dia 2010 productivity in latin america chapter 13: the political economy of productivity prepared...

DIA 2010Productivity in Latin America

Chapter 13:The Political Economy of Productivity

Prepared for presentation at RES Working Sessions. October 21st 2008

THE QUESTION

The rest of the report will tell which (extant or missing) policies constitute key obstacles for higher productivity in Latin America

While policies seem to be the main driver, there may be also some politically induced economic actions which may affect productivity E.g, Microsoft comes to DC

This chapter will attempt to explain the (political) reasons behind those policies (and choices)

The ultimate objective of the chapter is to help the overall report to produce recommendations that include (rather than ignore) the politics behind the policies. (And to do that at the country level)

THE QUESTIONS (1)

Some more specific questions the chapter will try to answer (will be more comprehensible after the framework)

How does the policymaking process affect productivity related policy demands?

What is the role of the socioeconomic actors (business, labor unions,etc) in the determination of public policy in LAC?

How does the economic structure of the country affects the articulation of the “real actors” in the policymaking process?

THE QUESTIONS (2)

What is the role of different political institutions in the articulation of the transactions between the political and the “real” actors?

How much does the organization of interest groups depends (or is affected by) the political/institutional organization of the country?

What are the characteristics of the arenas in which public policies are decided and how do they affect the productivity-related policies?

What can we suggest in each case given all of the above?

Inputs for the chapter

Parallel development of: A framework and a set of general and

comparative insights• (started in Murillo, Scartascini and Tommasi)

8 country-case studies• Argentina, Brazil, Bolivia, Chile, Colombia, Costa

Rica, Mexico, Venezuela (hopefully) Externalities from other work for

the DIA Work by (and with) associated researchers

• E.g., Ben Ross Schneider

This presentation

Format quite different from final chapter Focus on what we are doing How we are doing it / thinking about it Pending (analytical and empirical) tasks Only very tentative “empirical findings”

At this stage, the presentation may not yet be crisp enough

Final chapter will have More “empirical findings” using the country studies Recommendations

• (“political economy” caveat)

The Framework in a Nutshell

THE FRAMEWORK

Productivity

POLICIES

POLICYMAKING INSTITUTIONS

political (State) actors

The Policymaking Process (PMP)

INTEREST GROUPS

“real” actors

Socioeconomic Structure

PoliticalInstitutions

THE FRAMEWORKBuilding Blocks The framework uses a number of building

blocks

Some pre-existing ones1. Studies of the PMP and the features of policies2. Role of political institutions in the determination of

policies3. Models of interest groups behavior and rent-

seeking• A bit US centered• Some good applications in trade policy

4. Role of veto players in the reform process5. Organization of “real actors” (businesses, unions,

etc)

THE FRAMEWORK

INTEREST GROUPS

”real” actors


political (State) actorsPOLICIES

Productivity



2

4

5

1. PMP and the features of policies2. Political institutions and policies3. Interest groups and rent-seeking4. Role of veto players in the reform process5. Organization of “real actors”

13Reduced form PI

THE FRAMEWORKBuilding Blocks Some we are developing further

Especially the integration of these pieces

1. Country-centered general equilibrium view Understand public policies as outcome of

general politico-economic equilibrium (please don’t try Persson-Tabellini or Grossman-Helpman at home).

Specific policies interpreted in the context of the overall “vector of policies” and political dynamics

• In some cases, some sectors may have to be sacrificed for the greater good

• Consequently, it is not good idea to look only at marginal policies and reforms (or lack thereof)

THE FRAMEWORKBuilding Blocks2. Feed-back effects

Most literature looks only in one direction• Interest groups affect policies (short run)• Interest groups affect politics (very long

run) Our approach is broader

• Here we look at these (also in the medium term) and we also look at how politics (and institutions) shape the formation of groups

THE FRAMEWORKBuilding Blocks3. The role of time

Path dependence• Group organization• Past policies (from past politics) are the

status quo Intertemporal considerations

• Role of horizons

THE FRAMEWORKBuilding Blocks4. Arenas

Developed countries political economy analysis takes as given things that here are variable• In developed countries, transactions take

place in institutionalized arenas (e.g., the legislature).

• It is not always the case in LAC• While in some countries they take place in formal

arenas they may also take place in the streets and other informal settings.

• Different arenas imply different tokens of exchange, different types of transactions, enforcement mechanisms, etc.

THE FRAMEWORK

The determinants of policies In real politics, policies are chosen for a number of

reasons/characteristics, 1. (only) one of which is whether they are productivity

enhancing (Y+) or not (Y-)

2. Its temporality (how early benefits and cost accrue)

3. Its distributional features (who gains/loses)

We will see later how characteristics (2) and (3) will interact with the features of the PMP, and of the distribution of “real” power to determine whether some Y+ / Y- policies are adopted in equilibrium

THE FRAMEWORK

INTEREST GROUPS

”real” actors



Productivity



Lets look inside some of these boxes and arrows before attempting to put everything together

THE FRAMEWORK

INTEREST GROUPS

”real” actors



Productivity



From PMP to (features of) Policies(without details of specific socieconomic actors)

Previous work (such as the IPES 2006) analyzed how the workings of political institutions in the PMP shape the features of public policies (such as volatility or credibility).

PMPs that favor inter-temporal transactions and cooperative policymaking are characterized by good government capabilities (e.g., long term horizons, capable bureaucracies, enforcement technologies, etc).

These characteristics may be associated with better policies directly.



POLICIES

From PMP to (features of) Policies(without details of specific socieconomic actors)

Also, PMPs that favor inter-temporal transactions and cooperative policymaking tend to have better policy features.

These features of policies (in themselves) might matter for productivity: Volatility Adaptability Coordination

This (institutionally driven) “supply” will affect what interest groups demand



POLICIES

The features of policies and productivity

For example, let’s see a brief sketch on how volatility affects policy demand

Interest group deciding to demand Y+ (“public goods”) or Y- (“rents”) Productivity enhancing (“public goods”) Y+

• Ports, infrastructure, healthy competition policy Productivity decreasing (“rents”) Y-

• Inefficient barriers, subsidies that induce misallocation of resources

Under some conditions• Rents are a spot transaction• Public good provides higher long term benefits

If policies are unstable in this polity, interest groups might prefer to demand rents rather than public goods.

THE FRAMEWORK

INTEREST GROUPS

”real” actors



Productivity



The “Demand” of Public Policies

The demand of public policies depends on the interests of those that would be ultimately affected by the policies

Caveat: “Demand” is a shortcut since sometimes the arrow goes the other way and groups and coalitions are put together by the polity in order to extract political rents. The extent of one or the other depends on policymaking

institutions

INTEREST GROUPS

“real” actors




Who are the interest groups? According to the specialized literature and the

country studies they are: Different groups of voters Different types of business actors

• Different levels of aggregations• Business as firms, Business as sector, Business as capital

• Different types of organization Unions Social movements, etc.

INTEREST GROUPS

“real” actors



THE FRAMEWORK

INTEREST GROUPS

”real” actors



Productivity




Different economic structures matter for demand

Different groups have different demands• E.g., Multinationals needs are different than large local

firms which are different from the small firms’

Who has the stronger voice matters• E.g., demand will be tilted towards the preferences of the

group with more power

Certain things can only be demanded if coordinated

• E.g., certain public goods may need coordinated actions. How much do the economic or geographic structure facilitates collective action may determine demand.

INTEREST GROUPS

”real” actors



Interest groups preferences do not translate directly into policy demands and policy demands do not necessarily imply changes in policies

It depends on: How interest groups organize

• How many• At what level• Are they stable or not

How they articulate with the policymaking process• In which arenas do they participate (executive,

legislature, street)• What types of transactions do they engage in

INTEREST GROUPS

”real” actors


THE FRAMEWORK

INTEREST GROUPS

”real” actors



Productivity



Articulation

Different ways in which interest groups link with the political structure, has potential implications for Y+/Y-

Let’s look at two of them here.

Arenas of exchange Different arenas generate different outcomes

• In some countries transactions take place at the legislature while they take place with the bureaucracy or the president in others

• In some, negotiations take place at the federal level. In others, at a decentralized one.

• Each one provides certain bargaining possibilities and tokens of exchange

• In some arenas it may be easier to provide pork, in another regulations, and so on.

Articulation

The electoral connection The characteristics of the party system may

matter for the stability of the relationship• More stable relationships may provide possibilities for

internalizing certain demands• It may also provide a more stable arena for exchanges.

For example, in Chile transactions take place within the coalition instead of outside

Inclusiveness and representativeness of electoral system

• Under some institutional conditions, the power of the interest groups may be higher

• E.g, politicians have a lower electoral connection so they can cater more freely to interest groups

Articulation

A brief note on public opinion We are aware of the relevance of public opinion The preliminary evidence in the country studies

shows that it matters Politicians cater to perceived interests of citizens and

groups (and they build coalitions through messages that affect those perceptions)

• Brazil’s demand for macro stability• Argentina’s use of public opinion by the president

Previous work has captured part of the issue, which makes us wonder how much time to spend on it.

• The Political Economy of Reforms (Lora, etc)• IPES 2009• Stokes (and others) on deliberative democracy

Putting everything together.What would a model look like? How could a model explain differences in the content of policies

(e.g., a higher demand for ‘public goods’ instead of ‘rents’) based on the previous ‘pieces’?

Basically, Policymaking

Low government capabilities Volatility, low adaptability, lack of coordination

Economic structure High fragmentation, peak associations with low survival

rates, etc Articulation (determinants of incentives)

Loose electoral connections, institutional fragmentation, lack of enforcement mechanisms, etc.

might tend to favor Y- over Y+

Putting everything together.Conceptual messages

By moving from a fragmented view, some conceptual messages arise (which are compatible with our previous theoretical work)

1. Taking a picture is not enough for understanding the reasons behind productivity

Powerful actors today may not be powerful tomorrow Powerful real actors today may want to affect political

institutions in order to remain powerful tomorrow Politicians may want to alter institutions in order to gain

power and influence over the interest groups


2. Looking at the partial equilibrium margin could provide a distorted view of the vector of policies.

In a country with a relatively good equilibrium, both good and bad policies are possible

• Politicians try to isolate certain sector or policy areas from negotiation, put good institutions in place, and so on.• E.g., fiscal or monetary policy. Regulatory framework

• However, there may be some sectors or areas in which they decide to let “politics play their role”. • They give the ministries to the coalition, they use those

areas for generating transactions, they buy votes with pork, etc.


3. The articulation of political and business interests may not only happen at different arenas but it may also change over time

In some countries, the articulation is stable• Interest groups know who to talk to and what is

their role (Chile) In some others, it is not. Political actors

pick different alliances at different moments in time

• The president (or other powerful political actor) may decide who to work with in order to extract as much rents as possible. (Argentina)


4. Some countries reach stability and cooperative outcomes at certain levels (deep institutions, policymaking transactions) while others do not

In some countries, the relationship between real and political actors is sustained by the institutional framework

• E.g., Chile’s electoral system favors transactions within the coalition

In some countries, the relationship is independent of the institutional framework (institutions change but the outcomes are similar)

• It may be the case in Mexico and Venezuela In some countries, the relationship is unstable

• E.g., Argentina In some countries, transactions have moved from the

institutionalized arenas to non-institutionalized ones.• E.g., Bolivia


5. It may also be the case that results are different according to the level of government at which transactions take place.

Some groups have a say at the national level (e.g. finance sector), so they affect the policies that are decided at that level (e.g., general macro policy)

Some groups have a say at the subnational level (e.g., industries). Therefore, they ask for policies decided there, such as:

• Tax benefits (which may generate problems for tax changes when coordination is necessary across state lines)

• Infrastructure (difficult to coordinate across states) If interest groups and the political organization differ in

their level of aggregation, exchanges may become more difficult (e.g., teachers unions in Mexico)

The country studies Very preliminary results The preliminary work shows great promise Country studies seem to cover the full range of

possibilities It is important to note that we are not going to

concentrate on explaining variations in productivity at the country level

We are going to be looking at the vector of policies instead.

Basically, whether

c: country; i: sector; t: time, where Yc,i,t can take the values Y+ or Y-

ΣYc,i,t>0

The country studies Very preliminary results Some rough approximation by comparing set of

countries shows the following characteristics

Stability in the PMP vs. PMP in flux Chile vs. Bolivia

Capture: interests vs. political agents Mexico vs. Argentina

Decentralized vs concentrated role of interests Brazil vs. Colombia (or Costa Rica)

Institutionalized arena vs de-institutionalized Brazil vs. Bolivia

Transactions in different arenas Chile vs the rest

Putting everything together.Practical messages1. What are the main political/institutional

constraints that may limit the adoption of policies that are productivity enhancing

2. Suggestions on how to put together public policy packages that:

Are productivity enhancing Take into account the desires of certain

key actors who may otherwise block the reforms, or affect its implementation and sustainability

Have a positive probability of being implemented

Putting everything together.Practical messages

3. Suggestions to the Bank on how to facilitate the conditions in 2.

4. Suggestions about potential institutional changes that may facilitate the adoption of a vector of policies that is more favorable for productivity within the logic in 2.

5. Suggestions on pending work that may be warranted to fully understand the full scope of the phenomena.

Work ahead

Keep working on the general framework Country studies: AR, BO, BR, CH, CO, CR, ME, and VE Synergies with other projects (e.g., PDP) and other

researchers (e.g., BRS, Galiani, etc) The more information we get from the other chapters

(and the sooner) it may be easier for us to bring this chapter to provide more fruitful results. We can help to explain why certain policies are enacted

only once we know who benefits and what is their impact.

We can only ask country teams to look into certain issues only as long as we know that that is the problem in the country.

DIA 2010Productivity in Latin America

Chapter 13:The Political Economy of Productivity

dia 2010 productivity in latin america chapter 13: the political economy of productivity prepared...

Documents

productivityrelated

determination of policies

public policies

nutshell slide

role of political institutions

country level slide

missing policies

features of policies