Costs of change and political polarization

We study a two-period model of policy-making where (i) changes of current policies impose costs on all individuals that increase linearly with the magnitude of the policy shift and (ii) political power changes over time. We show that policy polarization is minimal for intermediate marginal costs. In turn, welfare is a single-peaked function of the marginal cost. One interpretation is that societies with political institutions that impose positive but moderate costs on political reforms simultaneously achieve the highest welfare and the lowest policy polarization.     

Addressing Ethnicity in Sub-Saharan Africa: Institutions and Agency

African leaders have not used processes in constitutional reforms that would result in institutions that could, in turn, reduce ethnicity (ethnic consciousness and mobilization for effective ethnic group demands on the state). Popular methods used to manage ethnicity have serious costs and weaknesses. Proposed are constitutional reforms via stable equilibrium determination processes. Focal points embedded in the cultures of the groups, relating to political institutions, distributive justice, and societal civility should facilitate the tasks. Important as enabling factors are leadership activities within civil society, inter alia to promote mutual respect, generalized trust, and pluralistic solidarity. JEL Classification: D74, O55, Z13.     

Where are we in the political economy of reform?

We review the experiences of developing countries with market-oriented reforms, using the tools of modern political economy. We impose intellectual discipline by requiring that actors behave rationally using available information and that basic economic relationships such as budget constraints be accounted for. We attempt to integrate two approaches, one based on dynamic games played by interest groups, with one that focus on limited information and the dynamics of learning.

We describe the “starting point” as the set of “old” policies and we attempt to explain the dynamics (political, economic and informational) that lead to reform (section II). We analyze strategies for reformers subject to political constraints (section Ш). We evaluate the aggregate and distributional costs of reforms, emphasizing the importance of looking at the right counterfactuals (section IV).

We conclude by pointing to the challenges ahead: the second-stage institutional reforms necessary to take off from underdevelopment.     

Bank ownership,performance, and the politics: Evidence from Taiwan

This paper investigates the effects of politics on the performances of financial institutions in Taiwan over the period from 1994 through 2009 using the two-stage generalized method of moments approach. We argue that politics and financial institutions are related and this relationship varies with the ownership of financial institutions. Our main findings are, firstly, during election years, the private financial institutions earned higher ROA and loan growth than the government- and foreign-owned. Secondly, government-owned institutions are not affected by current elections for all measures of performance, while foreign institutions significantly earned lower ROA, higher interest margin, and spent higher overhead costs. The finding that lendings of government-owned institutions are no longer subject to political pressures across time implies partial success of financial reforms in Taiwan.     

What matters for growth in Europe? Institutions versus policies,quality versus instability

We study how the quality and instability of institutions and policies affect economic growth in 35 European countries. While stability entails valuable predictability, instability can reflect reforms that offer positive long-run consequences. We construct measures of quality and instability for a panel of countries for 1984–2009. Results suggest that the quality of policy is growth-promoting. Notably, this positive effect becomes larger the more unstable policies are. The findings suggest that for European countries, the benefits of policy flexibility – due to experimentation and learning or making rent seeking more difficult – dominate the costs of reduced predictability.     

The political economy under monetary union: has the euro made a difference?

Economic and monetary union (EMU) has transformed Europe and has created an integrated pan-European economy. Much research has focused on understanding this integration process and what benefits and costs it entails. This paper identifies a political economy channel of EMU as the monetary union implies that member states had to transfer or at least curtail their policy autonomy in several areas, such as monetary policy and fiscal policy. The paper shows that EMU has helped reduce the impact of political shocks on the domestic economy of member states but magnified the transmission of political shocks within the euro area. Equally importantly, economies with weak domestic policies and institutions exhibited a significantly higher sensitivity to domestic political shocks before EMU, but not thereafter. While this may entail that EMU has brought benefits to countries with weaker policies and institutions by insulating them from adverse political developments at home, a potential drawback is that it may provide weaker market discipline for domestic political stability.
— Marcel Fratzscher and Livio Stracca     

Governance–Based Analysis Of Regulation

This article surveys current literature on the developing nature of regulatory systems and regulatory reforms, attempts to place such arrangements in the pervasive context provided by public policy processes and institutions, and argues that an explanation of the 'governance of regulation' is crucial to an understanding of the strengths and weaknesses of regulatory practice. The article begins by defining the range of meanings of regulation, then goes on to emphasize the importance of the framework of governance within which regulatory policy and practice proceed. The location of regulatory reform in contemporary debates on state–market relations and related managerial reforms is examined. Reference to this framework highlights the significance of the public policy process through which regulatory policies must be delivered, and the key role within that framework of political categories of analysis. The article ends by considering the issue of 'policy transfer' between developed and developing economies, and the need for policy–relevant research into regulatory systems and policies in developing countries.     

Integration,Diversity, Plurality: Territorial Governance and the Reconstruction of Legitimacy in a European ‘Postnational’ State

This article deals with the European ‘legitimacy crisis’ from a neglected perspective, looking at ‘Europe’ not primarily as a set of formal (or formalisable) institutions, but rather as an emergent, policy-driven institutional construct. In this perspective, European integration may be very much seen as the outcome of the policies that are enacted in the European supra-national arena as well as of the way such policies are continuously reinterpreted, renegotiated and re-enacted in the different arenas of its multi-level polity. What is at stake in adopting a policy approach to the European legitimacy issue is, hence, a critical appraisal of development of processes of ‘institutionalisation of Europe’ that range far beyond issues of constitutional design. A crucial consequence is the need to ‘spatialise’ discourse on European reforms. The conclusion is a plea for an integration model for Europe not only constitutionally respectful of diversity, but constitutively enhancing diversity, and for an approach to policy reforms acting upon a ‘political geography of differences’.     

NATIONAL SECURITY AND INDUSTRIAL POLICY: THE NEED FOR A PUBLIC CHOICE PERSPECTIVE

This paper argues that the issues raised by the industrial policy debate are as much political as they are economic. There is every reason to believe that, without substantial reform of political institutions, efforts to administer a rational new industrial policy would soon degenerate into the type of inconsistent morass of special-interest-generated policies which industrial policy advocates rightfully criticize as our de facto set of industrial policies.
This important political dimension has been overlooked by many industrial policy advocates. An important exception is Robert Reich, who has proposed a new centralized industrial policy agency in hopes that the battle of conflicting interests would promote greater aggregate efficiency. We argue that on theoretical grounds, however, such centralization might either increase or decrease efficiency. The competition of the military services under the Defense Department gives us a close analogue for study. Unfortunately, however, our review of efficiency in defense policy suggests that this would be a very poor model on which to base a broader industrial policy. To promote substantial increases in defense and industrial policy efficiency appears to require that much more fundamental institutional reforms be considered.     

The Institutional Foundations of Public Policy: A Transactions Approach with Application to Argentina

Public policies are the outcomes of complex intertemporal exchangesamong politicians. The political institutions of a country constitutethe framework within which these transactions are accomplished.We develop a transactions theory to understand the ways in whichpolitical institutions affect the transactions that politicalactors are able to undertake, and hence the quality of the policiesthat emerge. We argue that Argentina is a case in which thefunctioning of political institutions has inhibited the capacityto undertake efficient intertemporal political exchanges. Weuse positive political theory and transaction cost economicsto explain the workings of Argentine political institutionsand to show how their operation gives rise to low-quality policies.     

The nexus of economic and institutional evolution

The current state of the development economics literature ascribes an indisputable central role to institutions. This paper presents a formal model of institutional evolution that is based on the dynamic interactions between formal and informal institutions and economic development; the main features of the model is consistent with the fundamental theories that shed light to institutional evolution, namely the collective action and transaction cost theories, as well as dialectics. As informal institutional quality accumulates like technological know-how, while the level of formal institutional quality is chosen by the government to maximize welfare, subject to the economic and political costs. The solution of the model yields a punctuated trajectory of formal institutional evolution. Simulations reveal that the extent of diversity in informal institutional quality across a country delays formal institutional reforms. We also observe that, both the optimal quality of formal institutions and welfare are higher the more homogeneous is the country with respect to its informal institutions or the cultural attributes.     

Economic Developments in the West Bank and Gaza Since Oslo

The performance of the Palestinian economy in 1994–2000 was uneven, but for the period as a whole, real per capita income declined despite the mobilisation of substantial amounts of foreign aid and despite considerable progress in establishing a basic institutional framework. This paper argues that economic growth and private investment, in particular, have been adversely affected by closures, by uncertainties about political developments and the direction of policies and policy reforms, by problems of governance, and by the excessive transportation and transaction costs related to the intensification of the permits system.     

ACCRUAL BUDGETING AND FISCAL CONSOLIDATION IN THE EMU

Drawing on modern macroeconomic literature focusing on the study of politico-institutional determinants of public policies, this article analyzes the institutional design of the European fiscal policy laid down by the Treaty of Amsterdam and the Stability and Growth Pact. Both documents provide countries in the EU, and in particular those that have adopted the euro, with a common code of fiscal conduct that is expected to uphold discipline in the management of government finances. Nevertheless, a simple review of this code of conduct shows the existence of serious drawbacks mainly derived from the asymmetry between the treatment given to outcomes of fiscal policy in comparison with that given to the procedures followed in generating them. It seems that the current design of the European fiscal coordination system does not really take into account the findings of modern macroeconomics and does not pay due attention to the relation between budgetary processes/institutions and outcomes in fiscal policy. Moreover, this article argues that in the implementation of the broad reforms needed to achieve a sustainable fiscal consolidation, there are political complementarities (in the sense that the ability to gain political consent for one reform depends on the acceptance of other reforms) between the setting up of new fiscal policies of expenditure containment and new fiscal procedures.
All in all, this analysis points to a sorely needed procedural reform in public sector budgeting as the best contribution to pursuing the stabilization of European public finances: the fuller use of accrual concepts in budget reporting. Much more than an isolated technical exercise, the shift to accrual budgeting could be quite a useful tool to facilitate wider reforms aimed at improving public sector financial management and performance while enhancing transparency and accountability.     

Why not a political Coase theorem? Social conflict, commitment, and politics

Do societies choose inefficient policies and institutions? An extension of the Coase theorem to politics would suggest the answer is no. This paper discusses various approaches to political economy and develops the argument that there are strong empirical and theoretical grounds for believing that inefficient policies and institutions are prevalent. We conclude that these inefficient institutions and policies are chosen because they serve the interests of politicians or social groups that hold political power at the expense of the rest. The theoretical case depends on commitment problems inherent in politics; parties holding political power cannot make commitments to bind their future actions because there is no outside agency with the coercive capacity to enforce such arrangements. Journal of Comparative Economics 31 (4) (2003) 620–652.     

Trade, inequality, and the political economy of institutions

This paper investigates the relationship between international trade and the quality of economic institutions. We model institutions as fixed costs of entry, in a framework that has two key features. First, preferences over entry costs differ across firms and depend on firm size. Larger firms prefer to set higher costs of entry, in order to reduce competition. Second, these costs are endogenously determined in a political economy equilibrium. Trade opening can lead to higher entry costs when it changes the political power in favor of a small elite of large exporters, who in turn prefer to install high entry barriers.     

评估地方政府层面的制度改革:一个有待研究的领域

在地方政府层面,对制度改革政策的评估是目前政策评估领域中很少涉及的内容。文章将相关的方法运用到制度改革政策的评估中,从而对该领域的研究做出一些探索。文章将制度方面的政策(如地域性和功能性改革)概括为一类特殊的公共政策,并从概念上和方法上将其与普通的实体政策相比较。文章探讨了评估过程中存在的诸多问题,包括交易成本的确定和找寻制度改革的度量指标等。文章最后提出了关于功能性和地域性改革评估的分析框架,以便区别制度评估和绩效评估。此外,该框架还可以应用于比较性的评估研究中。     

Where are the rent seekers?

In a remarkably simple and yet one of the most original and insightful observations of 20th century economics, Gordon Tullock pointed out that there are efficiency losses when public policies and political behavior create contestable rents. Tullock also observed that social losses from contesting rents appeared smaller than might be expected, so raising the question ‘where are the rent seekers?’ Tullock proposed that political accountability and ‘free-riding’ incentives in interest groups limit social losses from rent seeking. We affirm Tullock’s explanations, which apply differently under different political institutions. We compare Tullock with Gary Becker, who focused on deadweight losses from redistribution and concluded, in contrast to Tullock, that political redistribution is efficient. The comparison with Becker highlights the significance of the recognition of Tullock’s concept of rent seeking. By excluding rent-seeking losses from the social costs of redistribution, Becker could arrive at a conclusion more favorable than Tullock to an ideology that sees merit in extensive redistribution. Tullock’s model, although more encompassing of actual social costs of redistribution, would have been less welcome in the social democratic welfare state.     

DEMOCRACY IN REFORMING COLLAPSED COMMUNIST ECONOMIES: BLESSING OR CURSE?

From a political standpoint, post-communists systems include both democratic and non-democratic nations. From an economic standpoint, they include both collapsing and expanding economies. All four logical possibilities exist for post-communist political and economic systems. The Czech Republic is an example of a democratic political system and an expanding economic system. Russia is an example of a democratic political system and a collapsing economic system. China is an example of a non-democratic political system and an expanding economic system. North Korea is an example of a non-democratic political system and a collapsing economic system. The fact that all four logical possibilities exist suggests that democracy is neither necessary nor sufficient for good economic performance. However, democracy is certainly a value in itself that requires certain basic institutions, including free and fair elections, the orderly transfer of power to those elected, the rule of law and the separation of powers, and the protection of individual freedoms and basic liberties, including those of speech, press, religion, assembly, property, and economic opportunity. Economic policies, rather than the form of government, determine the results for an economy. Russia and China, the two largest socialist economies, followed very different economic policies and experienced radically different outcomes. The failure of “shock therapy” economic policies for transition to a market economy in Russia is related to its use of the Washington Consensus SLP package of stabilization, liberalization, and privatization, as recommended by the World Bank and the IMF. The success of Deng's economic policies for transition to a market economy in China is related to its rejection of the SLP in favor of the ICG approach of institutions, competition, and government. Other interesting cases are those of the Czech Republic and North Korea. Those nations in which both political and economic reforms have been simultaneously successful, such as the Czech Republic, are generally small, homogeneous European nations with a historic work ethic, with a relatively short period of socialism, and with support from neighboring advanced industrialized nations. There is great difficulty in simultaneously establishing both democracy and a market economy without a very special set of circumstances. Thus, it is necessary to determine a sequence for political and economic reform. Ultimately, however, the ideal of both democracy and a market economy may be attained even in nations without special circumstances and external assistance, with Russia eventually turning its economy around and with China eventually reforming politically into a democratic nation.     

INTERNATIONAL FINANCIAL ASSISTANCE: A LOAN MECHANISM-DESIGN APPROACH

International Financial Institutions (IFIs) tie resource transfers to capital-scarce countries to improvements in their economic policies and institutions. The objective of this assistance is twofold: to augment the recipient's capital base and to improve its allocation of resources. This paper offers a political-economy explanation for the limited success of some of these loan programs. In our model, governments select policies under the influence of interest groups. Their capacity to absorb IFI loans and their reform efforts are both unobservable to the IFI. An optimally designed loan mechanism must create sufficient incentives – in the form of rewards and punishments – to counter the influence of interest groups on economic policy choices. The loan mechanism is, however, constrained in two ways: it cannot punish a country so severely as to threaten its political stability and it must remain affordable to the IFI. Whenever reform incentives are inadequate, a government will accept the loan but cheat on the implementation of reforms. If, on the other hand, the mechanism design is optimal, it might be so costly to the IFI that a well-entrenched interest group can block the reform program. Nonetheless, the availability of properly designed loan mechanisms will push governments to implement partial reforms even if the optimal mechanism is too costly for the IFI.     

Enterprise reform in China: agency problems and political control

The past reforms of state-owned enterprises in China delegated many effective control rights to managers while maintaining ultimate control rights for the Party and government. The result is that either the agency costs are high because managers lack accountability or the political costs are high because the government causes political interference. Reform of state-owned enterprises in China should aim at reducing both political and agency costs, which can be done through depoliticization, effective corporate governance, and deserialization. In particular, China needs an ownership transformation with a combination of privatization, denationalization, and pluralization; a state assets management system to limit political influence from the government; and corporatization to establish effective corporate governance which may take a variety of forms.