity in the economic sphere, but it has also progressively contributed to transform both people’s cognitive maps and their value systems. It is to this latter that one refers today in speaking of the financialization of society. The article mainly deals with the remote causes of the crisis with the aim of showing the consequences of the misleading ideology diffused by mainstream economics, from which have drunk market agents, government political authorities and controlling agencies.      

The political economy of secession: The case of Quebec

In the absence of oppression, citizens of a sub-unit who contemplate secession carefully weigh the benefits and costs of different outcomes. Here these costs are shown to be highly variable: they depend on the strategic behavior of each state and on whether cooperative relations would be re-established after secession. Using Quebec as a case, it is shown that threats of non-cooperation by the predecessor state may be discounted as not credible. Elementary game theory, however, shows that, with repeat play, retaliatory non-cooperation could be a rational strategy. Moreover, it is shown that reaching a compromise solution requires a credible threat on the part of the potential secessor to accept a sovereignty where there would be no economic cooperation. In modern welfare states, these risks are severe enough to make secession rare, and incremental constitutional change the norm. For comments on earlier drafts of this paper I am grateful to Gordon Tullock, Isidoro Massa, other participants at meetings of the Public Choice Society and the European Public Choice Society, Ignatius Horstmann, Douglas Brown, the editors, and two anonymous referees. Errors are mine.     

The political economy of public debt

Public debt (as opposed to current taxation) alters the inter-temporal pattern of tax rates??it reduces current rates and increases future rates. Accordingly, whether the share of the cost of a given public expenditure is reduced or increased by debt for a given individual depends on the time profile of that individual??s income (tax base) vis-à-vis others?? incomes. Therefore, given the age-profile of income in virtually all Western countries, individuals will tend to be better off under current taxes the younger they are. If (as most standard models of political economy assume) individuals vote according to their economic interests, and if they are tolerably well-informed, then the pattern of support for public debt will track age. And increases in the median age of the population will lead to larger public debt. In other words, public debt policy collapses to a kind of demographic politics. This explanation may, however, be sensitive to assumptions about motives for bequest. Specifically, if bequestors seek to leave positive bequests and are motivated exclusively by the lifetime consumption of their heirs (as well as themselves) then the aged may, under plausible assumptions about the age of their heirs, prefer current taxes over debt.     

The political economy of sin taxes

We analyse the determination of taxes on harmful goods when consumers have self-control problems. We show that under reasonable assumptions, the socially optimal corrective tax exceeds the average distortion caused by self-control problems. Further, we analyse how individuals with self-control problems would vote on taxes on the consumption of harmful goods, and show that the equilibrium tax is typically below the socially optimal level. When the redistributive effects of sin taxes are taken into account, the difference between the social optimum and equilibrium is small at low levels of harm, but becomes more pronounced when consumption is more harmful.     

The political economy of legal titling

The libertarian case for legal titling is that formalization of the economic (de facto) rights of those who own land and buildings improves prospects for capitalism and, ultimately, development. Although all rich countries have private property rights, we argue that the success of legal titling depends on a certain kind of state—what we call a property-protecting state—that is often missing in developing countries. We use insights from Austrian economics, public choice, and institutional economics to clarify the political basis for legal titling to improve land tenure security. Evidence from Afghanistan shows that legal titling has not worked because the country does not have a property-protecting state. We suggest focusing on improving political institutions before investing in legal titling. In the meantime, it makes more sense to register land ownership at the community level, without the state.

     

The political economy of civil society

The dichotomy between intended and unintended outcomes of individual and collective action is central to political economy. It concerns the relationship of markets and states and their link to the constitution of society. As such, this dichotomy points to the patterns of connectivity that provide the social embedding of markets and states. The present paper argues that civil society is best understood as the principal locus of connectivity in which markets and states operate. Civil society so configured is neither separate from the body politic and commercial society nor subordinate to them but instead constitutes the primary objective structure of the social domain. It embeds the causal arrangements that determine the crisscrossing of both intended and unintended outcomes in specific contexts. Within the social domain, dispositions of the means-end type interact with non-instrumental dispositions. One important implication is that civil society is compatible with a range of different political economies and specific socio-economic arrangements. Based on a typology of three distinct paradigms of civil society, we argue that the proximity paradigm is conducive to the discovery of political economies that foster greater openness and specificity compared with the political and the economic paradigm. This paper suggests that the theory of civil society in general and the proximity paradigm in particular are indispensable heuristic tools to identity the unrealized capacities inherent in any given social configuration. A proximity heuristic is applied to the discussion of credit arrangements and policy. We conclude that a hierarchy of policy principles is necessary to preserve the primacy of social connectivity over means-end relationships and the conditions for context-specific arrangements and policy options.     

The political economy of public education

I study the relationship between income inequality and public spending in education in a voting model. Voters collectively choose the uniform quality level of public education, the amount of a public good, and the tax rate on labor income. Parents can decide to opt-out of the public education system by purchasing private education at the desired quality level, and children’s expected income is assumed to be increasing in the quality of education. I show that higher income inequality is associated with higher governmental spending in education if and only if the expected marginal returns to education are larger for the children of relatively low income parents. In turn, better public education tends to reduce future inequality. These results are consistent with most findings in the empirical literature about public investment in education. Lastly, I show that for other kind of publicly provided goods, such as health care, the relationship with income inequality exhibits an ambiguous or opposite sign.     

The political economy of linguistic cleavages

This paper uses a linguistic tree, describing the genealogical relationship between all 6912 world languages, to compute measures of diversity at different levels of linguistic aggregation. By doing so, we let the data inform us on which linguistic cleavages are most relevant for a range of political economy outcomes, rather than making ad hoc choices. We find that deep cleavages, originating thousands of years ago, lead to better predictors of civil conflict and redistribution. The opposite pattern emerges when it comes to the impact of linguistic diversity on growth and public goods provision, where finer distinctions between languages matter.     

The political economy of fiscal procyclicality

It is well-recognized that fiscal spending in developing countries tends to display significant procyclicality (increased spending during expansions and vice versa), in contravention of rational stabilization policy. Theoretical explanations have relied on either financial access or political-economic factors to justify this phenomenon. In this paper, we model the fiscal-output relationship as a dcc-garch process, and inquire whether debt or political economy constraints play a comparatively more important role in conditioning this correlation. Our evidence favors a positive effect from political economy, with weaker and more mixed results pertaining to financial access. Somewhat surprisingly, we also find that politics-induced procyclicality appears to be driven by advanced economies, and fiscal rules exacerbate procyclical tendencies.     

The political economy of delayed reform

Abstract

The role of economic policy in Finland's depression of the 1990s is analyzed with a simple model of an open economy, and the conditions for a successful financial reform derived: Let the system adjust after the removal of interest rate ceilings, and the domestic interest rate then be aligned with foreign rates before liberalizing international capital flows. In Finland, the financial system was liberalized simultaneously with international capital movements, with the domestic shadow interest rate initially considerably higher than the international market rates. A capital inflow the size of the monetary base followed, leading to the ‘crazy years’ of 1987–89. With a large current account deficit, the Bank of Finland tightened money sharply, causing a banking crisis practically wiping out the savings bank sector. The GDP declined by 13%. Several lesser policy measures aggravated the crisis.