Public Choice (2013) 157:357–365DOI 10.1007/s11127-013-0137-z

Public choice, political economy and development:an introduction to the life, times and themesof Martin Paldam

Toke S. Aidt · Christian Bjørnskov ·Peter Kurrild-Klitgaard · Gert Tinggaard Svendsen

Received: 28 October 2013 / Accepted: 1 November 2013 / Published online: 8 November 2013© Springer Science+Business Media New York 2013

Abstract Martin Paldam is one of the most prominent figures of Danish economics andEuropean public choice. In this introduction to the special issue, we identify five of theareas, where he has made significant contributions: (1) vote and popularity functions andpolitical business cycles; (2) democracy and institutions; (3) the economics of corruption;(4) development aid; and (5) social capital.

Keywords Public choice · Political economy · Democracy · Development · Corruption ·Social capital

1 Introduction

Martin Paldam turned 70 on October 1, 2012. As vigorous as ever, he continues to be one ofthe most widely cited and internationally acclaimed Danish economists of recent decades.Paldam is particularly well known for his work in the field of public choice—both through

T.S. AidtFaculty of Economics, University of Cambridge, Austin Robinson Building, Sidgwick Avenue,CB39DD Cambridge, UKe-mail: tsa23@econ.cam.ac.uk

C. BjørnskovDept. of Economics and Business, Aarhus University, Fuglesangs Allé 4, 8210 Aarhus V, Denmarke-mail: ChBj@asb.dk

P. Kurrild-Klitgaard (B)Dept. of Political Science, University of Copenhagen, Øster Farimagsgade 5, P.O. Box 2099, 1014Copenhagen K, Denmarke-mail: kurrild@ifs.ku.dk

G.T. SvendsenDept. of Political Science and Government, Aarhus University, Bartholins Allé 7, 8000 Aarhus C,Denmarke-mail: gts@ps.au.dk

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ten papers published in Public Choice and more than 200 papers in other scientific outlets,but also by serving as president of the European Public Choice Society 1982–1983 and or-ganizing the 1983 and 2003 annual meetings of the society.1 However, his scientific interestsare remarkably broad, his contributions unfailingly interesting, and he has left his clear markon the development of several fields within the social sciences. Going into his eighth decade,he is at the forefront of developments in meta-analysis, is contributing to our understandingof the economics of religion, and still serves as a guide and mentor to many of his (mostlymuch younger) colleagues. Above all, he has done more than any other Danish economist tointroduce several generations of students to public choice and cultivate their interest in thattradition—including the authors of this introduction and several contributors to this specialissue. Part of the approach to teaching that has made Paldam so popular with students ingeneral and with those interested in public choice analysis in particular is his notion thatthey can encouraged to think outside the box and to present more speculative ideas thanwhat he with characteristic frankness refers to as “himself and other old farts”.

Although his father, Jørgen Paldam (1917–2000), was also an economist and a leadingfigure in the Danish labor movement, it was hardly written in the stars that Martin Paldamwould become a professor of economics. But after first enrolling in the theoretical physicsprogram at the University of Copenhagen in 1961, he decided to switch to studying eco-nomics. He graduated in 1969 and subsequently worked for five years for the Danish Coun-cil of Economic Advisers before moving to Nigeria—one of the roughly 90 countries hehas visited over his career—to serve as the United Nations Economic Adviser to the Sokotoprovince of Nigeria in 1973 and 1974. He then returned to Denmark to take up a posi-tion as associate professor of economics at Aarhus University. In 1982, Paldam successfullydefended his “higher doctoral thesis” (similar to a German habilitation) on political charac-teristics of business cycles in the OECD since 1948. After a year at the World Bank, he wasmade research professor of economics in 1986. Finally, Paldam was made full professor in1989. Since October 2012, he holds a position of Professor Emeritus in the Department ofEconomics and Business of Aarhus University, although the respectful add-on “emeritus”only means that teaching now is a choice rather than an obligation.

A few days before his 70th birthday, we organized a workshop in Martin Paldam’s honor.Yet, instead of merely celebrating his past achievements, we decided to organize the work-shop in Paldam’s spirit too: The papers to be presented at the workshop would have to beoriginal and at the forefront of current research. Ever curious and inquisitive, it would havebeen out of character for him to participate in an event in which no one would say somethingnew or thought provoking. In both academic and public debates, Paldam has been fearlessand often politically incorrect but always academically honest.

The workshop was organized around a set of “Paldam themes”—a condensation of thefields within public choice, political economy and development economics to which Paldamhas contributed over the years—and that we identified after a thorough (re)reading of hisvery extensive research output. During early spring of 2012, we invited a number of scholarsfrom around the world whom we knew would be interested and were working within thesefields to write papers for the workshop and, subject to review, to be published in PublicChoice. The workshop took place at Aarhus University September 28–29, 2012 at which anumber of these papers were subjected to a first critique from, amongst others, a group ofPaldam’s current students.

1In 1999 Paldam was co-founder of the Danish Public Choice Society and he attends the annual workshopunfailingly. Before Paldam, there was very little Danish public choice analysis, cf. Nannestad (1993), Kurrild-Klitgaard (2006).

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2 The “Paldam themes”

The papers in this special issue revolve around the fields in which Paldam worked (and con-tinues to work), and to present new developments and fresh surveys. The fields or “Paldamthemes” covered are the following:

(1) Vote and popularity functions and political business cycles(2) Democracy and institutions(3) The economics of corruption(4) Development aid(5) Social capital

Paldam has made important contributions to each of these subfields of public choice anal-ysis. They all share his view that conventional wisdom should be approached with an openand critical mind and that the data should be allowed to speak for themselves. This oftenleads to controversial conclusions. His work, for example, challenges the view that develop-ment aid fosters economic growth, that democracy emerges at critical junctures in history,or that economic voting in the welfare state of Denmark is mainly socio-tropic.

2.1 Vote and popularity functions and political business cycles

Today public choice scholars take it for granted that the electoral calendar induces businesscycle fluctuations in macroeconomic aggregates as well as in government budgets, and thateconomic conditions, in particularly unemployment and inflation, influence the popularityand electoral success of incumbent governments. Paldam became involved with this researchagenda in the late 1970s and published one of the first systematic empirical evaluations ofthe opportunistic political business cycle in 1979 (Paldam 1979). However, he is, perhaps,best known for his work on so-called “Vote and Popularity” functions, not the least becauseof the widely quoted survey on the subject in this journal (Nannestad and Paldam 1994)and the special issue of Electoral Studies that he edited with Michael Lewis-Beck in 2000(Lewis-Beck and Paldam 2000). In the early 1990s, Paldam, in collaboration with PeterNannestad, oversaw the collection of a large survey of Danish voters that enabled one of thefirst detailed investigations into economic voting outside the United States. The result thatDanish voters look more to their pocketbook than to socio-economic conditions in general(Nannestad and Paldam 1997), stands in contrast to the general view that voting is mainlysocio-tropic; it sparked controversy at the time (Hibbs 1996) and continues to do so (Lewis-Beck et al. 2013).

Several contributions to the present Festschrift reflect this research agenda. First, MichaelLewis-Beck and Mary Stegmaier, in the paper titled “The VP-function revisited: A surveyof the literature on vote and popularity functions after over 40 years”, provide a thoroughsurvey of recent advances in the literature on vote and popularity functions and update theclassical survey by Nannestad and Paldam (1994). They find that some conclusions from theolder survey have stood the test of time, while others must be revised in the light of researchconducted in the past 20 years. Second, since Paldam (1979) the focus in the literatureon the political business cycle has shifted from establishing that a cycle exists to a moredetailed inquiry into how the budget cycle interacts with underlying economic conditionsand political institutions. The paper by Jakob de Haan and Jeroen Klomp, “Conditionalpolitical budget cycles: A review of recent evidence”, reviews the evidence emerging fromthe recent surge of research into this question and finds that the cycle is conditional on, e.g.,the electoral system and the ideological color of the government.

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The volume also contains two new empirical pieces on aspects of vote and popular-ity functions. In the paper titled “Voting functions in the EU-15”, Linda Veiga studies theresponsibility hypothesis in the context of the European Union. She shows that the intro-duction of the Maastricht Treaty, which transferred a number of policy instruments to supra-national government units, reduced the impact of economic variables, especially inflation,on electoral outcomes. Francisco Veiga and Rodrigo Martins, in their paper “Economic per-formance and turnout at national and local elections”, inquire into the effects of economicconditions on voter turnouts in elections. They demonstrate that economic conditions notonly matter for national elections, but also for local elections and that the effects are non-linear and more complex than commonly assumed.

2.2 Democracy and institutions

For half a century scholars have engaged in a lively scholarly debate about the origins ofdemocracy and other important institutions of collective choice and the consequences thesehave for economic and social development (Borner and Paldam 1998). In one corner, we findscholars in the tradition of Seymour Martin Lipset, who argues that democracy is a naturalconsequence of economic development (Lipset 1959); in the words of Paldam, democracyis part of the “grand transition”. In the other corner, we find scholars such as Acemoglu andco-authors, who argue that “there is no relationship between changes in income per capitaand changes in democracy” (Acemoglu et al. 2008: 810). They instead suggest that the cor-relation between democracy and development can be explained by the fact that countries atcritical junctures in the past were pushed onto divergent development paths, some of whichled to economic prosperity and democracy and some of which did not. In joint work withErich Gundlach, Paldam challenges the critical junctures view. In fact, Gundlach and Pal-dam (2009a: 341) conclude, based on an IV approach using pre-historical characteristics asinstruments for present day income levels, that the long-run causality appears to be runningexclusively from income to democracy, with critical junctures playing no role in the longrun. This does not, however, imply that institutions, including democracy, have no causaleffect on economic and social outcomes in the short to medium-run, as discussed in Paldamand Gundlach (2012) and reflected in several contributions to this volume that delve deeperinto nuts and bolts of the “grand transition”.

In “Institutional interactions and economic growth: The joint effects of property rights,veto players and democratic capital”, Mogens Kamp Justesen and Peter Kurrild-Klitgaardexplore the conditions under which institutions protecting private property rights affect eco-nomic growth. Secure property rights are widely believed to foster economic growth. How-ever, in their contribution, Justesen and Kurrild-Klitgaard challenge the universality of thisview and stress the importance of an intermediating role by veto players. They argue andpresent supporting evidence that the growth-enhancing effect of property rights institutionsis conditional on the existence of a sufficient number veto player institutions. The reasonis that veto players induce institutional stability, thus ensuring that property rights remainstable in the foreseeable future. However, they also show that not all veto players are equal:It is first and foremost constitutionally anchored “checks and balances” on the executivebranch of government that make the difference.

Andreas Freytag and Sebastian Voll, in “Institutions and savings in developing andemerging economies”, take up the theme that property rights affect growth but focus theirattention on national savings as a key transmission channel between institutions and growth.They distinguish between low- and high-order institutions and show in a panel of 60 low-income and transition countries that this hierarchical view is important for understanding

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how “institutions” affect the incentive to save. In particular, it appears that high-order in-stitutions, such as democracy, are less important than low-order institutions associated withgood governance and secure property rights.

Toke Aidt and Peter Jensen in their paper “Democratization and the size of government:Evidence from the long 19th century”, study a different aspect of the grand transition: Theconsequences of franchise extension and ballot reform for the size of government. This is aclassical question in public choice analysis but data limitations have focused attention on thesecond half of the 19th century or on the modern period after World War II. Aidt and Jensenexplore new data for Western Europe between 1820 and 1913 and provide new insights intohow the gradual widening of political participation and electoral accountability affectedpublic finance decisions during the full first wave of democratization. They challenge theview that suffrage reform equates to fiscal expansion (cf. Meltzer and Richard 1981) andshow that the extension of the franchise, in fact, exhibits a U-shaped relationship with publicrevenue per capita, while the expansionary effect is most evident in government spendingper capita.

Désirée Teobaldelli and Friedrich Schneider also examine the effects of democracy anddo so on a topic intimately associated with Paldam’s interest in corruption (see below),namely the “underground”, “informal” or “shadow” economy. In their paper titled “Theinfluence of direct democracy on the shadow economy”, the authors analyze, both theoret-ically and empirically, the influence of the institutions of direct democracy on the size andgrowth of shadow economy sectors. They work from the theoretical premise that more di-rect democracy will make fiscal policies reflect the preferences of citizens more accuratelyand thereby reduce their incentives to operate in the informal sector. An implication thenis that a country’s extent of direct democracy is negatively related to the size of its shadoweconomy. An empirical analysis of 57 democracies confirms these predictions.

In the paper titled “Inter-country differences in voter satisfaction with the democraticprocess: A study of world elections”, Vani K. Borooah, Anastasios Katos and Eleni Kat-souli examine differences between voters in established democracies in Western Europe,North America and Oceania and new democracies in Eastern Europe. They find significantdifferences: Voters in established democracies are on average considerably more satisfiedwith democracy than voters in Eastern Europe. Considerable differences also exist withinthe two groups of countries in voter satisfaction, but it remains an open question why this isso.

2.3 The economics of corruption

A highly disputed issue in the political economy literature is why corruption occurs and howit affects economic growth and poverty. What are the roles of institutions and of traditionsof corruption? Here, Paldam has contributed to the literature by disentangling the causalrelationships between corruption, income, culture and institutions. It is not easy to changethe status quo because cultural bases and political institutions are stable and resistant toanti-corruption efforts (see Paldam 2002; Gundlach and Paldam 2009b).

Several competing theories seek to explain why corruption occurs. In their paper “Whydoes bureaucratic corruption occur in the EU system? A principal-supervisor-agent model”,Urs Steiner Brandt and Gert Tinggaard Svendsen focus on the case of bureaucratic corrup-tion within the EU and the Commission’s anti-fraud agency, Office Européen de Lutte An-tifraude (OLAF). They develop a principal-supervisor-agent model that adds to the literaturein two ways. First, they model relative bureaucratic efficiency by introducing an agent thatcan be either honest (not prone to corruption) or corrupt: When offered bribes, the corrupt

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type will deliver an inefficient outcome from the point of view of society overall. Second,the general model is applied to the EU setting. According to the model, corruption is likelyto occur when the expected value to the client from bribing the agent is larger than the ex-pected value to the principal of truth telling by the supervisor. Flawed economic incentivesand the lack of institutional independence among principal, agent, supervisor and client arehighlighted and the main policy recommendations are that OLAF should be placed outsidethe Commission and that whistleblowers ought to receive adequate protection.

2.4 Development aid

One of the most controversial questions—and one of the most emotional debates—in eco-nomics is whether or not foreign aid positively affects long-run development. Although earlycritics on the left and right of the political spectrum had been skeptical of the value of aid(e.g. Friedman 1958; Papanek 1972), the academic consensus for many years remained thataid, of course, did good. The work by Mosley et al. (1987) began a long process that chal-lenged this consensus and left the field divided. Some academics (e.g., Hansen and Tarp2000) continue to argue that foreign aid positively affects long-run development, while oth-ers (e.g., Ovaska 2003) contend that aid is directly detrimental to economic growth. Manyother studies have found no effects at all.

Paldam has been engaged in this controversial debate through both original work withPeter Jensen (Jensen and Paldam 2006) and his highly skeptical book about Danish develop-ment aid, which gave him a very visible public profile in Scandinavia in the late 1990s (Pal-dam 1997). In recent years, he has contributed to the academic debate by writing a series ofsurveys with Chris Doucouliagos (e.g., Doucouliagos and Paldam 2009, 2010, 2011). Theirinnovation is the use of meta-analytical studies to systematically and objectively review andsummarize a literature, an approach that Paldam now also contributes to methodologically.Using meta-analysis to summarize the evidence from about 150 cross-country studies, heand Doucouliagos clearly show that the overall finding is a zero effect: Foreign aid does notaffect long-run economic growth.

A related question, which has gained prominence in more recent years, is if developmentaid affects institutional development. If aid were to hinder institutional innovations, thena key to unlock the micro-macro dilemma would have been found (Djankov et al. 2008;Young and Sheehan 2013). In the paper, “Does aid improve democracy and governance?”,Zohid Askarov and Chris Doucouliagos use meta-analytical tools to show that the associa-tion between foreign aid and the development of regulatory and judicial institutions is in factrobustly negative. Conversely, the claim that aid undermines democratization efforts turnsout not to be robust.

2.5 Social capital

In the beginning of the 1990s, Robert Putnnam (1993) caused quite a stir in the socialsciences with his book Making Democracy Work, which introduced the concept of socialcapital as a key determinant of the North-South divide in Italian economic development.Putnam’s definition of social capital as “features of social organization, such as trust, norms,and networks that can improve the efficiency of society by facilitating coordinated actions”(Putnam et al. 1993: 176) rang several bells among social scientists. Knack and Keefer’sseminal paper showing that social capital had “an economic pay-off” (Knack and Keefer1997) gave additional impetus to a growing interest in the concept among economists andpolitical scientists, and when the World Bank therefore in the late 1990s set up its SocialCapital Initiative, Paldam became member of the steering committee.

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His two conceptual papers on the dimensionality of the concept were influential in thesubsequent development of the literature (Paldam 2000; Paldam and Svendsen 2000). As aconsequence of Paldam’s question of dimensionality, most public choice scholars now pre-fer to separate the three elements of Putnam’s concept, treating trust, norms and networks asdifferent aspects of social capital. In particular, generalized social trust is now considered tobe a important determinant of several cross-country differences in economic, social and po-litical. Yet for each consequence, additional questions of how trust effects occur and wherecross-country differences come from arise.

In this special issue, Eric M. Uslaner asks if trust changes people’s perceptions of riskand their social environment. In “Trust as an alternative to risk”, Uslaner argues against thepopular idea that strong formal institutions, such as effective and fair judicial systems, createsocial trust. He offers an alternative interpretation of the concept based on its psychologi-cal foundations. In data from Philadelphia, Pennsylvania, Uslaner shows that individualsexhibiting trust in most people also have systematically lower risk perceptions than less-trusting individuals. Instead of having objective risk shape trust, the data support the notionthat trust shapes the way individuals perceive risk and thus the way they come to interactwith the rest of society.

Christian Bjørnskov and Pierre-Guillame Méon, in their paper “Is trust the missing rootof institutions, education, and development?”, instead address the question whether there areclear long-run economic consequences of trust differences. They use a large cross-sectionof up to 115 countries and two-stage and three-stage least squares to alleviate potential en-dogeneity problems and to track trust’s effects through various possible transmission mech-anisms. Bjørnskov and Méon find that social trust affects long-run development, measuredby either GDP per capita or labor productivity. However, they find no evidence that trust hasdirect effects, but conclude that the long-run consequences of trust arise indirectly throughits effects on educational attainment and institutional quality, which subsequently affect eco-nomic development.

Rasmus Thönnessen and Erich Gundlach, in their paper “The size of human capital exter-nalities: Cross-country evidence”, continue some of the themes from the Paldam/Gundlachresearch agenda on the “grand transition”, but at the same time connect with the issue ofsocial capital. They focus on the empirical evidence of human capital externalities, whichhas been scarce and inconclusive, and they suggest that the missing evidence results frommisleading comparisons between private and social rates of return, or just bad statisticalanalysis. Their research suggest a possible causal link from human capital to social cap-ital in the context of alternative views of long-run development and argue that the grandtransition view (Paldam 2002) is compatible with the existence of a large human capitalexternality, of which they find evidence.

3 Conclusion

Now into his eighth decade, Martin Paldam is a social scientist of impressive stature, havingmade deep and wide-ranging contributions across a number of subfields of the public choiceliterature, guided by his almost insatiable appetite for improving our knowledge of howthe real world works. In Danish academia his importance has not least been to press hiscolleagues and students to apply the rationality assumption and the tools of microeconomicsto study political-economic institutions and processes. We salute him and thank him for hisachievements, while we hope and expect that he will continue his work for many years tocome.

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Acknowledgements The authors are very grateful to the editors of Public Choice for accepting thisFestschrift in Martin Paldam’s honor and in particular to Bill Shughart for his very important and invalu-able help with the editing of the papers.

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