Governing For Prosperity

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Overview

How do political institutions help promote prosperity in some countries and poverty in others? What can be done to encourage leaders to govern not for patronage but for economic growth? In this book, such distinguished political economists as Douglass North, Robert Barro, and Stephen Haber answer these questions, providing a solution to one of the most important policy puzzles of the new century: how to govern for prosperity.

The authors begin from a premise that political leaders are self-interested politicians rather than benign agents of the people they lead. When leaders depend on only a few backers to stay in power, they dole out privileges to those people, thereby dissipating their country's total resources and national growth potential. On the other hand, leaders who need large coalitions to stay in office implement policies that generally foster growth and political competition over ideas. The result is that those who promote policies that lead to stagnation tend to stay in office for a long time, and those who produce prosperity tend to lose their jobs. Analyzing countries in North and South America and Asia, the authors discuss the range of political regimes that permit or even encourage leaders to rule by mismanaging their nation's resources. And they show that nations must forge institutions that allow all social groups to participate in and benefit from the economy as well as force political leaders to be responsible for policy outcomes.

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Editorial Reviews

Booknews
In nine case studies, political economists analyze how politics promotes a country's prosperity or poverty. Bueno de Mesquita is with the Hoover Institution, Stanford U. Root is at the Milken Institute in Santa Monica. Annotation c. Book News, Inc., Portland, OR (booknews.com)
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Governing for Prosperity


Yale University Press

Copyright © 2000 Yale University
All right reserved.

ISBN: 0-300-08017-4


Chapter One

WHEN BAD ECONOMICS IS GOOD POLITICS

Bruce Bueno de Mesquita and Hilton L. Root

At the beginning of the twentieth century, one could reasonably argue, collective property yielded a path to prosperity and the unplanned swings of market forces could not possibly be superior to central planning. The empirical record has convincingly debunked what many wise people believed. Countries that adopted collectivist, centrally planned cheap labor experienced political and social upheaval. Market economies, by contrast, tended to experience relatively rapid economic growth, enhanced competitiveness, and relatively stable social and political orders, even as the cost of labor rose. The debate on the virtues of the socialist model as an alternative to capitalism seems settled; market economies enjoy a clear victory. Yet vast portions of humankind still live with the daily tragedy of hunger, poverty, and disease. These are preventable and are not the product of ignorance or of inevitable natural forces; rather, they are the product of reversible institutional and political failures caused by perverse incentives created by some political institutions.

Substantial variation in economic performance can no longer be attributed to ignorance about what makes an economy grow; observers must look elsewhere than at competing economic theories to explain national economic failure. Today, the key to economic success or failure-indeed, to a broad array of policy successes or failures-lies within the political institutions of sovereign states. Political arrangements create incentives for political leaders to foster growth or to steal their nation's prospects for prosperity. How to govern for prosperity is likely to be the most important policy puzzle of the twenty-first century.

The chapters on political economy in this volume attempt to provide useful solutions to this puzzle. Each chapter explores how institutional arrangements create and foster growth-oriented or growth-inhibiting incentives. The central thesis of this book is the following: given the state of knowledge about the economics of growth, the solution to poverty lies in the construction of political institutions that provide leaders with incentives to focus on the welfare of their citizens. Society does not have to wait for civic-minded leaders to improve citizen welfare, but it does have to construct institutions for growth that reflect the interest of leaders in securing political power. In too many instances, institutional arrangements turn bad public policy into good politics.

We identify two contrary impulses in politics: the impulse among politicians to fight over the distribution of goods and the impulse to coordinate the protection of future access to benefits. The choice between fighting over current distribution and coordinating on future benefits depends on the extent to which incumbents rely on allocating private goods or public goods to stay in office. That dependency, in turn, is a function of the political institutions under which they operate. Certain features of democracy promote a focus on public goods and on coordination, whereas key aspects of autocracy promote attentiveness to the allocation of private goods and, therefore, to questions of distribution.

Under normal circumstances governments allocate access to resources through taxation, regulation, and spending. Leaders can choose to allocate resources for the provision of public goods that benefit all or to provide private goods that benefit their cronies. When leaders provide privileged access to resources, they interfere with efficient distribution through the market's decentralized decision making, weakening the economy and diminishing the total resources at a leader's disposal. Why leaders would knowingly choose policies that lead to economic decline is one of the great conundrums that accounts for much of the world's poverty.

Economists typically view leaders as benign agents promoting the welfare of their society who would not knowingly precipitate an economic crisis. This book recognizes that deliberate policy failures are ubiquitous throughout history and seeks a solution to this dilemma in the incentives of leaders to stay in office. Political leaders want to stay in power. They are willing to purchase political loyalty at any cost to the economy, including providing privileged access to resources, thereby weakening the nation's economic performance. Although dispensing privilege may place the well-being of the national economy in jeopardy, leaders may disregard the economic costs until they run out of enough resources to stay in power: their focus is on political crisis, not economic crisis. A political crisis arises only when incumbents are not able to purchase sufficient loyalty to retain office. Politicians worry about an economic crisis when it becomes a political crisis.

The character of political institutions determines when an economic crisis becomes political. A society's political institutions are democratic, in part, when they require leaders to satisfy a large coalition of supporters in order to stay in office. When private goods must be divided among too many people to be of much value to most members of the winning coalition, then leaders are compelled to focus on allocating resources through the provision of public goods and, therefore, respect market decision making. By contrast, autocratic leaders generally require a much smaller winning coalition to stay in office. With a small winning coalition, autocrats can choose to use private goods as the means to stay in office, rewarding the cronies who make up their winning coalition. Thus, for autocrats, economic crises need not represent political crises and so they can attend to distribution problems without much concern for general or future prosperity. Democratic institutions deprive leaders of this choice, compelling leaders through formal, institutional constraints to provide effective public policy and avoid economic crises. This dynamic, more than elections, is the crux of the relationship between democracy and growth.

The literature on political institutions and economic growth uses the logic of democratic societies to analyze the stability of nondemocratic societies. In doing so, it attends to coordination issues as the main problem of politics and so views institutional transitions as dependent on coordination. This perspective has produced compelling explanations of how political crises lead to dramatic institutional transitions in which coordination among political rivals dominates their distributive decisions. Examples of such transformations include the French, Glorious, Russian, Tokagawan, American, and Chinese revolutions. As is evident from this list, some of the institutional transformations seem to have ensured an emphasis on coordination even after the crisis, while others have restored distributional conflicts as usual. Scholars have paid scant attention to the political rationality that underlies the persistence of regimes with poor public policy performance. Because such persistent regimes are largely overlooked, knowledge about transitions concerns important but rare events in which revolution is the product of the logic of coordination (Goldstone 1991; Moore 1966; Skocpol 1979; Tilly 1978, 1993).

Each chapter examines means of resolving or avoiding distribution and coordination problems as the way to settle or avert economic and political crises. Chapter 2, by North, Summerhill, and Weingast, highlights differences between successful and unsuccessful responses to economic crises. The authors identify the essential institutional characteristics of economic order and explain what political institutions require to sustain order. Their perspective does not explore why political authorities should be motivated to provide order. Thus, they provide one of the two conceptual frameworks in this book. The second framework, outlined in Chapter 3 by Bueno de Mesquita, Morrow, Siverson, and Smith, is concerned with the motivation of political authorities to sustain disorder or order. Many political regimes persist for long periods of time with high levels of disorder, such as in Mexico and India, both discussed in this book. In their discussion of Mexico in Chapter 5, Haber and Razo evaluate the costs and benefits of disorder and note that even revolutionary change cannot be counted on to resolve distribution issues or to alter the path of economic growth. In a complementary way, Root and Nellis show in Chapter 4 that the adoption of democratic principles of governance without the adoption of a democratic system of public administration likewise does not assure resolution of distributive problems that jeopardize economic growth. Zak's Chapter 6 focuses more generally on the impact of political instability on economic exchange, while Feng in Chapter 7 and Barro in Chapter 8 highlight the macro-effects of political institutions on economic growth rates.

Chapters 3 and 4 investigate the political incentives for leaders to promote order or to rule through disorder. These chapters deal with the range of political regimes that allow or even encourage leaders to rule by mismanaging their nation's resources. In that way, they offer a fresh perspective on how disorder can be incentive-compatible with political survival. They draw attention to divergences in private interests as a key feature of day-to-day politics and show when such divergences promote or inhibit political survival. By contrasting the focus on coordination in one set of chapters and the tensions arising from the clash of divergent interests in other chapters, this book covers the gamut of complementary insights on fundamental social change.

Typically, economists approach economic reform by assuming that decision makers and citizens have a common interest and that leaders simply need information about how best to realize those interests. We disagree. Distributional differences allow decision makers to resolve political differences through punishment strategies rather than through cooperation. Weaker parties, to be successful, must accept the status quo because they can increase their welfare only through the leader's largesse. When an economic crisis eliminates the leader's ability to distribute sufficient largesse, then the norm of political loyalty weakens, as it depended on the leader's ability to dispense private rewards. For this reason, crises provide a momentary opportunity for institutional change. The economist's approach to reform, then, is particularly well suited to designing interventions in crises, but it underestimates the strength of the conventions that sustain poor economic policies. A crisis can eliminate the ability of leaders to reward loyalty, thereby making economic change possible. However, only when crisis looms does such a perspective apply. Most of the time, societies are surrounded by economic policies that are deleterious to prosperity and social welfare. Economists provide economic policy solutions that are tried, tested, and true for promoting prosperity, but they rarely confront the political incentives that block economic reform. By identifying different institutional sources for these incentives, we attempt to provide a genuine political economy of economic reform and to bridge the gap between the solutions of economists and the political reality of obtaining and holding political power.

This book draws attention to the complementary institutional lessons to be drawn from the literature on resolving or managing distributional conflicts and the literature on shared risks and cooperation at moments of dramatic social change-moments that are often precipitated by the collapse of the existing governing apparatus. A fundamental problem in politics is that there are no clear ways simultaneously to resolve the problems of cooperation which predominate in crises and the problems of allocation or distribution (Morrow 1994), characteristic of politics as usual. The reason is straightforward. Coordination requires sharing information. Distributional motivations lead to the suppression of information. That is why governments, like democracies, that focus on coordination emphasize the transparency of laws and regulations, while autocracies emphasize the opaqueness that contributes to discretion. Crises provide a focal point for constructing new institutions because the divergent interests of elites are diminished by the lack of resources worth fighting over. When there is no crisis, rivalry over control of the society's wealth can eventually precipitate a crisis unless the elites agree to design institutions to prevent their competition from degenerating into plunder. Rare indeed are the situations in which political leaders have incentives to be so farsighted as to make substantial sacrifices in the present for the well-being of future generations.

HOW CAN GOVERNMENTS STAY IN POWER DESPITE FAILED OUTCOMES?

Something is fundamentally wrong when stealing a country's resources is a virtue. Yet, Mobutu Sese Seko, who ruled Zaire for over twenty years, provided an example-albeit extreme-of political leadership that is rapidly devastating the welfare of much of the world's population. He proclaimed: "You who have stolen money and put it into homes in Zaire and not abroad, I congratulate you." Throughout much of the world, governments provide neither peace nor prosperity, and longevity of leadership inversely correlates with policy performance. Bueno de Mesquita, Morrow, Siverson, and Smith (Chapter 3) show that leaders in polities with autocratic institutions can enhance their prospects of remaining in office by over 40 percent under conditions of declining prosperity. By contrast, leaders in polities with more democratic institutions have more than a 50 percent increase in the risk of being ousted from office if they fail to produce economic growth. Policies required to produce prosperity often diminish a leader's hold on power, resulting in an inverse correlation between revenue growth and political survival. This book is designed to stimulate debate about how to alter this unfortunate correlation by identifying incentives to govern for prosperity.

Scholars commonly believe that regime type determines a government's responsiveness to the needs of its population. Cross-country comparisons do not support such a clean conclusion. India is a democracy with poor policies; Korea and Singapore undertook significant economic reforms as essentially one-party states. True, the majority of authoritarian governments failed to promote growth or to gain the business sector's confidence. However, the differences between so-called authoritarian states may be as great as what separates them from the democratic alternatives (Root 1996).

As Barro (Chapter 8) points out, democracy often leads to redistributive policies that stymie growth.

Continues...


Excerpted from Governing for Prosperity Copyright © 2000 by Yale University . Excerpted by permission.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

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