Political Economy and Growth

Philip KeeferDevelopment Research Group

PREM Growth Course26 March 2009

Why not just focus on economics? Partial reforms don’t deliver big growth bang for buck. Economic explanation:

• Wrong reforms (e.g., not the “bottleneck” reforms).

• Exogenous constraints (capacity; land-locked; neighbors; no knowledge)

• Synergies absent (Reform more than sum of parts).

• None distinguish fast- and slow-growers, though.

Political explanation:• Governments have limited interested in growth • Explains partial, poorly implemented, halting,

wrong reforms; inattention to exogenous constraints; lack of synergies.

• Assertion: if one size does not fit all, it’s more likely because of politics than economics.

What do politicians need to do to support growth?

Growth requires: Policies that give a substantial fraction of entrepreneurs access to

• finance• skilled workforce• land and transportation• regulatory approvals and security from

opportunistic behavior by government officials• (etc.)

When do politicians pursue these? • When political success depends more on broad

public than on special interest support• When they can align incentives of public officials

who implement these policies.

What dimensions of politics matter?

2 key political market imperfections (PMIs): lack of information; lack of credibility (Keefer and Khemani, WBRO 2005)Citizen information

• Uninformed citizens can’t hold governments accountable for poor performance.

• Discourages pro-citizen (pro-growth) policies (no political credit)

• Encourages pro-special interest policies (no blame).

• e.g., Grossman and Helpman: special interests finance advertising to reach uninformed citizens.

Lack of Political Credibility

Low political penalty for reneging on promises. Why?• Challengers can’t promise to do better.• Incumbents bear no reputational loss.• Citizens cannot hold government officials

collectively responsible. Policy consequences

• Low credibility promotes narrow targeted (clientelist) policies, discourages broad public policies (Keefer and Vlaicu, JLEO 2008).

• Explains policies in young democracies: more corruption, less rule of law, less secondary education, larger public sector wage bill/GDP (Keefer, AJPS, 2007).

Political parties keyInstitutionalized parties allow broadly credible promises:

• Instill collective responsibility; • Generate reputational costs from reneging

Give governments leverage over officials:• harder for officials to play divide and conquer; • appointments less likely to be cronyistic; • government-official “contracts” more credible.

Parties institutionalized if:• Voters vote for party, not just candidates.• Parties raise money.• Party members can replace party leaders.

Per capita growth ~2.5 percentage points higher in democracies with programmatic parties.

Same issues important in autocracies

Autocrats who want to pursue growth need to bring government officials on board.But how can they credibly promise to reward officials for success? Institutionalization (of parties, bureaucracies, military) (Gehlbach and Keefer).

• Autocrat allows large sub-group of citizens to organize◦ (60 million members of the Chinese Communist

Party)• Increases their ability to overthrow autocrat if he

reneges.• Increases their willingness to invest.• Autocrat can write pro-growth contracts with

party members

Ruling party institut’n and investment

Dependent variable:

Private investment/GDP

Base sample

More autocratic

Age of ruling party

0,088(0.01)

0.109(0.00)

Ruler years in office

0.072(0.43)

-0.050(0.70)

Length of non-democratic episode

0.012(0.92)

0.103(0.53)

Political instability

0.677(0.90)

0.880(0.89)

N, countries 107, 86 87, 76

R-squared 0.28 0.27

• OLS, SEs corrected for clustering, p-values reported• Observations: non-democratic episodes• Source: Gehlbach and Keefer (2007)

Applications: Benin, Ghana, MENA

Benin, Ghana: CEMs concerned with growth. Key concern: What are the incentives of political decision makers to pursue growth? MENA: Flagship on the private sector in the region. Key concern: What are the incentives of political decision makers to encourage private investment?

Benin – democratic “success”, growth “failure”

0.0

05

.01

.01

5.0

2

Growth in Benin versusAfrican and all other democracies, 1992-2006

Benin African democracies,1992All democracies, 1992

Benin: Governance weak-.

8-.

6-.

4-.

20

.2

All other democracies Benin

Governance in Benin versus all other democracies, 2006

Regulatory quality Rule of lawCorruption

Gov. expenditures don’t increase human capital

02

04

06

08

0

All other democracies Benin

Education and public spendingBenin versus other democracies, 2005

Gross secondary school enrollmentGovernment expenditures/GDP, percent

Benin: low information, low credibility

African politics often characterized as “neopatrimonial” or “clientelist”.

• More likely when citizen information low and no loss of credibility from slow growth.

• Benin exhibits both of these traits.

Benin: Citizens uninformed

Afrobarometer question on whether fees are obligatory in public primary schools, public health clinics.

• 65-75% answered correctly in 17 countries other than Benin.

• 31-51% answered correctly in Benin.Many media outlets, but . . .

• Under-capitalized. • Little spent collecting news about government

policies. • Governments are willing to apply pressure

against critical media.

Benin: parties not institutionalized

Parties not programmatic (2006, Database of Political Institutions):

• 60 percent of biggest parties in all democracies are programmatic.

• None of Benin’s parties. Parties unstable (not institutionalized).

• ~100 parties disappeared in 2005, ~75 new parties in 2007.

• Youngest governing coalition (FCBE) won the most seats in 2007; oldest (PRD) lost a seat.

Benin: Low citizen attachment to parties

Citizens indifferent between parties when parties not programmatic/institutionalized.

66% of 1200 Benin respondents to the Afrobarometer survey indicate they do not feel close to any party; twice as many as in Ghana.

Politicians know parties don’t matter, so they switch often.

“I prefer to start my own party rather than accept a subordinate role in the party of another.”

Consequence: 95% of Beninese respondents: politicians rarely or never keep their promises (Ghana: 82%).

Benin: Presidents weakly accountable for growth

Presidents are the key decision makers in Benin.Absence of parties means campaigns based on individual, not party characteristics. Two consequences.

• Rely on clientelist payouts to voters and donations from special interests: attenuates incentives to pursue growth.

• Difficult to govern: Can only trust those vested in president’s success since no institutionalized party.

Institutions exacerbate low accountability

Rules in Benin marginalize legislators.• President has sole authority to propose budgets

AND (very unusual): de facto authority to declare budget amendments by deputies to be invalid, b/c cost implications insufficiently documented.

• President of the National Assembly almost entirely controls agenda of Assembly and (very unusual) 2/3 vote necessary to remove him.

Deputies indicate little legislative oversight of budgets, little interest/capacity in advancing policy agendas.Citizens have no reason to hold deputies accountable for growth failures if they’re essentially powerless to influence policy.

Benin: policy implications

Institutional• Increase vote threshold for parties• Increase responsibility of National Assembly for

budgetInformation

• Increase collection and dissemination of information about gov’t decisions. ◦ Start with budget – currently even the National

Assembly is poorly informed about budget implementation.

• Make it easy for media to report on government performance.

Improve the quality of education• Current policy emphasizes quantity

Ghana: could do better

• Growth better than SSA average; signif. FDI; big reforms w/r/t red tape, education, health.

• But:• Growth far lower than East Asian countries at similar

levels of development.• Governance no better or worse than average of all

other countries.• Public spending not productive

• Secondary school enrollment 20 percentage points lower than comparators.

• Public investment and government employment are several percentage points of GDP higher than average;

• But public investment has not been growth-maximizing.

Puzzle: limited impact of competitive elections (2000)

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

gross secondary enrollment

public investment/GDP

central government wage bill/GDP

tax revenues/GDP

Puzzle: limited impact of competitive elections (2000)

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

corruption rule of law bureaucratic quality

What explains limited policy responsiveness to elections?

Again, political market imperfections: • Uninformed citizens, • Limited political credibility • not fully (but more than in Benin)

institutionalized partiesLeading to:

• continuing preference for policies serving targeted constituencies;

• slow improvement of public goods; • continued significant rent-seeking

Ghana: Information

• No newspapers: Afrobarometer 2005: 60% NEVER get news from newspaper vs. 14% in South Africa

• Low education – and it matters: ◦ Up to 10 years of education (vast majority), 36

percent could identify Economic Recovery Program (ERP);

◦ more than ten years of education: 66 percent. (Afrobarometer 1999)

Ghana: Non-credible electoral promises

Few, stable parties in Ghana (in contrast to Benin)• Less dependent on charismatic leaders; more

party discipline; members have more influence on party leadership

But:• No programmatic differences

◦ preference for the market similar between NDC and NPP, their supporters.

◦ Broad public campaigns focus on competence/ corruption, not promises regarding future policies.

• Party and party policy stances irrelevant to unusually large number of legislative campaigns.

• Enormous importance of personal handouts by candidates, not parties.

Why is Ghana doing well?

• Despite strong political incentives to pursue clientelist policies, Ghana is doing better than neighbors. Why?◦ No dominant political party (not Senegal).◦ Two main political parties are relatively

“institutionalized” (not Benin).◦ Strong traditional restraints on arbitrary

behavior by key “patrons” – chiefs and elders.◦ Continually falling risks of extra-institutional

threats to the regime.

Policy implications-info and education

Information• Accelerate transparency reforms and the

dissemination of relevant information to citizens.• More aggressive collection and dissemination of

government performance information • Examples:

◦ test scores and class sizes by school◦ mortality by hospital; etc.◦ spending by community.

Quality and quantity of education• Bias in the system towards construction and

quantity improvements.• Need access expansion, but also dramatic quality

improvement.

MENA: What are the growth issues?

• By many measures, MENA and East Asia are similar.

• But private investment, exports, growth far lower in MENA.

• Why?• Overall political environment does not favor

growth, even if specific policy reforms are evident.

Governance not obviously the problem: WBI Governance Index

-1-.

50

.51

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005year

MENA Oil MENA Non-Oil

No competitive elections Richer CountriesEast Asian Countries

WBI Governance Index

ICRG Index – better in MENA, non-oil than in East Asia

2.5

33

.54

4.5

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005year

MENA Oil MENA Non-Oil

No competitive elections Richer CountriesEast Asian Countries

ICRG Rule of Law + Corruption

Domestic credit to private sector high in non-oil MENA (but smaller as fraction of total)

02

04

06

08

0

Domestic Credit to the Private Sector/GDP, 2005

MENA Oil MENA Non-oil

No competitive elections Middle IncomeEast Asia

So why are MENA growth and exports low?

Incumbent firms favored• credit access very concentrated.• trade barriers much higher in MENA.

Incumbent workers favored• labor protection much stiffer

Government can’t make credible commitments to new entrants.

Trade barriers high in MENA

Overall Trade Restrictiveness, Manufacturing (Tariff and NT Barriers)

0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8

Algeria

Egypt

Jordan

Morocco

Tunisia

China

Indonesia

Malaysia

Source: Kee, Nicita and Olarreaga 2006

Labor protection extends to public sector

• 1997 (Schiavo-Campo, et al) (old but best)• Algeria, Bahrain, Egypt, Jordan, Lebanon, Morocco,

Syria, Tunisia, West-Bank Gaza and Yemen: ◦ government (central + non-central) employment

= 3.3 percent of population.◦ avg. govt. wage = 3.4 times GDP/capita.

• China◦ government emp. = 1.7 percent of population.◦ average wage = 1.3 times GDP/capita.

• Indonesia◦ government empl. = 1.0 percent of population.◦ average wage = 1.6 times GDP/capita.

Civil service is clue that growth is more politically important in East

Asia• Merit matters more in East Asia.• Singapore:

• Entrance to civil service rigorously meritocratic.• 2006: 40% of average civil service and 50% of

senior civil service total compensation performance-based.

• Performance criteria are related to growth objectives.

• China: • Meritocratic recruitment.• Growth second only to “maintenance of order” as

promotion/bonus criterion (mayors/governors).• Where does this occur in MENA? Perhaps Dubai.

Can’t write growth-promotion contracts with civil servants in MENA

• Contracts with leaders not credible. • MENA: few/no formal obstacles to arbitrary

decisions by rulers.• East Asia: Ruling parties more institutionalized

(e.g., leadership transitions are regularized – China, Malaysia) and/or consequences of slow growth are high (Singapore).

• Delegation to officials is key, but leaders unwilling. • Delegation gives officials greater ability to

overthrow ruler.• MENA: Centralized control is key. • East Asia: Broad delegation.

Institutionalization in East Asia

China: • Mao opposes CCP institutionalization.• ruling party institutionalization in post-Mao

period• elimination of competing organization (Red

Guard)• creation of formal cadre evaluation system.

Indonesia: • In 1969, Suharto reforms military:• Joint command (reduces coordination costs)• Increases delegation downwards (to very local

commanders).

MENA Contrast: military institutionalization

Sadaam Hussein replaced successful officers with incompetent loyalists, established competing armed forces,

• at substantial cost to military readiness and• despite external threats. (Hashim 2003).• Little delegation of authority to lower level

officers • Little trust across units or between enlisted

men and officers. Similar to observer claims about military organization throughout the region (Egypt, Syria).

MENA parties less institutionalized• Age of ruling party = institutionalization.

• Takes time to institutionalize; and • Non-institutionalized parties disappear.

-20

020

40

60

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

MENA Oil Large MENA Oil

MENA Non-oil No competitive elections

Middle Income East AsiaLarge East Asia

Why the difference?High rents

• oil• foreign aid

Lack of intra-elite cohesion • Competing clans rather than, as in China,

shared experience of “The Long March.”• Abu Dhabi: of nine Amirs since 1818, five

murdered, two deposed.• Sharjah: eight leaders since 1803, two

murdered, three deposed.• Jordan: coup threats led King Hussein to

“de- institutionalize”.

How to maintain support with low growth?

No institutionalization Low growth, but discourages overthrow

Redistribute to key interests to forestall revolt.• Spending on military: Large oil countries,

5.8% GDP; 1.3% in large East Asia (2004).• Gov. wage bill: Egypt 7.8%, Morocco

12%; East Asia<6% (2005).

MENA: Reform implications-coordination

• Focus on inter-ministerial coordination.• Ruler strategies discourage coordination.• Philippe de Meneval discusses Bank project to

promote coordination in Morocco.

MENA: Reform implications-investment promotion

• Pursue reforms that offer guarantees to investors but don’t challenge leader aversion to institutionalization • Reforms over limited geographic jurisdictions,

such as Export Processing Zones, The civil service overseeing regulatory activities can be transparently and meritocratically recruited without increasing coup threat.

• Accelerated growth-oriented public investment.◦ Value of inv. lost to leaders if they renege

on their commitments to investors;◦ And infrastructure cannot “rebel.”