Institutions and Economic Outcomes Flashcards
Define property rights
A bundle of social rights associated with a transition that specifies (Demsetz 1974)
The theoretical and legal ownership of resources and how they can be used.
How to establish effective property rights
Must be …
- A form of authority to enforce these rules seen as communal and shared and the only clear actor in the system who had rights to property
- A rule of law
- Informational, bureaucratic and coercive thinking
Why Might We See Inefficient Property Rights and what are its impact ?
Property rights are socially beneficial, but not necessarily individually beneficial, creating a coordination problem. Which allow for individuals and society to obey these institutions and adjust their behaviour accordingly
Without property rights, there is a fear of expropriation which leads to an under-investment
The redistribution of rights and wealth may create new political threats: The political commitment problem which refers to the threat of extortion
The Political Commitment Problem
Being provided a piece of land always come with the threat of expropriation will always remain even in countries with property rights
Thus, are living with a political commitment and threat that a ruler will watch you invest in the land and then swoop up and take it
This leads to people not investing in the piece of land which also leads to government not gaining any money from it
Solving the Political Commitment Problem
Some form of proto-democratic institution would allow us to check the power of the person who controls the means to coercion (monarchs and governments)
* Democracy would thus encourage economic performance as in these forms of government more likely to get a check on power on those in charge which is done through getting people to give up their power
The “Inclusive Institutions” Hypothesis
(Acemoglu and Robinson)
for property rights to function they require inclusive institutions that can help solve the political commitment problem
Example of solving property rights- The Glorious Revolution of 1688
Pre-1688: English monarchs struggled to obtain funds from nobles due to property seizures.
Threats of rebellion were used to maintain control.
Post-1688: England experienced economic and trade growth.
Nobles began investing in their own lands.
This is because the crown required parliamentary approval for finances, reducing its power.
Reforms included:
Placing crown property under common law.
Prohibiting the dismissal of judges.
Establishment of the Bank of England in 1694 for managing loans.
Limiting crown monopolies.
Resolving property disputes in common law courts.
Are democracy good for property rights and a CA for it
Democracies place limits on governments ability to engage in the arbitrary seizure of private property which as a result encourages investment and in-turn growth
e.g. In early modern Europe, England had a limited government whilst France did not which could explain why the English economy grew whilst the French didn’t
Democracy helps ensure the rule of law, which secures stable property rights which would encourage growth-boosting investments
However
Singapore: not a democracy but there are still checks on the institutional power so how can democracies better than autocracies
So we should look at the institutional configurations of each regime as all would be different
Political Institutions and Public Spending
Median Voter Models
- A median voter theorem states that the policy of the median voter should be preferred in a pairwise vote, as they are the decisive votes
- If we assume that the policymaker in a dictatorship is richer than the median voter, this implies that spending policy should be closer to that of the poor leading to greater wealth fare
- This depends on the level of inequality in society
In a high inequality society, there would be a huge disagreement between the rich and the median voters which would lead to political revolutions
In low inequality society’s the policy preference would not be so different as interests are similar
Political Institutions and Public Spending
Incomplete Accountability Theory
- Democracy shifts spending policy towards the poor; however, in new democracies poor voters have limited capacity to monitor incumbents:
- This is due to …
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 (Keefer and Khemani 2006).
Case study: Education Spending in Africa
*In African presidential elections, candidates have often made extravagant promises and in certain instances made specific promises e.g. abolishing primary school fees
An alternative promise, such as to exert effort to build more schools or to hire more teachers, cannot be as easily verified
- In Malawi, they had abolished school fees after the end of its autocracy in 1992, which resulted in a huge rise in the number of people attending schools
Democracy drives investment in education - However Harding and Savage found that these democracy’s did not exert effort to build more schools or to hire more teachers, as they cannot be as easily verified
- These multi-party democracies had a rise in teacher: student ratios than there was in autocracy which led to overcrowding and other issues
SUPPORTS INCOMPLETE ACCOUNTABILITY THEORY
as these politicians had favoured highly visible policy which was inefficent due to them not considering other factors which if solved would not be able to directly attributed to executive actions e.g. hiring more teachers
Why could it be argued that dictatorships are good for economic growth - property rights
Democratic countries appear to be more capable of abolishing property rights when they want, which is derived from the Meltzer-Richard model which argues that people pay different amounts of tax yet all receive the same amount so those who are net recipients would prefer higher taxes, net contributors would prefer lower taxes.
Which in a market economy is tied to productivity as higher income earners are more productive (vice versa).
So in dictatorships which represent the ideals of the many (poor) favour higher taxes whereas dictatorships make tax policy based on the preferences on above-average earners
So in democracy’s people would rather consume then invest limiting economic growth (vice-versa)
Why could it be argued that dictatorships are good for economic growth - Autonomy from Special Interests
- Economic growth is related to dictators not being subject from special interests like democracy’s as they cant be voted out
- Dictators have the ability to create difficult short term policies in order for long-term benefits for their economy
HOWEVER
* Due to dictators predatory behaviour, elites are likely to move their investments away due to an unstable and unpredictable leader lowering economic growth
Why could it be argued that dictatorships are good for economic growth - Consumption vs Investment
- Democracies encourage workers to consume their assets immediately rather than invest in them, which as a result leads to poor economic growth
- Poor people cannot afford to direct their assets away from immediate consumption as many live paycheck to pay check
- And when workers organise by forming political parties or trade unions they are able to drive wages up reducing profits from business owners hence their investment
- And as poor people make up majority of the electorate politicians have incentives to direct money towards them and away from investments
- Unlike dictators who are much more future orientated and cause they cant be voted out, use their power to force people to save increasing economic growth
Median Voter Theory - Hypothesis
Democracy will shift spending towards poor median
voters, particularly in unequal societies and repressive environments.
