role of government in economic policy
TRANSCRIPT
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Governments Role in
Economy
Basic Concepts
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Government
organizations of individuals
particular set of institutions and people
authorized by formal documents legally empowered
mae binding decisions on behalf of a
particular community e!ternally" war# trade# border control# $$$
internally" ta!# education# health# welfare# $$$
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Good Governance
Rule of law government can tae no action that has not been
authorized by law
citizens can be punished only for actions thatviolate an e!isting law
%roperty rights
Regulatory regime &acroeconomic policies
'bsence of corruption
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Governments %ower
%ower
ability to get people or groups to do what they
otherwise would not do
Governments power
to develop institutions
to carry out policies
sometimes unpopular
has to be sufficiently strong
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Governments %ower
sufficient power
constrained power
&adison" oblige the government to controlitself
restraints to chec arbitrary and corrupt
behavior by the government (ey" building effective political institutions
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%olitical )nstitutions
*rganizations# individuals# and agencies
Electoral rules
single+member district and first+past+the+post proportional representation system
Constitutional rules
division and limit of power between branches of government
between central and local governments
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%olitical )nstitutions
Constrain arbitrary e!ercise of power by
politicians and bureaucrats
delineate property rights between state and
private sector
enforce property rights
influence competition in political process
hold public officials accountable for theiractions
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Economic %olicy *utcomes
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Economic %olicy *utcomes
%olitical institutions play important role
Resolve redistribution conflict from
economy policies
,hree e!amples of policy choices
budget deficit
financial maret
trade policy
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Budget -eficit
-ifference between revenue and
e!penditure
Government influence on budget
muster political support for ta!ation
resist demands for e!pansion of spending
%olitical institutions of budget procedures balanced budget rules
power of finance ministry
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Balanced Budget 'mendment
.ever passed /$0$ Congress
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Balanced budget rules in /$0$
'll /$0$ states but 1ermont have
constitutional 2345 or legal 265 re7uirement
for balanced budget
Gramlich 24889"46:5 holds that all real+world
balanced budget amendments have
significant enforcement problems
even with the ;trics
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Balanced budget rules
are more liely to be effective if
voluntarily adopted
impose hard constraints
difficult to reverse
effectively enforced by
a credible third party or
higher level government
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)nfluence of Electoral Rules
&inority 2coalition5 governments tend to
have higher budget deficit than ma=ority
government
0tates with systems of proportional
representation tend to have higher budget
deficit than states with ma=oritarian
systems$
Budget deficit tends to rise in election year
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>inancial maret regulation
)nfluence of political institutions
independent financial regulatory agencies
central ban independence
checs and balances in political process
'mong developing countries# central ban
independence doesnt seem to affect
inflation outcomes
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)nternational trade liberalization
Governments trade policy influenced by
domestic political conflict between gainers
and losers from trade liberalization
)ndustries that tend to have tariff protection
industries in decline
industries that are highly unionized
mae substantial campaign contributions
more geographically dispersed
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Corruption
E!ercise of public power for private gain
has large costs for economic development
undermines well+functioning marets a ta! that distorts competition ? lower returns
a barrier to new entries in maret competition
subvert states legitimacy weaens state capacity to provide institutions
to support marets
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Causes of corruption
-istorted policy environment 2opportunity5
@ea =udiciary 2credible threat to punish5
%oor civil service management Aow public sector pay 2not evident5
*ther factors
*penness to international trade Comple!ity of regulatory environment
igh and variable inflation
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%olitical institutions
%olitical institutions can help reduce the
opportunities and incentives for corruption
Restrain politicians from arbitrary actions
old politicians accountable for their action
-ecentralization
Electoral rules
%ress freedom
Civil society
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,a!ation institutions ? policies
,a! provides the state with resources to
build maret+supporting institutions
@ea ta! collection institutions lead to
disproportionate reliance on ta! revenue
from more visible and easier sources
international trade
large firms
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,a! collection institutions
%oor countries tend to have weaer ta!
administration ? higher reliance on tariffs
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Conclusions
%olitical institutions matter
Good governance is essential to economic
development
Effective 0tate
plays a catalytic# facilitating role
encourage and complement the activities ofprivate businesses and individuals