Government

1. Government MA EITEI May 29th, 2009

2. Economic reasons for govt existence • Market failure • Missing markets • Imperfect info • Public goods, etc. • Poverty and income distribution • Law and property rights enforcement

3. Constraints on govt – govt failures • Degree of benevolence (dictatorship, rent seeking, etc.) • Information/picking winning activities – replacement of market in production • Incentive compatibility – regulation vs business operation • Competency – bureaucracy, MNG of SOE • Autonomy/resistance to manipulation • Govt heterogeneity and coordination issues

4. Past experience of govt success • Acting in accordance with mkt opportunities • Autonomy • Embeddedness • Policy coordination • Communication with other agents • Not the size of involvement, but rather the nature matters

5. Neoclassical political economics • Policies (partly) respond to vested interests in society • Applies individual optimization to lobbies and interest groups • Competitive self-interested behavior in politics over redistribution

6. Neoclassical political economics – 3 strands • Collective choice analysis (Olson) • Public choice school (Buchanan) • International trade and development school (Bhagwati, Krueger etc.)

7. Ad collective choice • Organizing for common interest (provision of collective goods) suffers from free rider problem • Hence govts would not exist unless for other reason (coertion/force monopoly and collection of taxes) • Smaller interest groups – lobbies, castes, social classes - viable due to easier bargaining • Focus on redistribution of existing output rather than on expansion (public good argument)

8. Ad public choice - issues • provides rationale for predatory states, yet certainly not monocausal state theory • strict focus on exchange relationships • social relationships/networks omitted

9. Economic historians - North • separate from neoclassics, less-extreme approach to state (‘neutral’ state) • state a discriminating monopolist setting property rights and providing justice and protection • increasing returns to scale and indivisibilities • max revenues s.t. the recipients do not ensure justice and protection through different means • design of property rights that lower TCs and thus raise output and state revenues – i.e. a positive role for state

10. Economic historians – North cntd • ideology important (similarly to Marx) to override Olson’s free-rider problem • individual incentives to free-ride reduced if the institutions are considered legitimate • obedience of institutions despite being against narrow individual interest

11. Bureaucracy market surrounded by other social networks/structures – complementarity Weber: modern bureacratic state in fact necessary to allow for functioning (capitalist) market use of office for private interests a feature of earlier, primitive societies

12. Weber’s state and bureaucracy cntd mkt needs the state due to a different logic of its incumbents’ operation logic different from the neoutilitarian exchange relationships -> state forms a coherent entity – bureaucracy fulfilment of its goals the best means to max individual self-interest

13. Key factors for functioning bureaucracy bureaucracy of developmental states – meritocratic recruitment and internal promotion (esprit de corps) autonomy from outside pressures (not absolutist power though) combined with embeddedness (for info and implementation) non-bureaucratic elements: important role for internal (coherence) and external (responsiveness) networks – e.g. persisting ties from school

14. Potential problems the combination of autonomy AND embeddedness needed similar policies in Latin American countries as in SE Asia, yet lack of autonomy the degree of embeddedness varied - South Korea vs Taiwan vs Brazil in the former, however, gradual exposure to market, removal of financial support, export quotas dependent on quality and price

15. Departure from ‘ideal’ developmental states right conditions for embeddedness might not always be present (Brazil) power of landed oligarchy presence of TNCs and defensive nationalism pockets of efficiency need strong political support uncoordinated reform by addition more complex bureaucratic structure

16. Departure from the ‘ideal’ cntd individualization instead of institualization of ties limited capacity supply – selectivity needed ethnic, class, and religious fragmentation (India)

17. La Porta et al. (1999) – The Quality of Government What factors determine a good government?

18. Dimensions of govt quality degree of interventionism index of property rights protection index of quality of business regulation top marginal tax rate efficiency survey scores on corruption bureaucratic delays tax compliance

19. Dimensions of govt quality • quality of provided public services • infant mortality, school attainment, illiteracy • index of infrastructure quality • expenditures on transfers or govt consumption • govt consumption, transfers and subsidies • public sector employment • size of state enterprize sector • democracy and political rights (indices of the same)

20. La Porta et al. (1999) cntd economics: income politics: ethnic heterogeneity in society legal system culture: religion as a proxy for work ethic, trust, tolerance mutual overlap acknowledged yet not treated here

21. Ad Economics Endogeneity of income Overlap with both: politics – fattening the goose culture - beliefs mitigate free-riding

22. Ad Politics ethnic heterogeneity: underprovision of public goods Common vs Civil vs Socialist Law Common – protection of individuals against the State Civil – (constrained) instrument of the State power, propones the State perspective Socialist – designed to maintain power and extract resources

23. Ad Culture Hierarchical religions (Catholicism, Islam) larger enmeshment with State power (political touch) –> mutual competition for public goods provision more interventionist – like to tell people what to do Protestantism

24. La Porta et al. (1999) – Main findings Income matters strongly What else matters negatively: ethnolinguistic heterogeneity Socialist and French Civil Law shares of Catholic and Muslim population yet insignificant once Law system controlled for

25. Rauch and Evans (2000) • relates bureaucratic structure to performance of officials • use measures of: • meritocratic recruitment – entry exams, university degree • career prospects – • internal promotion • hiring and firing procedures • salaries

26. Rauch and Evans (2000) cntd • survey in 35 countries • at least 3 experts per country • mostly quantitative responses • control for level of economic development, education (avg yrs of schooling for agents over 25), and ethnic diversity • measures of bureaucratic performance: • ICRG • Business and Environmental Risk Intelligence (BERI) • Business International (BI)

27. Measures of bureaucratic performance • high govt officials are likely to demand special payments • autonomy from political pressure • speed and efficiency of civil service • the degree to which govt represents obstacle to business • the degree to which business transactions involve corruption or questionable payments

28. Results • meritocratic recruitment matters most • internal promotion and career stability matter less • significant only when meritocratic recr. omitted • ethnic diversity does not matter

29. Missing enforcement and informal substitutes • even if formal policies are lacking, informal mechanisms might effectively replace them • often minimal pollution regulation • inadequate admin capacity • > almost zero price of pollution

30. Informal enforcement • hence highly-polluting production might be expected • yet many clean factories in S and S-E Asia • plant characteristics might matter here • economic characteristics • external pressure

31. External pressure • local community pressure -> reduction of emissions/indirect compensations • started by directly affected communities • ready identification of polluter needed • problems: • illiteracy • lacking influence over govt officials • direct dependence on polluter • benefits: newly introduced formal regulation might build on existing local agreements • reputational concerns