Note
Studied by 1 personpolitical institutions and economic performance
inclusive institution (Acemoglu, Johnson & Robinson)
economic institution → economic performance & resource distribution → political power → political institution (full circle)
economic institution
protection of private property right
presence and functioning of market
why are they important?
affect individual incentives to invest in physical and human capital
but what are the determinants of economic institution
the ‘inclusive institution’ hypothesis (Acemoglu, Johnson & Robinson)
on one hand, private property rights require state to prevent theft and enforce contract
however, because states’ monopoly on force, governments have difficulty committing to enforceable property rights that constrain their ability to expropriate wealth
this lack of real property rights makes economic contracts incredible and undermines investment in the economy
property rights however require inclusive institutions that help solve the political commitment problem
institutions are difficult to change as they are locked in vicious/virtuous cycle
however, they can also be changed under rare and specific circumstances
emerging bourgeoise during industrial revolution challenged the power of landowning aristocracy
methodological challenge to test this empirically
modernisation theory (economic development → democracy)
endogeneity (chicken and egg problem)
what if we can find a proxy for political institution that is unrelated to contemporary economic performance?
trace the origin of political/economic institution
colonisation by European powers
2 types of institutions:
where there is a large native population + high mortality for European settler (e.g. sub-Saharan Africa, Central America), colonial power install extractive institution to expolit the natives
where there is low native population + low settler mortality (e.g. N.America, Australia), colonial power install inclusive institution to attract European settlers
persistence of institution: political & economic institution would survive decolonisation
the only reason mortality rate from centuries ago can affect contemporary economic performance is through their effect on political institution
these results demonstrate the role of political institution in determining economic outcome
having inclusive political and economic institution is the key in promoting economic performance and growth
the political commitment problem
governments might prefer to adopt efficient property rights institutions, but because of their monopoly on force they get locked into a sub-optimal equilibrium with incredible institutions and little investments (the prisoner dilemma)
how to solve the political commitment problem?
the political commitment problem implies that where there is an unconstrained executive, only the powerful will have secure property rights
the only way to solve this problem is to give up one’s monopoly on force, but this often creates a new commitment problem since the newly enfranchised can’t commit not to overthrow the government
the inclusive institutions hypothesis proposes that to solve this problem we need inclusive institutions that devolve power to voters (or other powerful groups)
endogeneity (chicken and egg problem)
economic performance → political institution (full circle)
even though there is a strong correlation between economic development and democracy, this doesn’t tell us the direction of causality
it is:
economic development → democracy?
democracy → economic development?
democract ↔ economic development?
correlation does not imply causation
how do we empirically test the effect of political institutions on economic performance?
proxy
if we can find a proxy that only directly affect political institution, but with no direct relationship with economic performance
should we find a correlation between this proxy and economic performance, then the causality must flow through political institution → political institution directly cause change in economic performance
selectorate theory (Bueno De Mesquita et al)
premise:
economic performance determined by policies implemented by political leader
all leader wants to stay in office (office seeking)
political institution determine whom among the society the leader need to please in order to stay in power
selectorate theory: key concepts
2 types of supporting groups of leaders:
selectorate (S): the people who have a say in selecting a leader
democracy → adults over 18
monarch → members of the royal family
military Junta → high ranking army officials
civilian dictatorship → members of the ruling party
winning coalition (W): the sub-set of the selectorate whose support is necessary for the leader to remain in power
democracy → the proportion of voters needed to elect a new government
military junta / monarchy → a particular group of generals, aristocrat
civilian dictatorship → a faction of a ruling party (politburo, cabinet, party elders, etc)
size of winning coalition and public policy
to stay in power, political leader could choose between distributing public goods (e.g. hospitals, schools, roads etc) or private goods (e.g. corruption) to stay in power
choice between provision of public or private goods depends on the size of the W & S:
all leaders prefer to “buy off” the winning coalition with private goods (because this is cheaper), but this is not always possible
as the winning coalition increases in size, the share of private goods might become so small that members of the winning coalition would get more value from the dictator providing public goods
the larger the winning coalition is relative to the selectorate, the more expensive it is to buy off. this can decrease opportunities for corruption and patronage
size of W/S ratio affect W loyalty
the risk of “defection” is determined by the W/S ratio (the size of the Winning Coalition relative to the size of the Selectorate)
it denote the probability that a member of the selectorate will be in a winning coalition (or, the probability that if a member of W “defects”, the chance they could be in an alternative winning coalition)
this has implications for the “loyalty” of a dictator’s supporters:
small W/S (e.g. personalistic, dominant party) = strong loyalty
larger W/S (e.g. democracy, monarchy, military) = weak loyalty
strong loyalty norm → greater opportunity for leader to enrich themselves, as his/her supporters have nowhere else to go
small W + large W/S ratio
small W means the leader would have incentives to prioritise provision of private vs public goods
however, small W/S ration means that W is not entirely loyal to the leader → they need to be tempted to stay on the side of the leader
leader would have to promised better performance, not for the benefit of the population, but for the increase amount of private good it could pay for
if the economy falter, W could lend their support to a competor
explain why some autocracy (Gulf states, China) can maintain respectable performance
the two Leopolds
Leopold II, King of Belgium and sovereign of Congo Free State
Belgium: constitutional monarchy
large S & W, Leopold has to provide public goods, ensure good economic performance that benefit the population to stay in power
Congo: personal estate of Leopold
small S & W, Leopold was a cruel dictator that employ slavery and violence to extract wealth for his own gain
who is the real Leopold?
action of leaders/policy depends on the incentives provided by political institution
selectorate theory summary
economic performance is determined by policy implemented by political leader (Provision of public v private goods)
this is in turn affected by the incentives office seeking leaders faced under different political institution
selectorate theory not only explain why democracies have better performance, but also the difference among autocracies
large W (democracy) → prioritise provision of public over private goods
small W + large W/S (monarch/military junta) → leader need to ensure performance to maintain the flow of private goods
small W + small W/S (closed autocracy) → leader could satisfy the loyal W with even meagre private goods
incomplete accountability theory
democracy shifts spending towards the poor; however in new democracies poor voters have limited capacity to monitor incumbents
low voter information → when voters lack information, politicians will allocate goods that are visible and easy to claim credit for. Politicians will under-provision less attributable goods (Harding and Stasavage 2013)
low credibility → because parties are weak, voters may disbelieve campaign promises. Politicians will respond by over-investing in personal exchanges and under-invest in public goods
hypothesis → democracy will increase spending on goods that are clearly attributable to political action. will decrease spending on less attributable goods
arguments against democracy
what democracy does (and doesn’t do) for basic service - Harding and Stasavage (2014)
core claim → democracy forced elected leaders to substitute visible, attributable education investments that helped the poor (school fees) for more less visible and sustainable investments (school inputs, teachers)
data → survey data on education attainment from 29 African countries and 523,000 citizens since 1980
conclusion → whilst democracy incentivise leader in providing public goods, limitation from incomplete accountability may lead those effort astray
other arguments against democracy
democracy is redistributive
policy dictated by the median voter, usually with below average income
undermine private property right, discourage investment
state autonomy
autocracy can resist popular demand for immediate consumption
prioritise resources for long term growth
democracy has short time horizon
politicians in democracy only care about winning the next election
dictators can adopt more long-term perspective in policy making
these issues are not exclusive to new democracies
prioritise immediate consumption over long term investment
sacrifice long-term investment in infrastructure to pay for immediate subsides
short time horizon of government under democracy
the government want to attract votes in the immanent general election
prioritise public goods that is highly visible and attributable
level of democracy and material well-being
democracy ensure decent level of material well-being
some autocracy have comparable performance with democracy
however, there exist huge variation among autocracies - some have really dire performance
summary
Acemoglu, Johnson and Robinson: inclusive institution, such as democracy is the key in enhancing economic performance
selectorate theory: size of wimming coalition and selectorate determine the incentives of political leader in provision of public v private goods
potential limitation to democracy: limited accountability theory
in general, democracy seems to ensure some level of good performance. some autocracies do perform well, but there exist a lot of variations among autocracies