Power and Money Exam #2

What does Figure 1 show? Is there a relationship between settler mortality and per capita GDP?

Figure 1 plots the logarithm of GDP per capita today against the logarithm of the settler mortality rates per thousand for a sample of 75 countries.

• It shows a STRONG NEGATIVE relationship

  • Colonies where Europeans faced higher mortality rates are today substantially poorer than colonies that were healthy for Europeans

In Section “A”, what is the argument concerning the relationship between mortality rate and European settlement?

Mortality rates were a key determinant of European settlements.

• Both the British and French press informed the public of mortality rates in the colonies, and there was great awareness surrounding diseased environments

  • The eventual expansion of many of the colonies was also related to the living conditions there

• In places where the early settlers faced high mortality rates, there would be less incentive for new settlers to come

In Section “B”, describe in one paragraph the nature of “settler colonies” and describe in a paragraph the nature of the colonial experience in Latin America, Asia, and Africa. In terms of property rights, what is the basic difference between these two patterns?

"Settler colonies" involved Europeans settling in large numbers, and they modeled life after their home country.

• They had representative institutions which promoted what the settlers wanted, which was freedom and the ability to get rich by engaging in trade--private ownership of land and livestock was established very early

Latin America:

• Deep Colonialism--

  • 300 years of colonial rule

  • Population of 10-50% European descent

• Political Ideologies--

  • Limited government and democracy

    • Modeled off of the United States

• Economic Ideologies--

  • Classic Liberalism

    • Property rights

    • International trade

Africa and Asia:

• No settlement, but colonized nonetheless

  • No settlers bring property rights or education

  • Exploitation made both even worse

• East Asia--

  • Never colonized

  • "Defensive Modernization," property rights and education

What are the two steps in the logic that links European settlement to current levels of wealth?

Settler mortality leads to property rights, eventually leading to GDP

• Settler mortality leads to states implementing property rights, property rights lead to greater wealth

  • Settler states emphasized Lock and Smith ideologies with a strong emphasis on education

  • Property rights were transmitted from Britain to colonies (Classic Liberalism; invisible hand, self regulation, division of labor)

In this analysis, how do we measure “wealth,” and how do we measure “property rights”? Do you find these measures plausible?

Expropriation risk, or to gauge the attractiveness of a country's investment climate by considering the effectiveness of law enforcement, the sanctity of contracts, and the state of other influences on the security of property rights

What is “endogeneity”? Why is it a problem in general? How is it a problem for the specific argument that property rights lead to wealth?

Endogenous = if X occurs, then Y happens; if Y occurs, then X happens

• The relationship works both ways: both variables are correlated, but we don't know which causes which

Settler population causes property rights (exogenous part), which causes wealth, which leads to more property rights (endogenous part)

• By adding the variable of settler mortality, wealth cannot influence it, making it exogenous

  • Wealth cannot cause mortality

    • In the current world, we must say yes

• However, there is a relationship between mortality and property rights

In the last decade or so, has there been a movement towards more democracy, more authoritarianism, or about equally large movements in both directions?

The wave of autocratization is ongoing in 42 countries

• May be signs that the autocratization wave is slowing down, but one should be cautious with that interpretation

Democratization is taking place in 18 countries

• Almost all components of democracy are getting worse in more countries than they are getting better, compared to ten years ago

How might democracy influence property rights, both positively and negatively?

Since Democracy equalizes the right to influence the allocation of resources, distributions of consumption caused by the market and those voted on by citizens must differ since democracy offers those who are poor, oppressed or otherwise miserable as a consequence of the initial distribution of endowments an opportunity to find redress via the state

• Endowed with political power in the form of universal suffrage, those who suffer as a consequence of private property will attempt to use this power to expropriate the riches, or call for a greater equality of incomes

How might democracy influence the level of investment in a nation?

Democracy generates an explosion of demands for current consumption, which in turn, threaten profits. Hence, they reduce investment and slow economic growth.

• Poor people want to consume immediately

• When workers can organize, they drive wages up, reduce profits, and reduce investment

• When people can vote, governments distribute incomes away from investment

• Lowering investment slows down growth

What does the statistical evidence have to say about the effect of democracy on economic growth? Taking it as a whole, is it positive, negative, neither, both, or something else?

We do not know whether democracy fosters or hinders economic growth. 

• Statistical studies of growth notoriously explain little variance and are very sensitive to specification

  • Without a good economic model of growth, it is not surprising that the partial effect of politics is difficult to assess

Are rapid economic growers democratic? How about very slow economic growers?

Rapid economic growers are authoritarian, and slow economic growers are democratic

How does democracy help prosperity by: 1.) Preserving property rights, and 2.) Preventing bad rulers?

Preserving property rights?

• The Institutional Argument:

  • Democracy is about institutions

    • ex. U.S. Separation of Powers

• Redistribution is constrained

  • Checks and Balances  

• The Historical Argument:

  • Classic liberals set up democracies, so the political culture is classic liberal and the institutions are classic liberal

  • Free Market Division

Preventing bad rulers?

• Stop Predation:

  • Corruption is bad for prosperity

  • Voters will evict corrupt politicians

    • "Throw the rascals out"/Africa 

How does democracy hurt prosperity by: 1.) Threatening property rights, 2.) Undermining investment, and 3.) Empowering “special interest” groups?

Threatening property rights?

• Poor vote to take property from the rich

  • Relationship to utilitarianism

    • ex. Federalist Paper #10

Undermining investment?

• Poor have a higher propensity to consume (less likely to invest)

  • Democracy moves money from rich to poor

    • Taxation, unions, government spending

Empowering “special interest” groups?

• The Intuition (Particularistic Pressures):

  • A few benefit, many suffer

    • Alaskan "bridge to nowhere"

      • In a democracy, the small states hold a lot of power (large number of electoral votes), and certain actions are often taken to secure their votes

      • In Alaska, for example, this small town with 50 people wanted a bridge built, and after petitioning in Congress a bill granting $500,000 in funding for the bridge was approved

    • In modern democracy, many groups with special interests have laws protecting them

• Why it happens:

  • Government needs critical votes

  • Politicians need campaign contributions

In what sense were the Conservative and Liberal parties “classic liberal” parties before 1970?

The Liberal Party and the Conservative Party were considered “classical liberal” parties before 1970 due to their support for free market economies, open trade policies, and very small amounts of government intervention. When the two parties eventually merged in 1967 to form the National Party, they emphasized classic liberal values with support for a capitalist system, laissez-faire economics, and continued foreign investment in Chile. This party strongly opposed any structural reform in Chile and was anti-Marxist. By the Election of 1970, presidential candidate Jorge Alessandri represented the continuation of the party’s beliefs by emphasizing a free market model of development

In what sense were the Christian Democrats “modern liberal” in 1970?

The Christian Democrats were considered “modern liberal” in 1970 since they developed the concept of communitarianism as an alternative to the theories of capitalism, on one hand, and Marxism on the other. They did not believe the capitalist system should have been dismantled, as they deemed economic growth and greater efficiency as necessary, but some argued that the capitalist system itself was incapable of creating a just society. President Eduardo Frei (1964-1970), the head of the Christian Democratic party, still called for structural reform, especially land reform through the agrarian reform program, but his approach maintained the capitalist system

In what sense were the Communists and Socialists “radical” in 1970?

The Communist and Socialist parties were considered “radical” in 1970 because they were a “class-based coalition” that sought true revolutionary measures compared to centrist parties who were viewed as mere reformists. These parties advocated for an abandonment of capitalism in favor of a transition to socialism, attempting to aid the poor and change the balance of power in society away from the economic elite of Chile. In the Election of 1970, Salvador Allende represented the Left, hoping to transition to socialism by emphasizing that the state, not the market, should determine property rights. He had also hoped to implement numerous social welfare measures through his Popular Unity program, such as expanded health services, expanded education, and agrarian land reform

In what sense was Pinochet “classic liberal” after 1973?

Pinochet implemented free market policies, privatized social security, health care, and education

• Boosted international trade and increased capital mobility

In what sense were the Socialists and Christian Democrats “modern liberal” around 1990-2010?

They respected market forces while also addressing the issues of inequality that exist in capitalism, so they created a social welfare state as a compromise

• They accepted capitalism and didn’t want to dismantle the system like radicals did

  • Radicals believe in expropriating property, while modern liberals believe in taxing property to address inequality

• Michelle Bachelet, 2005 Election

What was the trend in the % of the population who could vote?

Over time, as Chile became more democratic, there was an increase in the percentage of the population who could vote

What was the trend in how many voted Left?

Over time, more people in Chile began to vote Left as power shifted away from the Right (Center remains relatively stagnant)

In what sense do these trends support the argument that democracy threatens property rights?

As voting rights expanded to poorer voters, more people began to vote Left, meaning that the poor vote to take property from the rich (threatening property rights)

To which of our 3 perspectives do the Liberals, Conservatives, Christian Democrats, Socialists and Communists belong?

Liberals and Conservatives (1900-1964):

• Both classical liberals

  • PN, PDR

Eduardo Frei (1964-1970):

• Frei as a modern liberal?

  • Brining justice and inequality to the debate

  • Rising expectations, mediocre policy change

• PIR, PDC (Christian Democrats)

Salvador Allende (1970-1973):

• Allende as a radical

  • PR, MAPU, API, PSD, IC, PS, PC

    • Socialists, Communists

What 3 measures did Allende adopt for the economy with respect to property rights?

Copper:

• Importance:

  • 85% of Chile's export earnings

    • Chilean government claimed ownership

• Extent of Support:

  • "Virtual national consensus"

  • "The congress unanimously approved the bill"

• Outcomes:

  • Nationalize Anaconda and Kennecott (USA)

  • Expropriate: Unpaid (?) nationalization

Land Reform:

• Extent of Support:

  • Pre-existing Agrarian Reform Law

  • Legally bypasses Congress, but with support

• Outcomes:

  • Frei: -15% of land = 3.5 million hectares

  • Allende: -45% of land = 9+ million hectares

  • Paid (?) nationalization

Domestic Industry:

• The Most Contentious Issue:

  • Government nationalization of domestic business

  • No clear congressional majority

  • Presidential decree-laws

  • Was this constitutional?

• APS = Area of Social Property

  • Allende did nationalize firms

How was economic performance under Allende?

Great Economic Performance Initially (1970-1971):

• Wages increased by 20%

• 8% growth rate in the economy

• Inflation decreased

• National unemployment decreased

Bad Economic Performance (1973):

• Wages fell by 38%

• Economic growth rate decreased

• Inflation skyrocketed

• National unemployment rate increased

What are 5 reasons that democracy collapsed? (Write 2-3 sentences explaining each of these reasons).

Resistance from the Propertied:

• Landowners:

  • Lost 60% of their land

• Industrialists:

  • From 43 to 164 government firms

  • Focus on the largest firms

• USA:

  • Copper expropriated

Economic Difficulties:

• Some Specific Policies:

  • Rapidly rising wages led to inflation

  • Nationalization led to a fall in production

  • Inflation and production decreased which led to shortages

• "Although policy stimulated the economy in the short term, it overheated later, causing high inflation, a scarcity of goods, and a thriving black market"

U.S. Pressure:

• Economic Sanctions:

  • Nixon: "make the Chilean economy scream"

    • Cut off all loans, credits, and international aid

• Funding the Opposition: $8 million

  • Newspapers: El Mecurio

  • Mass Demonstrations: Truckers

• Provoking a Military Coup?

  • Arms for kidnappers of Schneider

    • But no clear evidence of final coup plotting

  • Guatemala and Iran

    • Two democracies the CIA overthrew through coups

      • Iran for oil, Guatemala for the United Fruit Company

    • Attempt to stop the authoritarian communist movement

Constitutional Struggle:

• U.S. Style Political System:

  • Division-of-Powers; Divided Government

  • President = Radical

  • Congress = ?

    • Radical: Communists, Socialists

    • Modern Liberals: Christian Democrats

    • Classic Liberals

• Swing Players: Christian Democrats

  • Support capitalism

  • Electoral incentives

  • Assassination of Zujovic

• Constitutional Crisis:

  • Presidential use of decree-laws

    • "Several long-forgotten decree laws to take effective control of important industries…to maintain industrial production [in light of] owner sabotage…or…protracted labor dispute"

  • Constitutional Crisis:

    • Congress limits decree-laws; Allende vetoes

      • "1970 constitutional reform package…wording was such that there was no clear statement of the size of the congressional vote necessary to override a presidential veto of a constitutional amendment"

    • 2/3 or 1/2 of the congressional vote?

Collapsing Social Order:

• Right: Schneider assassination

• Right/Center: truck and shop strike

• Left: Workers 'self-defense' organizations

• Right/Center: marches, rallies, truckers

• Right: Fatherland and Liberty; bombing

• Left: rallies, poder popular

Who was Augusto Pinochet?

Duration of Rule in Chile:

• 1973-1989 (17 years)

Regime Type:

• Authoritarian government

• A single military ruler

Two Political Goals:

• Repressing the left

• Classic liberalism

In a few sentences, describe Pinochet’s two general projects for Chile. 

Repressing the Left:

• Political Vision:

  • Anti-communism, classic liberalism

  • Believed in the 'dangers of democracy'

• Political Tactics:

  • Coercion--exile, death, torture

  • Dissolving all political parties

  • Outlaw labor unions and strikes

Classic Liberalism:

• The Chicago Boys:

  • The Technocrat Phenomenon

  • The University of Chicago

    • One of the most conservative institutions in the United States at the time, emphasizing the importance of Adam Smith and free markets

• Economic Policies:

  • Privatization

  • International Trade

  • Capital Mobility

    • If you wanted to borrow money, you were allowed to (rational consumer in the free market)

• Welfare Policies:

  • Social Security

    • Privatized their social security system (eliminated the government sector)

  • Health Care

    • Devastated by privatization--the more you pay, the more healthcare you receive

  • Education

    • Replaced teachers/professors with military officials (eliminate the spread of leftist ideas)

What has economic growth been like in Chile in the decades since democratization in 1989?

Since democratization in 1989, Chile has experienced great economic success under the free market model implemented under the military government, with poverty levels falling following the implementation of the social welfare state

What happened to social welfare spending in these decades?

Social spending tripled between 1990 and 1996, accounting for 70% of a much larger budget by 1997

• Increased greatly over time (increased spending on housing, social security, health, and education)

What is the difference between radical socialism and modern liberal socialism?

Radical Socialism:

• Emphasis on the state, not the market, determining property rights

  • Believed that capitalism was "evil"

Modern Liberal Socialism:

• Still respected the market forces in terms of economic success

  • Emphasis on a social welfare state as compromise

Are modern Chilean socialists radicals? Explain.

No, modern Chilean socialists are not radicals, instead they respect modern liberal socialism

Explain in detail the “anatomy of personal rule.” What does it have to do with legitimacy? With material incentives (e.g. spoils)? With coercion?

The "anatomy of personal rule" is when power is concentrated within one person (usually a president)

• Leaders in weakly integrated, poverty-stricken society want legitimacy

  • This style of government leads to lower legitimacy and decreases material incentives while increasing coercion

• Rulers want bureaucrats to implement laws and policies, and they want citizens to act in accordance to these decisions

  • Willing compliance is a weak state is difficult to accomplish--hence coerced compliance

• In Africa, legitimacy was a serious problem due to individuals becoming preoccupied with private and sectional advantage

What did foreign actors have to do with personal rule?

Often foreign actors played a major role in personal rule, helping support the individuals in power

• For example, in Zaire, the US supported Mobutu and his regime

  • CIA helped keep him in power with security, intelligence reports of possible opposition or uprising

• Africa was treated as a massive proxy war (US vs. USSR)

  • Foreign actors helped authoritarians to get the countries on their side

What does the metaphor of the four horsemen of the apocalypse have to do with Africa?

• War:

  • Coups--

    • Military/other elites overthrow the sitting executive

      • Numerous coups in African countries

        • Political instability, economic instability

    • Failing economy is the number one reason behind coups

  • Congo/Zaire--

    • 5.4 million dead, most deadly war since WWII

      • Congo, Angola, Chad, Zimbabwe, Libya, Sudan

• Famine:

  • Most severe kind of hunger crisis

    • Extreme shortage of food and several children and adult within a certain area are dying of hunger on a daily basis

  • A majority of famine is centralized in sub-Saharan Africa

• Pestilence:

  • Malaria as a chronic killer in Africa

    • 800,000 people used to die per year in Africa, but it has decreased over time to around 600,000

  • AIDS as a massive recent problem

    • Many HIV/AIDS deaths, reaching its peak in the nation between 2000 and 2005, decreasing over time

• Death:

  • Life expectancy is much shorter, with poorer areas having an average lifespan of 60 years

Explain in detail the “anatomy of personal rule.”

Personal Rule is a form of patrimonialism that arises when rulers have no constitutional, charismatic-revolutionary, or traditional legitimacy

• Does not utilize legitimacy

• Does utilize coercion and material incentives

  • Chief/strongman emerges and rules on the basis of material incentives and personal control of his administration and armed force

    • Fear and personal loyalties

What does personal rule have to do with property rights in Africa? Explain.

With personal rule, those in power dictate the market, pursuing their own private interests in the public realm

• Those in power abuse and limit property rights when they don't respect the distinction between the public and private realms

Describe South Korea’s economic development since around 1960.

South Korea had the third-fastest economic growth in the world between 1960 and 2000

• Annual per capita growth during this period averaged 5.9%, allowing incomes to double approximately every decade

  • By 2000, Koreans were ten times richer than they were in 1960

Did Japan have any effect on Korea? Good or bad for economic growth? How?

Yes, Japan seized control of Korea in 1905 and maintained control until 1945, modernizing rapidly and heavily investing in Korea to increase economic production

• Japan preferred to modernize its colonies through extensive state action

  • Increased Korea’s capacity and autonomy, while also enhancing property rights, educational enrollment, promoting better health conditions, and facilitating entrepreneurial experience

Did the U.S. have any effect on Korea? Good or bad for economic growth? How?

Yes, the United states attempted to construct South Korea as a part of its geopolitical strategy, shaping the structure of the independent government, the postwar educational system, and the country's internal and external relationships after WWII

• The United States strengthened the Korean state and invested in Korean society

  • The U.S. also invested very heavily in the Korean nation, receiving the third-highest level of U.S. aid in the world over the post-WWII period

What is “comparative advantage” in international trade theory?

In essence, if a country is comparatively poor at producing an item, then they should stop producing it and emphasize the production of what they are comparatively good at

• Seek the resources they are comparatively poor at producing through international trade

In the chapter on the Welfare State, in the packet, what kinds of specific policy programs did the author have in mind when he discusses the welfare state?

Industrial accident insurance, health insurance, pensions, unemployment compensation, family allowances, male suffrage, and universal suffrage

What does democracy have to do with welfare states?

Where democracy was established, welfare states followed

• Almost every country with a democracy introduced social insurance in the categories of  Industrial Accidents, Health, Pensions, Unemployment, and Family Allowances

  • Many democratic countries also expanded citizenship through universal male suffrage and universal adult suffrage

In what sense does it make sense to talk about a modern crisis of the welfare state?

• Rising Budget Deficits and National Debt:

  • Crisis lies in the fact that there is an issue funding the welfare state due to severe national debt

  Aging of the Population:

  • As more people retire, they rely on programs such as Social Security and Medicare, which the government pays for

    • If the government has no money, the debt is only going to increase

  Political Rhetoric vs. Reality:

  • Despite many talks about cutting government programs, usually nothing ever happens

    • Due to the debt growing, there is always tension in politics

  • Unfavorable solutions include raising taxes or cutting programs that are extremely popular (e.g. Social Security, Medicare, Medicaid)

In what sense does it NOT make sense to talk about a modern crisis of the welfare state?

In terms of total spending, the economy may be experiencing slow economic growth, but this is not necessarily a cause for crisis

Based on the reading in Africa, which is NOT a source of power?

Legitimacy

Which of the following descriptions best explains why African countries remain very poor?**

When politicians don’t respect the distinction between the public and private realms, they in turn abuse and limit property rights

Which of these statements is most accurate?**

African borders were created by colonialism, forcing different ethnic groups into a nation

Which of these statements about Mobutu’s rule in Africa is most accurate?

Mobutu implemented predatory policies to plunder his country

What role did the U.S. play in African authoritarianism?

Mobutu ruled through coercion with the backing of the United States government due to his opposition to communism

Which of these is NOT evidence that market capitalism is the route to success?**

Japan adopted free market policies, including free international trade, around 1880, and then grew much more rapidly after then

What best describes the economic effects of colonialism on South Korea?**

Colonialism led to economic investments by the occupying countries

Which of these statements is most accurate?

Both statements are true

• Korea succeeded economically by utilizing classic liberal principles of pro-capitalism and free markets, such as free international trade

• Korea succeeded economically by utilizing modern liberal principles of market failure, in which the government took responsibility for producing the 'public good' of industrialization

When was China democratic?**

None of these periods

The U.S. is a mix of which two kinds of welfare states?**

Safety Net and Social Insurance