Why do soft budget constraints exist and persist? In this paper we argue that the prevalence of soft budget constraints can be best explained by the political desirability of softness. We develop an infinite horizon political economy model where neither democratic nor autocratic politicians can commit to policies that are not ex post optimal. We show that because of the dynamic commitment problem inherent in the soft budget constraint, politicians can in essence commit to make transfers to entrepreneurs which otherwise they would not be able to do. This encourages such entrepreneurs to support them politically. Though the soft budget constraint may induce economic inefficiency, it may be politically rational because it influences the probability of political survival. In consequence, even when information is complete, politicians may fund bad projects which they anticipate they will have to bail out in the future. We show that, maybe somewhat surprisingly, dictators who are less likely to lose power, are more likely to use the soft budget constraint as a strategy to gain political support.
In this paper we investigate empirically whether or not the notion of an enclave adds substantially to existing knowledge of the determinants of long-run economic, political, or institutional development. We discuss the prominent place of enclaves in historical accounts in the dependent development literature, particularly in the work of Cardoso and Faletto (1966, 1979) and the large difficulties of determining in practice whether or not a country was or was not an enclave. We find little evidence for a relationship between past enclave status and long-run growth, inequality, or the size of the government. However, there does seem to be some preliminary evidence that countries that were enclaves have greater state capacity than non-enclaves and have been less democratic in the post-WWII period.
We construct a model to study the implications of changes in political institutions for economic institutions. A change in political institutions alters the distribution of de jure political power, but creates incentives for investments in de facto political power to partially or even fully offset change in de jure power. The model can imply a pattern of captured democracy, whereby a democratic regime may survive but choose economic institutions favoring an elite. The model provides conditions under which economic or policy outcomes will be invariant to changes in political institutions, and economic institutions themselves will persist over time.
Robinson, James A, Daron Acemoglu, Simon Johnson, and Pierre Yared. 2008. “Income and Democracy.” American Economic Review 98 (3): 808-842. Abstract
Existing studies establish a strong cross-country correlation between income and democracy but do not control for factors that simultaneously affect both variables. We show that controlling for such factors by including country fixed effects removes the statistical association between income per capita and various measures of democracy. We present instrumental-variables estimates that also show no causal effect of income on democracy. The cross-country correlation between income and democracy reflects a positive correlation between changes in income and democracy over the past 500 years. This pattern is consistent with the idea that societies embarked on divergent political-economic development paths at certain critical junctures.
Though many empirical and theoretical approaches to comparative development assume that institutions persist for long periods of time, specific institutions vary a lot over periods as long as a century. Therefore, a convincing theory of institutional persistence must explain how persistence of institutional equilibria and accompanying incentive environment is consistent with changes in specific institutions. In this paper, we propose a simple explanation of how economic institutions may persist even when political institutions change and illustrate it with the economic history of the U.S. South and some examples from Latin American history.
Many employment relationships concede rents to workers. Depending on the political institutions, the presence of such rents allows employers to use the threat of withdrawing them to control their workers' political behavior, such as their votes in the absence of secret ballot. We examine the effects of the introduction of the secret ballot in Chile in 1958 on voting behavior. Before the reforms, localities with more pervasive patron-client relationships tended to exhibit a much stronger support for the right-wing parties, traditionally associated with the landed oligarchy. After the reform, however, this difference across localities completely disappeared.
Questions of the effectiveness of economic policy reform are inseparable from the political economy factors responsible for distortionary policies in the first place. Distortionary policies are more likely to be adopted where politicians face fewer constraints. Hence reform should have modest effects in societies where the political system already imposes strong constraints, and in societies with weak constraints, because it does not alter the underlying political economy. Reform should be most effective in societies with intermediate constraints. Furthermore, effective reform in one dimension may lead to deterioration in others, as politicians address the underlying demands through other means—a phenomenon we call the seesaw effect. We report evidence that central bank reforms reduced inflation in countries with intermediate constraints but had no or little effect where constraints were strong or weak. We also present evidence consistent with the seesaw effect: in countries where central bank reform reduces inflation, government expenditure tends to increase.
We propose a general equilibrium model where the economic organization of agriculture and the political equilibrium determining the security of property rights are jointly determined. In particular, because the form of organization may affect the probability and distribution of benefits from future property challenges, it may be shaped in anticipation of this impact. Property rights security may then be secured at the expense of economic efficiency. The model provides a framework for understanding why in some contexts land is redistributed primarily via land sales and tenancy markets but via politics and conflict in others. We test some implications of the theory using a five-decade panel dataset that traces changes in the extent of tenancy and tenancy reform across 15 Indian states.
We construct a simple model where political elites may block technological and institutional development, because of a "political replacement effect." Innovations often erode elites' incumbency advantage, increasing the likelihood that they will be replaced. Fearing replacement, political elites are unwilling to initiate change and may even block economic development. We show that the relationship between blocking and political competition is nonmonotonic: elites are unlikely to block development when there is a high degree of political competition or when they are highly entrenched. It is only when political competition is limited and also when their power is threatened that elites will block development. Blocking is also more likely when political stakes are higher, for example, because of land rents enjoyed by the elites. External threats, on the other hand, may reduce the incentives to block.
In this paper we argue that the political incentives that resource endowments generate are the key to understanding whether or not they are a curse. We show: (1) politicians tend to over-extract natural resources relative to the efficient extraction path because they discount the future too much, and (2) resource booms improve the efficiency of the extraction path. However, (3) resource booms, by raising the value of being in power and by providing politicians with more resources which they can use to influence the outcome of elections, increase resource misallocation in the rest of the economy. (4) The overall impact of resource booms on the economy depends critically on institutions since these determine the extent to which political incentives map into policy outcomes. Countries with institutions that promote accountability and state competence will tend to benefit from resource booms since these institutions ameliorate the perverse political incentives that such booms create. Countries without such institutions however may suffer from a resource curse.
Our analysis begins with the puzzle: how did Botswana develop a legal rational state? We suggest that three key interlinked factors were important. First, during the pre-colonial period the Tswana developed local states with relatively limited kingship or chiefship and with a political structure that was able to integrate people of other ethnic groups such as Kalanga. Second, facing the onslaught first of the Boers, next of the British South Africa Company, and finally of the Union of South Africa, Tswana political elites attempted to maintain a good measure of independence by defensively modernizing. Finally, the political elites in both local states before independence and the national state at independence heavily invested in the country's most important economic activity, ranching. This gave them a strong incentive to promote rational state institutions and private property. Moreover, the integrative nature of traditional Tswana political institutions reduced the likelihood that alternative groups would aggressively contest the power of the new unitary state.
In this essay, I review recent research on the effects of economic development on democracy. On the theoretical side, for the first time there has been a systematic attempt to bring the types of formal models developed by economists and political scientists outside of comparative politics to bear on the origins of democracy. I present a simple analytical framework that captures some of the results in this literature. On the empirical side, the issue of identifying causal relationships in the data is finally receiving attention. However, the application of techniques adopted from best-practice econometrics shows no evidence that economic development has a causal effect on democracy. Neither does it support the idea that economic development influences the probability of coups but not democratizations. More likely, and in line with the model I develop, income per capita and democracy are correlated because the same features of a society simultaneously determine how prosperous and how democratic it is. There is still a lot to learn on this topic.
In this essay I argue that to develop institutions that promote economic development societies must be equitable in fundamental ways. I particularly emphasize how important an equitable distribution of political power in society is to have well functioning institutions that support market activities. I show these ideas are consistent with broad patterns in the cross-national data and country case studies.
In this paper I discuss the nature of the political constraints that the World Bank faces in delivering basic services to the poor. The main problem arises because the Bank has to work through domestic governments which have political aims different from helping the poor. The conceptual approach attractive to economists and central to much recent thinking in the World Bank, particularly the 2004 World Development Report, is the notion of "politician proofing". Given that political incentives derail good policies, how can those policies be politician- proofed? I argue that evidence and theory suggests that such an approach is ultimately futile, basically because we simply do not understand the relevant political incentives. I discuss alternative policy strategies and conclude that what is required is a much more fundamental assessment of what type of political equilibria deliver services to the poor. As I illustrate with the case of Botswana: once the political equilibrium is right, everything goes right and politician proofing is redundant.
The rise of Western Europe after 1500 is due largely to growth in countries with access to the Atlantic Ocean and with substantial trade with the New World, Africa, and Asia via the Atlantic. This trade and the associated colonialism affected Europe not only directly, but also indirectly by inducing institutional change. Where "initial" political institutions (those established before 1500) placed significant checks on the monarchy, the growth of Atlantic trade strengthened merchant groups by constraining the power of the monarchy, and helped merchants obtain changes in institutions to protect property rights. These changes were central to subsequent economic growth.