Political Economy Explanation Research Articles

Going to the Next Level: The Political-Economy of Bilateralism - A Case Study of the Canada-Costa Rica Free Trade Agreement

Given the proliferation and intensification of regional trade agreements (RTAs) and bilateral free trade agreements (FTAs) in the global economy, it is worthwhile to examine some of the key approaches for understanding why states cooperate through trade agreements. Evidence suggests that traditional economic explanations based primarily on welfare gains hold little in the way of explanatory power, especially for understanding larger country involvement in trade agreements with smaller countries. One theory suggests that side-payments to the larger country help explain why larger countries may be involved in such arrangements. Building upon political-economic explanations for economic strategies, this paper presents a three-level model that emphasizes the importance of interests and conditions at the multilateral and regional levels for influencing bilateral initiatives. Through an analysis of the Canada-Costa Rica Free Trade Agreement, this paper highlights the interconnected nature of state interests at multiple levels, as well as some of the shortcomings of purely economic explanations for understanding why states enter trade agreements.

Efficient Mercantilism? Rent Seeking under Leviathan: Buchanan and Tullock Meet Olson and Ramsey

The economics literature on mercantilism tends to emphasize gold hoarding and external barriers to trade as defining characteristics. However, medieval institutions included a host of internal barriers to trade as well as external ones. High offices were often for sale as were monopoly privileges. We analyze how a stable unitary government's regulatory policies may be affected by revenues generated by the expenditures of rent seekers. The sale of monopoly privilege can be a significant source of government revenue that augments tax revenues, especially in settings in which collecting ordinary tax revenues is problematic. Our analysis provides a possible political-economy explanation for relatively successful authoritarian states that have relatively little corruption, but many internal and external barriers to trade. A revenue-maximizing government encourages greater monopolization than is compatible with economic efficiency, but sells monopoly privileges in a manner that promotes innovation and partially accounts for the deadweight losses associated with monopolized markets.

Applying Insights from Transaction Cost Economics to Improve Cost Estimates for Public Sector Purchases: The Case of U.S. Military Acquisition

ABSTRACT This article uses Transaction Cost Economics (TCE) to help characterize, explain, and ultimately reduce the cost growth that plagues many of today's major investments in military capabilities. There is mounting evidence of a systematic bias in initial cost estimates of new weapon systems purchased by the U.S. military. Unrealistically low cost estimates result in cost overruns. Fixing cost overruns can substantially impact public budgets and military readiness. Cost estimates serve a dual function: first, as an integral part of the decision-making process to evaluate military purchases/investments, and second, as a baseline for future defense budgets. In the first case, underestimating costs can result in too many new weapon program starts and excessive investments in those systems. In the second case, unrealistically low cost estimates result in overly optimistic budgets. Budgets planned on the basis of optimistic cost estimates create the illusion of more resources available than actually exist. Two factors are often blamed for unrealistically low cost estimates: bad incentives (psychological and political-economic explanations), and bad forecasts (methodological explanations). While briefly exploring the former, the focus of this study is on cost estimating methodology. Conventional public cost estimating techniques focus on the production costs of public purchases (input costs, learning curves, economies of scale and scope, etc.). The goal of this article is to improve cost estimates by expanding conventional cost estimating methodology to include TCE considerations. The primary insight of TCE is that correctly forecasting economic production costs of government purchases or acquisitions is necessary, but not sufficient. TCE emphasizes another set of costs—coordination and motivation costs (search and information costs; decision, contracting, and incentive costs; measurement, monitoring, and enforcement costs, etc.). This study encourages public officials and cost analysts to capture these costs and to understand key characteristics of public-private transactions (uncertainty, complexity, frequency, asset specificity, and market contestability) to generate more complete and reliable cost estimates and improve public sector purchases.

Policy and Planning for Large-Infrastructure Projects: Problems, Causes, Cures

This paper focuses on problems and their causes and cures in policy and planning for large-infrastructure projects. First, it identifies as the main problem in major infrastructure developments pervasive misinformation about the costs, benefits, and risks involved. A consequence of misinformation is cost overruns, benefit shortfalls, and waste. Second, it explores the causes of misinformation and finds that political-economic explanations best account for the available evidence: planners and promoters deliberately misrepresent costs, benefits, and risks in order to increase the likelihood that it is their projects, and not those of their competition, that gain approval and funding. This results in the ‘survival of the unfittest’, in which often it is not the best projects that are built, but the most misrepresented ones. Finally, it presents measures for reforming policy and planning for large-infrastructure projects with a focus on better planning methods and changed governance structures, the latter being more important.

Why are more redistributive social security systems smaller? A median voter approach

One of the stylized facts of unfunded social security programs is that programs are larger in size, measured relative to the GDP, the tighter the link between pension claims and past earnings. We provide a political economy explanation of this stylized fact in a median voter model, where people vote on the social security tax rate. We compare pension systems with flat-rate and earnings-related benefit formulas. Only flat-rate benefits redistribute within a generation from high to low income groups. If labor supply is endogenous, they also imply larger efficiency costs than earnings-related schemes. Using data on eight European countries, we find that the median voter is typically middle-aged with high income. For these voters, earnings-related systems are more attractive both because of less intragenerational redistribution and lower distortions in labor supply. The median voter model is also able to account for a considerable degree of cross-country variation in contribution rates.

The WTO, Science, and the Environment: Moving Towards Consistency

Governments are increasingly using taxes to address a variety of environmental concerns. World Trade Organization (WTO) rules recognize that, like regulatory instruments, governments may use taxes for protectionist purposes. The rules are designed to prevent protectionist behaviour while allowing use of such instruments for genuine purposes such as environmental protection. Interestingly, however, there are some notable anomalies in the rules arising from differential evidentiary requirements in different situations. First, the rules are different depending upon whether a country's measure aims to protect on one hand human, animal, or plant health; or on the other, the environment. Second, the rules are stricter where a country's measure takes the form of a regulation than where it takes the form of a tax. The article argues that there is no principled rationale for the differential evidentiary requirements by instrument (regulation versus taxes) or area (health versus environment) but finds that there may be both a historical and political economy explanation. It also discusses the desirability for consistency in WTO law across instruments and risk-related policy areas.

African Demands for Special and Differential Treatment in the Doha Round: An Assessment and Analysis

Interest in Special and Differential Treatment (SDT) is experiencing a revival and Africa has made it a WTO priority. This article reviews the African SDT proposals and puts forward a political economy explanation of the strong focus on it. Small African economies cannot reap gains in the WTO through the use of reciprocity. However, there are still opportunities for them to influence the negotiations, if (i) no major trade interests of the main powers are in play, (ii) they can make a sufficient claim to the moral high ground and/or (iii) they can exploit the decision‐making procedures to block negotiations. This favours a prioritisation of negotiations on SDT, but potential gains here are fewer than they might be since the African approach to SDT is unfocused, substantially and politically.

Partially sighted persons and the public debt elephant

Recent data on the accumulation patterns of public debt across OECD countries suggests a synthesis is possible between the theoretical and empirical approaches to public debt and also between the traditional and more recent political economy explanations of public debt accumulation. The inductive approach of recent political economy explanations is combined with the intertemporal constraints highlighted in the Ricardian–Barro theory to present a reinterpretation of cross-country debt accumulations patterns. Like the elephant in the blind men and the elephant fable, the conclusion is glaringly obvious. Formal and informal budgetary constraints matter.

Institution building and growth in transition economies

Drawing on the recent literature on economic institutions and the origins of economic development, the authors offer a political economy explanation of why institution building has varied so much across transition economies. They identify dependence on natural resources and the historical experience of these countries during socialism as major determinants of institution building during transition by influencing the political structure and process during the initial years. Their empirical analysis shows that countries that are more reliant on natural resources and spent a longer time under socialist governments are more likely to see former communists remain in power and to start the transition process with less open political systems, with negative repercussions for the development of market-compatible institutions. Using natural resource reliance and the years under socialism to extract the exogenous component of institution building, the authors also show the importance of institutions in explaining the variation in economic development and growth across transition economies during the first decade of transition.

Culture in the Rise of Tiger Economies: Scottish Expatriates in Dublin and the ‘Creative Class’ Thesis

AbstractThis article evaluates the contributions which Richard Florida's seminal ‘creative class’ thesis might make to ongoing efforts to re‐inscribe ‘culture’ back into political economy explanations of the rise of Tiger economies. It reflects upon the value of reconsidering both the role of skilled migrants in Tiger states and the factors which attract skilled migrants to these economies in the first instance. Based upon analyses of a series of focus groups conducted with Scottish expatriates currently working in Dublin, the article specifically attempts to gauge how far the creative class thesis can be stretched to account for the locational preferences of talented migrants. Whilst Florida's work undoubtedly sheds light on aspects of expatriate existence which might not otherwise have been obvious, its ability to account for the relationships which have existed between technology, talent and tolerance in the Celtic Tiger must be questioned. Moreover, if political economy and Floridian readings are to do more than simply inform one another, there will be a need to establish more clearly the complex ways in which developmental states intersect with skill flows and cosmopolitan cultural agendas.

The Political Economy of US Aid to Pakistan

AbstractVariations of bilateral aid flows are difficult to explain on the basis of official development objectives or recipient need. Based on the example of US aid to Pakistan, this paper suggests alternative political economic explanations, notably the relevance of ethnic lobbying and the relevance of US business interests. Time series regressions for the period from 1980 to 2002 and logistic regressions based on votes for the Pressler and the Brown Amendment confirm the significance of these political economic determinants. While in case of the Pressler Amendment, the direct influence of population groups of Indian and Pakistani origins seems to have played a predominant role, the role of ethnic business lobbies appears to have dominated in the context of the Brown Amendment. Time series analysis also provides some evidence for the impact of US business interests based on FDI and exports, but these effects appear to be comparatively small.

Age Bias in Fiscal Policy: Why Does the Political Process Favor the Elderly?

Across countries, government expenditures tend to favor the elderly. This paper provides a political economy explanation for this phenomenon. I consider the classic problem of dividing a fixed payoff in an overlapping generations setting. Any share of the payoff can be given to any generation. Using a new solution concept for majority rule in dynamic settings (Bernheim and Slavov, 2006), I demonstrate that policies favoring the old are easier to sustain politically than other policies. This result appears across a broad class of majoritarian institutions and thus reflects general forces at work in the political process. Age bias arises because it is easy to induce the young to support policies favoring the elderly by promising them large rewards later in their lives. On the other hand, older generations cannot be rewarded in a similar manner. This asymmetry helps to generate broad political support for large transfers to older individuals.

On the endogenous allocation of decision powers in federal structures

This paper provides a political-economy explanation of the degree of centralization in economic policy making. To determine which policies are to be centralized, regions select representatives who then negotiate the degree of centralization and the regional cost shares of centrally decided policies. We show that the resulting degree of centralization is suboptimally low. Voters strategically delegate to representatives who are averse to public spending and hence prefer decentralized decisions in order to reduce their region's cost share. When spillovers are asymmetric, strategic delegation is stronger at the periphery than at the center.

Why are More Redistributive Social Security Systems Smaller? A Median Voter Approach

We suggest a political economy explanation for the stylized fact that intragenerationally more redistributive social security systems are smaller. We relate the stylized fact to an efficiency-redistribution trade-off to be resolved by political process. The inefficiency of social security financing is due to endogenous labor supply. Using data on eight European countries, we find that the stylized fact and a considerable degree of cross-country variation in contribution rates can be explained by the median voter model.

Institutions and growth in East Asia

Institutions have played a central role in political economy explanations of East Asia’s growth, from the developmental state to the micro-institutions of industrial policy. A review of these institutional explanations finds that few if any of the postulated institutional explanations involve either necessary or sufficient conditions for rapid growth. This finding suggests two conclusions. First, there are multiple institutional means for solving the various collective action, credibility, and informational problems that constitute barriers to growth. The search for a single institutional “taproot” of growth is likely to be a misguided exercise, and more attention should be given to understanding the varieties of capitalism in East Asia. Second, institutions are themselves endogenous to other political factors that appear more consequential for growth, including particularly the nature of the relationship between the state and the private sector.

Pension funds and corporate governance in developing countries: what do we know and what do we need to know?

Conventional wisdom holds that pension reforms from pay-as-you-go to fully funded systems spur the development of stock markets through a corporate governance channel, i.e. pension funds become large shareholders of publicly traded firms and therefore have the incentives to monitor managers and improve investor protections. This paper reviews the literature on the corporate governance channel associated with pension reforms in developing countries, and asks what we know and need to know about it. We know that pension funds are not yet large shareholders of publicly traded firms in developing countries. However, econometric results suggest that pension reforms lead to stock market development, but do not allow us to identify and separate the corporate governance channel. We know that pension reforms are followed by pro-investor legislation, but there is no convincing evidence that the pro-investor laws are enforced. We need to know more about the effects of pension reform on stock prices and performance of publicly traded firms, and whether pension fund management companies act in the best interest of pensioners. The paper also reviews the political economy explanations of the links between pension fund specific capital controls and the corporate governance channel, and suggests that there is a trade-off between the objectives of pensioners' welfare maximization, and corporate governance reform and stock market development.

Why have some countries on international rivers been successful negotiating treaties? A global perspective

This paper presents a typology of international rivers based on asymmetries in economic and political power among riparian states. This typology is then used, along with other factors such as the spatial location of riparians on the river, to explore the question of why some riparians on international rivers have been able to successfully negotiate treaties and others have not. The findings lend support to both economic and political economy explanations of cooperative action on international rivers. International rivers with riparians with countervailing economic and political power are far more likely to have negotiated treaties than other river types. Riparian states on international rivers sharing a “western civilization” were much more likely to have concluded treaties than riparian states on rivers in other civilizations. Somewhat surprisingly, rivers that cross “civilization boundaries” appear no less likely to have treaties than international rivers than run entirely through riparian states that share a single civilization. Adjacent upstream/downstream or “side‐by‐side” riparians were less likely to have concluded treaties than “country pairs” with other spatial relationships.

Political support for anti‐inflationary monetary policy

AbstractWe model a two‐party representative democracy with citizen‐candidate in which the leader is elected while the central‐banker is appointed by the leader. Assuming that fiscal policy is ‘more important’ than monetary policy, we show that, if some individuals who dislike inflation get organized in a lobby and offer campaign contribution to the party that proposes a zero‐inflation policy, then even if the majority of the population, as well as the majority of party‐members, favour inflation, no inflation results in equilibrium. The paper provides a political economy explanation of the role played by financial interest groups in providing political support to anti‐inflationary monetary policy. Copyright © 2004 John Wiley & Sons, Ltd.

The Political Economy of US Aid to Pakistan

Variations of bilateral aid flows are difficult to explain on the basis of official development objectives or recipient need. At the example of US aid to Pakistan, this paper suggests alternative political economic explanations, notably the relevance of ethnic lobbying and the relevance of US business interests. Time series regressions for the period from 1980 to 2002 and logistic regressions based on votes for the Pressler and the Brown Amendment confirm the significance of these political economic determinants. While in case of the Pressler Amendment, the direct influence of population groups of Indian and Pakistani origins seems to have played a predominant role, the role of ethnic business lobbies appears to have dominated in the context of the Brown Amendment. Time series analysis also provides some evidence for the impact of US business interests based on FDI and exports, but these effects appear to be comparatively small.

The Politics of Re-Centralization in Argentina And Brazil

In response to the growing salience of re-centralization in several Latin American countries that decentralized in the 1980s and 1990s, this paper examines presidential efforts to re-centralize fiscal power in the 1990s. In our study of re-centralization in Argentina and Brazil, we assess the utility of four common political economy explanations: the presence of economic crisis; the partisan powers of the president; the division of formal powers between the branches; and the extent of intra-bureaucratic conflict. We find that the success of economic stabilization measures facilitated re-centralization in both countries, though the pathways connecting the two phenomena were partially distinct. In Argentina, key re-centralization measures were rapidly achieved after stabilization as the result of the president's strong partisan powers and in the form of political deals within the Peronist party. Subsequently, the dissipation of President Carlos Menem's powers over the course of his second term facilitated the “return of the governors.” In Brazil, Fernando Henrique Cardoso re-centralized despite weak partisan powers, largely by using his reputation as a successful stabilizer to build a broad reform coalition. In Cardoso's Brazil, strong partisan cohesion in important cabinet posts also served as a partial substitute for the lack of partisan power in the legislature. These findings suggest the need for a closer examination of re-centralization efforts, particularly in the wake of macroeconomic stabilization and economic reform.