Figini, Paolo

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Economia dello sviluppo – Paolo FiginiSviluppo e istituzioniIntroductionThree topics:● Democracy and growth;● Electoral rules and economic policy;● The political economy of reforms.1. Democracy and growthThe evidence  that  democratization  drives  to  economic  growth is quite weak;● Democracy is too blunt a concept;● The  variables  at  interplay  call  for  a  much  more  complex analysis.Zoom on three particular aspects:● Democratization, liberalization and growth;● Type of democracy and growth;● Ex-ante and ex-post reforms and growth.1.a Democracy, liberalization and growthData  focus  on  sudden  change  regimes,  120  changes  in  150 countries in the 1960 – 2000 period:Many  methodological  issues  at  play,  which  require  a  careful selection of econometric techniques and testsGiavazzi and Tabellini (JME, 2005) provide an all-round analysis of the relationship:● Becoming a democracy accelerates growth by ¾ of a point;● Growth slows around the transition period;● Both democratization and liberalization have a significant and positive  effect  on  growth,  being  economic  reform  the strongest;● Also economic reform (without democracy) produces a positive effect;● Democracy  after  liberalization  has  a  positive  and  significant effect;● Liberalization after democracy has a NEGATIVE and significant effect.A  kind  of  explanation:  young  democracies  in  closed  economic environments are more likely bogged down in redistributive conflict and populist policies, while young democracies in open economies are forced to pay more attention to economic efficiency.1.b Different democratic systems and economic growthAs we will see, the type of political institutions have an effect on the size and the type of economic policies. And what about the effect on growth? (Persson, NBER 2005).● A  parliamentary  democracy  grows  1.5%  less  than  a presidential  democracy  and  0.5%  less  than  a  previous autocracy;● The electoral system (plurality vs. proportional) does not have any significant effect;A possible explanation lies in induced policy changes: parliamentary and  proportional  regimes  lead  to  a  bigger  size  of  government spending,  which,  according  to  the  authors,  might  lead  to  lower growth.● A new plurality and presidential democracy cuts governments consumption by 2% of GDP, while a parliamentary democracy raises by almost 3% of GDP.● However,  parliamentary  and  proportional  regimes  raise  the probability of a subsequent trade liberalization1.c Ex-ante and ex-post effects of economic reformsIf  democracy  has  positive  growth  effects,  it  raises  returns  to investment.  Since  investment  reacts  to  expectations,  expected regime changes might have a positive effect. (Persson and Tabellini, 2005).Growth would decelerate before an imminent and anticipated coup;PT  (2005)  introduce  the  concept  of  democratic  capital,  which shapes the willingness of its citizens to stand up for democracy;● It accumulates under democracy, depreciates under autocracy;● They  find  that  under  democracy,  the  probability  of  regime change hurts growth;● However,  under  autocracy,  the  probability  of  regime change does not have any significant effect on growth.A  kind  of  conclusion:  Stable  and  persistent  democracy  has  a stronger effect on development than democracy per se.2. Voting rules and economic poliyPolitical institutions sistematically shape economic policies;Political  institutions  are  formal  rules  embodied  in  constitutions, laws, and also norms and informal rules.Four important issues: i) plurality vs. proportional electoral system; ii)  parliamentary  vs.  presidential  government;  iii)  term limits  to office-holders; iv) direct vs. representative democracy.Two main “economic problems” of political institutions:● Representation  (problem  of  the  correspondence  between voters and elected). Models of spatial competition (Hotelling Downs and others);● Accountability (problem of the elected's responsibility). Models of agency.2.a Proportional vs. Plurality systemsKey trade-off in electoral systems: plurality favours accountability while proportional favours representation;Does  the  type  of  electoral  rule  have  an  effect  on  government spending?Three aspects of electoral rules:● Electorate formulas translate votes into seats: under plurality rule, only the winner of the highest vote share is elected in a given district; Possible adjustment seats at the national level. Under proportional rule, seats are assigned according to the share of votes.● District magnitudes reflect the number of legislators acquiring a seat in a typical voting district.● Ballot structures determine how voters cast their ballot. They can  choose  among  individual  candidates;  they  can  choose among  parties  with  closed  lists;  they  can  choose  among parties and candidates within the party.● However, other issues not considered here are of importance: voting  procedure  (single  /  double  round)  and  voting  rule (simple majority, qualified majority).Yes (PT, EER99 and many others): in a plurality system, it becomes more  attractive  to  target  spending  to  small  and  geographically concentrated groups of  voters  (particularly  when the race is  too close  to  call),  leading  to  a  different  distribution  of  government spending.Yes n. 2 (PRT, 05). Post election bargaining drives to a situation in which coalition governments (the likely outcome of the proportional rule)  spend  more  than  single-party  governments  (the  likely outcome of a plurality rule) for about 5% of the GDP – more veto power).Yes n. 3 (Myerson, GEB93). Corruption is better deterred when the probability of re-election responds to performance. This is achieved when we have personal rather than party ballots and large rather than small districts (leading up to 20% change in corruption – twice the effect of being a Latin American country). However, the honesty vs. ideology story might play a role.Data  confirms  all  three  theories;  however  the  type  of  electoral system mainly depends on one country's characteristics (it is, at least partially, endogenous).2.b Presidential vs. parliamentary systemsIn  parliamentary  systems,  governments  are  subject  to  the confidence of the legislature, whereas in presidential systems, the government is directly elected by the citizens.Separating powers (as in the presidential system) creates a conflict between  politicians  that  enables  voters  to  better  discipline  their power to extract rents when in powers. Overall we should expect presidential regimes to be associated with lower spending, mainly distributed to targeted groups.Data: Yes, cross sectional data find that presidential regimes have smaller government spendings (5% of the GDP).Also  the  electoral  cycle  differs:  the  expansion  of  welfare-state spending  in  election  and  post-election  years  is  significant  in parliamentary systems.2.c Term limit vs. no-term limitPolitical  control  is  achieved  in  part  by  re-election  chances responding  to  performance  while  in  office:  poorly  performing incumbents are removed from office by the voters.● On one side,  a  shorter  term limit  reduces  the  incentive  to please voters and hence the candidate may follow own private agendas;● On the other side, a shorter term may allow the politician to impose short-run costs in favour of long run benefits (which are in the voters interests).The term limit implies a change in the politicians behaviour because at  the  and  of  their  period  in  office,  they  are  not  (politically) responsible for their actions).● US  as  a  natural  experiment:  statistically,  second-term governors  are  associated  with  higher  spending  (and  taxes) than first-term governors.2.d Direct vs. representative democracyCitizens'  initiatives  and  referenda  should  increase  accountability, thus reducing rent-seeking.● Data with regard to US and CH (both strongly tax-adverse): yes, the size of government spending is lower when initiatives are allowed.Citizens'  initiatives  and  referenda  change  the  representation  of policy preferences:● Data:  huge  evidence  supporting  the  lack  of  congruence between policy and voter preferences on a variety of issues (effect of issue unbundling – Besley and Coate, 2000 – and / or instrument of signalling).3. The economic policy of reformsWhy do certain  countries  implement  economic  reforms promptly while others delay, at a considerable economic cost?● Two types of reforms: i) Stabilization programs; ii) Structural reforms.● The war of attrition model (Alesina and Drazen, AER91) is the main explanation:●  Two parties compete over a costly but necessary reform;● The status quo is  associated with costs,  increasing with time;● The implementation of the reform is associated with costs which are distributed unevenly (the party announcing the reform will loose the next elections);● The reform is delayed because none of the party is willing to assume the paternity of the reform;● A war of attrition starts: the passage of time will reveal which  of  the  two  parties  is  weaker  (the  one  with  the highest  cost  of  waiting):  this  party  will  announce  the reform;Delaying a stabilization is Pareto inferior to immediate stabilization, but it is individually rational for each of the two groups to wait, because of the potential benefits of being the winner rather than the looser.Some conclusions:● It is easier to stabilise more decisively in times of crisis than in times of moderate economic problems;● Stabilizations are more likely to occur when a crisis falls under a  strong  government  (presidential  systems,  unified governments, few veto points, large majorities, just after the elections,...)● Left-wing  governments  are  more  likely  to  implement  fiscal stabilizations  (maybe  because  they  face  less  resistance  to reform than right wing ones);● Governments are able to sharply cut the deficit when the latter has reached extreme high values;● External  inducements  (IMF  conditionalities)  have  a  very moderate  effect  (however  there are many reverse causality problems).Riferimenti bibliograficiBesley,  T.,  Persson,  T.,  2006.  Economic  Approaches  to  Political Institutions, Mimeo;Persson,  T.,  Tabellini,  G.,  2006.  Electoral  Systems and Economic Policy, Mimeo;Persson, T., Tabellini, G., 2006.  Democracy and Development. The Devil in the Details, Mimeo.Altre lettureRiferimenti bibliografici nei testi sopra citati. In particolare, quelli richiamati in questa dispensa sono:Alesina,  A.  and  A.  Drazen,  1991.  Why  are  Stabilizations Delayed?, American Economic Review, 81:1170-1188.Besley and Case, A. 2000.  Does Political Accountability Affect Economic Policy Choices? Evidence from Gubernatorial Term Limits, Quarterly Journal of Economics, 110:769-798.Giavazzi  F.,  and  Tabellini,  G.,  2005.  Economic  and  Political Liberalizations. Journal of Monetary Economics, 52:1297-1330.Myerson,  R.,  1993.  Effectiveness  of  Electoral  Systems  for Reducing  Government  Corruption:  A  Game  Theoretic  Analysis, Games and Economic Behavior, 5:118-132.Persson, T.,  2005.  Forms of Democracy, Policy and Economic Development. NBER Working Paper, No. 11171.Persson,  T.,  and  Tabellini,  G.,  1999.  The  Size  and  Scope  of Government:  Comparative  Politics  with  Rational  Politicians, European Economic Review, 43:699-735.Persson, T., G. Roland., and G. Tabellini, 2003. How do Electoral Rules Shape Party Structures, Government Coalitions and Economic Policies?, mimeo, Bocconi University.

Lezione 24

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Lezione 24

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