Private Investment and the Institutionalization of Collective Action in

Autocracies: Ruling Parties and Legislatures

Scott Gehlbach and Philip Keefer

Investment in Non-Democracies•

2007: 40 percent of countries lacking competitive elections attracted more private investment than 50 percent of countries with competitive elections.

•

Contrary to expectations, variation within regime type is as important as across regime type.◦

Std. dev. private investment/GDP among non-

democracies = 7.1%◦

average difference between democracies and non-democracies = 2.4%.

•

What explains intra-regime variation in ◦

investment in non-democracies?

◦

the ability of autocrats to make credible commitments?

Our answer: organizations that support collective action

•

We analyze specific organizational arrangements that allow members of a group to overcome obstacles to collective action.•

Qualitative evidence: non-democracies vary in the degree to which autocrats allow the “institutionalization”

of ruling

parties, militaries, and bureaucracies.•

Quantitative evidence: ruling party institutionalization and competitive legislative elections reduce expropriation risk and raise private investment.

Prior research on autocrat performance (1)

•

Where selectorate can discipline elite leaders, performance is better.•

North and Weingast: the ability to organize violence against the ruler secures the rights of the wealthy.

•

Besley and Kudamatsu, Bueno de Mesquita, et al, Haber: the larger the selectorate –

defined as the group that can

replace the leader –

the more successful an autocracy.

•

We make a more specific argument (the “selectorate”

can

act collectively only when it is allowed to organize) and bring more precise data to bear.

Prior research on autocrat performance (2)•

Ruling parties•

Haber, Razo, Maurer and Magaloní

link ruling party

characteristics to economic performance in Mexico. ◦

We are specific about the ability of party members to act collectively. Allows us to distinguish Mexico under Porfirio Díaz and the PRI; China under Mao and Deng.

•

Geddes: leaders use parties to raise costs of coups.◦

Us: This effect is strong depending on whether leaders delegate authority to parties and allow party members to organize (e.g., demonstrations).

•

Legislatures•

Boix and Svolik, Gandhi, Wright look at legislatures in autocracies, arguing that these constrain ruler.

•

We show that it is not legislatures, per se, but the ability of legislatures to build personal constituencies in competitive elections that matters.

Theory: Collective action and autocracy

•

Myerson (2008) and Gehlbach and Keefer (2010) focus on information barriers as obstacle to collective action.•

Organization is needed to solve information problems

•

Track and communicate leader actions towards members; limit information to within the ruling party.

•

Boix and Svolik: organization needed to provide information that prevents “mistaken coups”.

•

More generally: collective action difficult when group members are not allowed to erect organizational arrangements that permit them: •

to limit free-riding by members;

•

to take collective action independent of the leader’s direction.

Ruling parties, legislatures and elections

•

Ruling-party institutionalization = ruling parties where members can organize independently of leader.

•

Characteristics (relevant for empirical measures):•

Such parties more likely to survive the leader.

•

Likely to choose the leader (i.e., leadership transitions will be more “regular”).

•

Legislatures•

Allow coordination among a small group of supporters.

•

But this small group can more credibly threaten punishment of leader reneging when members can build their own support base.

•

Competitive (intra or inter-party) legislative elections accomplish this: ruler permits/requires members of legislatures to mobilize support for themselves.

Three hypotheses

•

Ruling-party institutionalization/legislative elections raise private investment: •

Party members in institutionalized parties are more confident that they will not be expropriated.

•

They do NOT raise FDI as much.•

Foreign investors don’t belong to these parties and can only on collective action by party members to defend their interests if party members have stake in the enterprise.

•

RPI/legislatures yield better governance (e.g., lower expropriation risk)

Qualitative evidence: RPI in China•

China: significant changes in organization of CCP from Mao to Deng.

•

Under Mao:•

“Mao Zedong attempted to sustain his revolutionary charisma and stem the trend of institutionalization. . . By launching mass campaigns such as the Great Leap Forward and the Cultural Revolution.”

(Shirk)

•

These pitted members of the CCP against each other (e.g., Red Guard): 1000’s of officials transferred to lower-level jobs, sent to countryside, imprisoned during Cultural Revolution.

Qualitative evidence: RPI in China•

After Mao: •

Deng Xiaoping abolishes Red Guard

•

Introduces personnel reforms in 1980 governed by “rules, clear lines of authority, and collective decision-making institutions to replace the over-concentration of power and patriarchal rule.”

(Shirk)

•

Rewards to cadres are transparent and easily observed by insiders (Whiting)

•

Xinhua News Agency’s “Second Editorial Office”

reports,

“domestic situation final proofs”, seen only by central leadership under Mao; in 1980s, circulation extended to provincial leaders.

•

Private investment soars. . .

Qualitative evidence: No RPI in Algeria

Algeria and the Front de Liberation Nationale•

Houari Boumedienne takes power in a coup in 1965.

•

Puts party under his personal control, replacing party members with veterans from war of independence.

•

Briefly tries to institutionalize in the mid-1970s to encourage the party to mobilize support, but dies.

•

His successor in 1979, Chadli Ben Jalid, reverses course.

•

Private investment declined.•

25.1% of GDP 1971-1975•

32.3% 1976-1979•

18.6% 1980-1985.Syria, similarly: •

Hafiz al-Asad comes to power in 1970 and sidelines the civilian Ba’th Party.•

Previously: recruitment to party ideological.•

Under al-Asad: sectarian and regional.

Quantitative evidenceHypotheses (again):Ability of supporters to act collectively:

•

raises private investment.

•

does not raise FDI (as much).

•

yields lower expropriation risk.

We estimate:

iiioi BXzy εββ +++= 21

How to measure collective action?

•

Ruling-party institutionalization = ruling parties where members can organize independently of leader.

•

Key attribute of such organizations: they survive leader transitions.

•

Measure 1: Age of ruling party when leader takes power (Database of Political Institutions).•

A ruling party created by the leader is less likely to be independent of the leader than one that pre-dates him.

•

A ruling party that allows collective action by members can more effectively fend off outside challenges, including those by party members who defect and attempt to build a competing organization.

RPI proxy-2

00

2040

60

Ruling Party Age - Leader Tenure, Non-democracies, 2004

MENA Oil Large MENA OilMENA Non-oil No competitive electionsMiddle Income East AsiaLarge East Asia

Measure 2: Regular Entry

•

If ruler enters “regularly”, more likely that supporters have chosen him in institutionalized proceedings (as inside an institutionalized ruling party).

•

Archigos

(Goehmanns

et al): “Entry regular?”

Measure 3: Legislative elections

•

Previous literature: is there a legislature or not?•

Argument here: capability of legislatures to mobilize support is critical to their ability to sanction leader.

•

Legislative Index of Competitive Elections (LIEC, DPI):•

Distinguishes whether there is a legislature at all (none = 1), legislators are appointed (2); legislators run in non-

competitive elections (3); or in competitive intra-party elections (4); or against other parties that get no votes or fewer than 25% of the total (5 or 6).

•

Two (nested) dummy variables•

1.5 < LIEC

•

3.5 < LIEC

•

We predict first dummy has no effect on investment, second a positive effect.

Measure 3: Legislative elections –

variable summary

•

23 percent that have a legislature exhibit elections with multiple candidates from the ruling party;

•

Additional 11 percent allow candidates from other parties, none of which compete;

•

Further 23 percent feature candidates from other parties who do compete, but the ruling party nevertheless controls more than 75 percent of the seats

•

12 percent result in fewer than 75 percent of the seats controlled by the ruling party.

•

Results robust to excluding nondemocratic episodes in which the ruling party controls fewer than 75 percent of the legislative seats.

What’s a non-democracy? Polity

(Much) previous research uses Polity data: • Intended to be de facto assessments of how political actors

behave –

builds in endogeneity

problems.

• Do not describe the actual constraints on non-democratic leaders

• Regime distinctions hard to interpret: • Codes whether polities are pluralistic in practice, so many

are non-democratic, although they have elections, and vice versa.

• The theoretical concern, though, is precisely the role of elections in non-democracies.

What’s a non-democracy? DPI

•

Our base definition mirrors Boix and Svolik, others.• A non-democracy is exactly that: a country that does not

have competitive elections for both the executive and the legislature.

• We use DPI: LIEC<7 or EIEC < 7•

However, we explore robustness to two further, stricter definitions:• LIEC<

6 and EIEC <

6

• LIEC< 6 and EIEC < 6• Large drop in sample size

•

Unit of observation: nondemocratic episode

Control variables

•

To ensure that our results are not driven by spurious correlation with instability: • length of episode• intra-elite turnover

•

Demographic variables (rural, total, young population)

•

Country size and per capita income

•

Heterogeneity in rates of return to investment -

natural

resource rents -

can spuriously influence results (high rents

drive more investment, but less institutionalization). • fuel exports/GDP• mineral exports/GDP.

•

Heterogeneity in costs of acting collectively: social, linguistic, ethnic fractionalization.

Identification

Three identification concerns: •

Selection bias (longer episodes systematically different than shorter episodes).

•

Private investment causes institutionalization. •

Omitted factors, unrelated to theory, cause both party age longevity and high private investment.

Identification: Priors?Reasons why these should not be major issues. •

Selection bias/reverse causation.•

We control for episode duration.•

Measures of collective action not correlated with episode duration.

•

By construction, party age less ruler years in office is constant throughout an episode until (if) ruler changes.

•

Results robust to dropping episodes < 5 yrs.•

Omitted variable bias•

Coefficients stable.•

Omitted factors must increase longevity of parties relative to leader years in office.

•

Not be captured by controls for elite instability and duration of non-democratic episode.

•

Should also affect FDI –

but party age, regular entry, legislative elections do not predict FDI.

Instrumental variable•

IV: was leader in first year of non-democratic episode a military officer? •

Gehlbach and Keefer (2008): dictators with military backing need less popular support and therefore less likely to encourage private investment with RPI.

•

Strong instrument (for RPI and regular entry, not for legislative elections) ◦

large F-statistics (meeting Stock and Yogo criteria),

◦

t-statistic on military officer is >3.5.

Econometric responses to identification•

Exclusion: no formal test possible. •

Problem: “institutionalized”

militaries can substitute

for “institutionalized”

parties, legislatures.

•

Institutionalized militaries may be more likely to take power.

•

But then military leaders should enter in the second stage.

•

Unlikely problem.◦

Theory: military variable affects private investment only through its effect on leader incentives to institutionalize.

◦

Qualitative evidence: military leaders coming out of institutionalized militaries (Pinochet) seem to be the exception compared to the un-institutionalized (Samuel Doe, Jerry Rawlings).

Results –

Party age and investmentDependent variable: Private investment/GDP FDI/GDP

OLS IV OLS IV

Ruling Party Institutionalization

.11

(.001)

.32

(.07)

.033

(.10)

.043

(.53)

Length of non-democratic episode

0.06

(0.68)

0.10

(0.57)

0.02

(0.91)

0.54

(0.58)

Intra-elite turnover 1.91

(0.69)

5.06

(0.29)

6.75

(0.28)

-.33

(0.92)

Number of nondem episodes 104 104 112 112

R-squared 0.29 .13 0.18 0.18

•

OLS, SEs corrected for clustering, p-values reported•

Observations: non-democratic episodes•

Other controls: percent population young and rural, population,

land area, income/capita, fractionalization.

Results –

Regular Entry, Legis. Elections

•

OLS, SEs corrected for clustering, p-values reported

Priv. inv./GDP (OLS)

Priv. inv./GDP (IV)

FDI/GDP (OLS)

FDI /GDP (IV)

Regular entry into office (average)

4.27

(.02)

6.21

(.09)

.19

(.79)

5.40

(.11)

Legislature (LIEC>1.5) 1.92

(.37)

.298

(.75)

Legislature (LIEC>3.5) 4.30

(.005)

.832

(.16)

Robustness•

Definitions of autocracy•

Stricter: ◦

All RPI and “regular entry”

results robust, except RPI in

the “domestic investment”

OLS regression (right sign).

◦

Competitively elected legislatures: significantly more investment than no legislatures.

◦

However, no significant difference (though sign is positive) between competitive and non-competitive leg. Elections.

•

Strictest (only 55 cases, vs. 104): ◦

Legislature results fully consistent with predictions.

◦

Regular entry fully robust.

◦

RPI not robust, but in all cases but one, estimated magnitude is same as in large sample.

Robustness•

Further robustness checks (RPI in base nondem sample): •

Continent dummies

•

Log of Frankel-Romer Trade Index

•

Chinn-Ito index of financial openness

•

FDI-only sample

•

Robust regression (under-weight influential outliers)

•

Exclude small countries (<1 million)

•

Add China dummy

•

Exclude episodes <5 yrs.

Robustness•

Besley-Kudamatsu use Polity to identify autocracies: political competition (POLCOMP), constraints on the executive (XCONST),and method of chief-executive recruitment (EXREC).

•

POLCOMP and XCONST, not EXREC: •

consistent with institutionalized capacity for collective action.

•

POLCOMP, XCONST, not EXREC, are significant predictors of private investment when entered one-by-one in place of our collective-action measures.

•

All of our measures are robust to including all three. None of the three are significant jointly with our measures.

•

Tells us that we are measuring collective action more precisely.

Identification•

Controls have small effect on point estimate (.11 with full specification, .10 in bivariate).

•

Effects of RPI are weaker on outsiders –

e.g., FDI! •

Results stronger under IV•

IV coefficients larger for priv. inv, lower for FDI.

Expropriation risk and RPI

•

Legislature not significant•

Estimated coefficients of RPI, regular entry, four different regressions.•

Control variables as in investment regressions.•

Country-clustered standard errors•

p-values in parentheses

Dependent variable: expropriation risk (ICRG)

OLS IV

Ruling Party Institutionalization

0.020

(0.11)0.054

(0.065)

Regular entry 1.17

(0.003)1.84

(0.02)

Extension: Bureaucratic institutionalization

•

Singapore: •

Public Administration organized to promote collective action by members (e.g., to provide services to citizens).

•

Compensation rule-based and performance-based ◦

40-50 percent of total compensation is performance-

based.

◦

Decided within public administration, not be political leadership.

◦

Transparent: compensation linked to automated tracking of spending and outputs.

◦

Civil servants have substantial discretion (required to act collectively).

◦

Performance-based compensation would not be observed if leaders could not make credible commitments to civil servants.

•

Middle East: characterized by patronage-driven organization under the control of the ruler.

Extension: Military institutionalizationIndonesia•

Suharto places the divided army under a single command•

Allows substantial delegation of authority to regional commands,

down to the village level.

•

Army mobilized for local development efforts. •

Retired military play a large role on the boards of private companies.•

1990s, Suharto reverses course, injects himself into promotion decisions, plays generals off against each other. •

Discipline breaks down. •

May 1998, popular uprising brings the regime down (miltary could

not save him).

Syria•

Best-trained military in the region, but little delegation even to field commanders;

•

evaluations and promotions controlled by the ruler; •

the general who attempted to increase use of merit was replaced,

just as Mao replaced Deng Xiaopeng when he tried to institutionalize the CCP.

•

Enjoy little success on the battlefield.

SummaryEarlier literature:

•

Asks whether non-elites can protect against opportunistic behavior by elites (Boix, Acemoglu and Robinson);

•

Whether selectorate can replace the leader (Bueno de Mesquita, et al., Besley and Kudamatsu);

•

Whether formal institutions –

like legislators –

are in place to guarantee investment (Wright, Gandhi).

Our work: •

Selectorates matter when they can organize collectively to replace leader.

•

Shows that institutionalization (e.g., of ruling party) is key. •

Re-interprets the role of these institutions (institutionalized ruling parties, legislatures, militaries, bureaucracies) in non-

democratic settings. •

Provides a unified framework for thinking about institutions in autocracies (from militaries to ruling parties).