Welfare Policies in the UNECE Region: Why so Different?

This paper provides the text of the Gunnar Myrdal Lecture presented at the U.N. Palais des Nations in 2006. It provides an analysis of why different countries in the western world have chosen different models of the welfare state. It discusses why the American welfare system is less generous than the typical European system, emphasizing the causes and implications of these differences. The variations in welfare systems within western Europe -- the Nordic system, the Anglo-Saxon system, and the Continental and Mediterranean systems -- are compared in terms of their effectiveness, successes and failures.Welfare, Europe, Myrdal

The Choice of Institutions

Verfassung, Wahlsystem, Politische Partei, Constitution, Electoral system , Political party

The Size of Countries: Does it Matter?

Borders are a man made institution, and as such their shape cannot be taken as part of the physical landscape. The size of countries is endogenous to politico economic forces. This paper discusses recent efforts by economists to study three related question: what determines the evolution of the size of countries? Does size matter for economic success? Given the trend toward decentralization and of creation of supernational unions like the EU, is the meaning of national borders evolving?

The Central Bank in Colombia

Abstract: In the last decade the issue of the optimal degree of central bank independence has been at the center of attention of academics and policymakers in many countries. The direction of institutional reform has almost universally been toward making central banks more independent from political pressure. The motivation of this move is linked to an increased emphasis on price stability as the main or only goal of monetary policy after two decades of exceptionally high inflation rates. Colombia has made an effort in reforming a complex set of monetary institutions, which for over two decades delivered a persistent, moderate rate of inflation. The central bank reform -along with the elimination of many indexation practices, the liberalization of financial activity and the reduction of trade and capital account barriers- delivered substantial progress. This paper argues that a reduced set of "second generation" reforms aimed at correcting limitations that were maintained may further deepen these accomplishments. We propose to make the board of the bank smaller and to remove any members of the executive from it. An appropriate timing of appointments should also create stability in the board. Lengthening the appointment tenure of the governor and board members, together with a staggering of terms, reduces the risk that every new executive brings about an entire new board, or at least a new majority in the board of the bank. The central bank should also have a clear mandate that sets inflation control as its overarching goal. This is important because the recent involvement of the Constitutional Court in the matter of the relative precedence of inflation control over other goals raises much confusion. Finally, we conclude that the central bank is the institution better suited to supervise the financial sector. While arguments pro and against using the central bank as the financial regulator certainly exist, on balance we conclude that for a middle-income country this is the best solution.Bancos Centrales, Política Monetaria, Independencia de la Banca Central, Instituciones Financieras, Economía Institucional, Reformas Institucionales

Distributive Politics and Economic Growth

This paper studies the relationship between political conflict and economic growth in a simple model of endogenous growth with distributive conflicts. We study both the case of two "classes" (workers and capitalists) and the case of a continuum distribution of agents, characterized by different capital/labor shares. We establish several results concerning the relationship between the political influence of the two groups and the level of taxation, public investment, redistribution of income and growth. For example, it is shown that policies which maximize growth are optimal only for a government that cares only about the "capitalists." Also, we show that in a democracy (where the "median voter theorem' applies) the rate of taxation is higher and the rate of growth lower, the more unequal is the distribution of wealth We present empirical results consistent with these implications of the model.

Bureaucrats or Politicians?

politics, delegation, bureaucracies

Why is Fiscal Policy often Procyclical?

Many countries, especially developing ones, follow procyclical fiscal policies, namely spending goes up (taxes go down) in booms and spending goes down (taxes go up) in recessions. We provide an explanation for this suboptimal fiscal policy based upon political distortions and incentives for less-than-benevolent government to appropriate rents. Voters have incentives similar to the "starving the Leviathan" classic argument, and demand more public goods or fewer taxes to prevent governments from appropriating rents when the economy is doing well. We test this argument against more traditional explanations based purely on borrowing constraints, with a reasonable amount of success.

External Debt, Capital Flight and Political Risk

This paper provides an explanation of the simultaneous occurrence of large accumulation of external debt, private capital outflow and relatively low domestic capital formation in developing countries. We consider a general equilibrium model in which two types of government with conflicting distributional goals randomly alternate in office. Uncertainty over the fiscal policies of future governments generates private capital flight and small domestic investment. This political uncertainty also provides the incentives for the current government to over accumulate external debt. The model also predicts that left wing governments are more inclined to impose restrictions on capital outflows than right wing governments. Finally, we examine how political uncertainty affects the risk premium charged by lenders and how debt repudiation may occur after a change of political regime.

Voting on the Budget Deficit

This paper analyzes a model in which different rational individuals vote over the composition and time profile of public spending. Potential disagreement between current and future majorities generates instability in the social choice function that aggregates individual preferences. In equilibrium a majority of the voters may favor a budget deficit. The size of the deficit under majority rule tends to be larger the greater is the polarization between current and potential future majorities. The paper also shows that the ex-ante efficient equilibrium of this model involves a balanced budget. A balanced budget amendment, however, is not durable under majority rule.