nep-pol New Economics Papers
on Positive Political Economics
Issue of 2005‒03‒13
ten papers chosen by
Eugene Beaulieu
University of Calgary

  1. Dictators and Their Viziers: Agency Problems in Dictatorships By Georgy Egorov; Konstantin Sonin
  2. The Politics of Institutional Learning and Creation: Bank Crises and Supervision in East Central Europe By Gerald A. McDermott
  3. Measuring the Institutional Change of the Monetary Regime in a Political Economy Perspective (Groups of interest and monetary variables during the Currency Board introduction in Bulgaria) By Nikolay Nenovsky; Yorgos Rizopoulos
  4. The Prohibition of Alcohol Revisited: the US Case in International Perspective By Ruth Dupré
  5. Businessman Candidates: Special-Interest Politics in Weakly Institutionalized Environments By Scott Gehlbach; Konstantin Sonin
  6. Economic, Social and Demographic Determinants of Political Participation in Latin America: Evidence from the 1990s By Alejandro Gaviria; Ugo Panizza; Jessica Seddon Wallack
  7. Reform, FDI and Economic Growth: Tale of the Tortoise and the Hare By Bruno Merlevede; Koen Schoors
  8. Explaining Patterns of Corruption in the Russian Regions By Phyllis Dininio; Robert W. Orttung
  9. Redistribution via Taxation: The Limited Role of the Personal Income Tax in Developing Countries By Richard M. Bird; Eric M. Zolt
  10. On sustainable Pay As You Go systems. By Gabrielle Demange

  1. By: Georgy Egorov; Konstantin Sonin
    Abstract: The possibility of treason by a close associate has been a nightmare of most dictators throughout history. Better informed viziers are also better able to discriminate among potential plotters, and this makes them more risky subordinates for the dictator. To avoid this, dictators, especially which are weak and vulnerable, sacri.ce the competence of their agents, hiring mediocre but loyal subordinates. One reason why democracies generally witness more talented people in the government is the dictator.s inability to commit to the optimal (less than the capital) punishment for those who unsuccessfully plotted to remove him from power. Furthermore, any use of incentive schemes by a dictator is limited by the fact that rewards are conditional on dictator.s own willingness to keep his promises, while punishments are conditional on dictator.s own survival. We model a principalagent game between a dictator and his (probably, few) viziers both in static and dynamic perspectives. The dynamic model allows us to focus on the succession problem the insecure dictators face.
    Keywords: dictatorship, formal political theory, principal-agent theory, institutions
    JEL: D72 P16
    Date: 2005–01–01
  2. By: Gerald A. McDermott
    Abstract: This article examines the political conditions shaping the creation of new institutional capabilities. It analyzes bank sector reforms in the 1990s in three leading postcommunist democracies – Hungary, Poland, and the Czech Republic. It shows how different political approaches to economic transformation can facilitate or hinder the ability of relevant public and private actors to experiment and learn their new roles. With its emphasis on insulating power and rapidly implementing self-enforcing economic incentives, the “depoliticization” approach creates few changes in bank behavior and, indeed impedes investment in new capabilities at the bank and supervisory levels. The “deliberative restructuring” approach fostered innovative, costeffective monitoring structures for recapitalization, a strong supervisory system, and a stable, expanding banking sector.
    Keywords: Institutional change, transition economies, bank crises, bank supervision, learn
    JEL: G28 F02 P26 K23
    Date: 2004–11–01
  3. By: Nikolay Nenovsky; Yorgos Rizopoulos
    Abstract: The paper explores the possibilities to measure the institutional change in the monetary field. A political economy theoretical framework is built up, where the change of the monetary regime is analyzed as the outcome of the debtors - creditors interactions. In this perspective, the value of some traditional monetary variables during the period before and after the introduction of the Currency Board in Bulgaria, in 1997, reveals the main actors' evolving relative positions.
    Keywords: institutional change, monetary regime, Currency Board, transition, Bulgar
    JEL: E42 E52 O10 P30
    Date: 2004–12–01
  4. By: Ruth Dupré (IEA, HEC Montréal)
    Abstract: The 13-year American episode of the prohibition of alcohol (1919-1933) is so notorious and has been so extensively studied that there would not seem to be much to add. However, very little of this work has been done in a comparative and international perspective. Yet, the prohibition movement was international and quite a few countries, particularly the ones with a significant Anglo-Saxon Protestant majority, went through a long lasting and vigorous struggle over the issue. While some of them came quite close to a total ban, they finally adopted different regimes and none went as far as the U.S. Why was it? This is the question addressed in this paper. Using a political economy approach, we try to compare the strength and stakes of the supporters and opponents of prohibition in the U.S., Canada, Australia and New Zealand. As these countries shared many socio-cultural features with the US, this international exploration should shed new light on the American experiment with prohibition, an episode which has always been somehow a paradox in the land of individual freedom and minimalist government..
    Date: 2004–11
  5. By: Scott Gehlbach; Konstantin Sonin
    Abstract: We initiate examination of the political boundaries of the firm by exploring the phenomenon of “businessman candidates”: business owners and managers who bypass conventional means of political influence to run for public office themselves. We argue that in-house production of political influence will be more likely in institutional environments where candidates find it difficult to make binding campaign promises. When campaign promises are binding, then a businessman may always pay a professional politician to run on the platform that political competition would otherwise compel the businessman to adopt. In contrast, when commitment to a campaign platform is impossible, then candidate identity matters for the policies that will be adopted ex post, implying that a businessman may choose to run for office if the stakes are sufficiently large. We illustrate our arguments through discussion of gubernatorial elections in postcommunist Russia, where businessmen frequently run for public office, institutions to encourage elected officials to keep their campaign promises are weak, and competition for rents is intense.
    Keywords: Businessman candidates, elections, citizen candidates, institutions, political economy
    JEL: D72 P16 P26 N40
    Date: 2004–12–01
  6. By: Alejandro Gaviria (Universidad Los Andes); Ugo Panizza (Research Department, Inter-American Development Bank); Jessica Seddon Wallack (UC San Diego)
    Abstract: This paper uses international data on voter turnout and individual-level data to describe levels and distribution of political participation in Latin America. The paper finds that, while voter turnout in Latin America is rather low, the analysis of more general indicators of political activism reveals that participation is fairly homogenous across socio-economic strata. The finding that participation in Latin America, though low, is comparatively egalitarian seems to partly contradict the perception that Latin America’s history has been one of exclusion and marginalization.
    Keywords: Democracy, Election, Participation, Latin America
    JEL: D72
    Date: 2003–09
  7. By: Bruno Merlevede; Koen Schoors
    Abstract: Our main interest is the impact of the choice of the speed of economic reform on economic growth. We estimate a system of 3 equations where economic growth, economic reform and FDI are jointly determined. We find that new reforms affect economic growth negatively but attract FDI, whereas the level of past reform leads to higher growth. This means that the immediate adjustment cost of new reforms is counterbalanced by an immediate increase in FDI inflows and higher growth in the future through a higher level of past reform. Reform reversals contribute to lower growth. We use the model to simulate the impact of big bang reform and gradualist reform on economic growth. This is only meaningful in the presence of reform reversals, which requires aggregate uncertainty about the appropriate reform path. Using the coefficients from the empirical model we find that even relatively small ex ante reversal probabilities suffice to tilt the balance in favour of gradualism. This could be reinforced by the shortsightedness of policymakers, but may be moderated by voter myopia.
    Keywords: policy reform, gradualism, big bang, FDI, economic growth
    JEL: O57 P21 P26 P27
    Date: 2004–11–01
  8. By: Phyllis Dininio; Robert W. Orttung
    Abstract: Corruption is one of the key problems facing the Russian state as it seeks to evolve out of its socialist past. Naturally, regional patterns of corruption exist across a country as large and diverse as the Russian Federation. To explain these variations, we analyze 2002 data from Transparency International and the Information for Democracy Foundation that provides the first effort to measure differences in incidence of corruption across 40 Russian regions. We find that corruption in Russia primarily is a structural problem, and not one related to its institutions. Within each region, the amount of corruption increases as the size of the regional economy grows, the per capita income decreases, and the population decreases. Russian policymakers can therefore work to reduce corruption by encouraging economic development outside of the key centers of Moscow and St. Petersburg. Because the data show that voter turnout also lowers corruption, policymakers can also fight corruption by fostering more political accountability in elections.
    Keywords: Corruption, Russia
    JEL: D73
    Date: 2004–11–01
  9. By: Richard M. Bird (International Tax Program, Rotman School of Management, University of Toronto); Eric M. Zolt (University of California, Los Angeles)
    Abstract: In developed countries, the income tax, especially the personal income tax, has long been viewed as the primary instrument for redistributing income and wealth. This article examines whether it makes sense for developing countries to rely on the income tax for redistributive purposes. We put forth three propositions. First, the personal income tax has done little to reduce inequality in many developing countries. This failure is not surprising given that in many countries personal income taxes are neither comprehensive nor very progressive - they often amount to little more than withholding taxes on labor income in the formal sector. Moreover, the personal income tax plays such a small role in the tax systems of developing countries that it would be unrealistic to believe that this tax could have a meaningful impact on distribution. Second, it is not costless to pretend to have a progressive personal income tax system. Tax systems generate real administrative, compliance, economic efficiency and political costs. The costs associated with badly designed and badly administered personal income tax systems likely exceed the costs associated with other taxes. There are opportunity costs as well. Third, given the ineffectiveness of the personal income tax, if countries want to use the fiscal system to reduce poverty or reduce inequality, alternative approaches merit consideration. Countries need to make better use of their expenditure programs in targeting resources to the poor. Given the dominance of taxes on consumption in the tax structure of developing countries, the distributional consequences of consumption taxes are of far greater importance than those of the personal income tax. Countries can also make greater use of benefit taxation and in particular fiscal decentralization may allow for better matching of those who benefit and those who pay for government activity. Finally, countries can consider alternatives to taxing income other than the current comprehensive income approach.
    Keywords: redistribution, progressivity, developing countries, tax policy, personal income tax, benefit taxation
    JEL: H22 H24 O15 O17 O23
  10. By: Gabrielle Demange
    Abstract: An unfunded Social Security system faces the major risk, sometimes referred to as "political risk", that future generations modify or even suppress the contributions. In order to account properly for this risk, the paper considers a political process in which the support to the system is asked from each new born generation. The analysis is conducted in an overlapping generations economy that is subject to macro-economic shocks. As a consequence, the political support varies with the evolution of the economy. The impact of various factors -intra-generational redistribution, risk aversion, financial markets, governmental debt- on the political sustainability of a pay-as-you-go system is discussed.
    Date: 2005

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