8th Lecture, STV4346B: Political economic topics I

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8th Lecture, STV4346B Political economic
topics I

• Carl Henrik Knutsen, Department of Political
  Science, UiO
• 4/12-2008

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Some introductory comments

• We have now gone through parts I and II of the
  course which focused on theoretical and
  methodological issues (I) and some very general
  political economic topics (II). In the third
  part, we will discuss some selected, more focused
  topics.
• To better illustrate the topics, and to enhance
  empirical knowledge, the different topical
  lectures will draw on experiences from within
  specified regions of the world. This does not
  mean that the topics are only relevant for the
  particular region with which it is presented, but
  the issues might be extra salient in these
  regions.

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Western Europe and North America

• The richest regions of the world, capitalist
  systems
• The most democratic regions of the world
• Implication developed economy and capitalist
  production system, as well as a democratic polity
  as underlying assumptions of studies
• The more assumptions we can make, the more
  focused our study will be, and the more specific
  the analysis and its results.
• Topics of the day A) Varieties of capitalism, B)
  The economic effects of labor market structures
  and color of government, C) Economic voting

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Varieties of Capitalism

• Hall and Soskice Ch 1, only pages 1-51
• Several forms of capitalism. Different countries
  have different economic institutions, different
  business-firm relations and different structures
  of firms
• Differences in institutional framework?
  Differences in corporate strategy (rational
  response depends on context)
• Institutional complementarity The
  functioning/efficiency of one particular
  institutional structure in one area depends on
  the structure of institutions in other areas.
  Implications
• Institutions tend to come in packages
• Institutional reform in one are alone is
  difficult
• No single best practice in one area of the
  economy, independent of context

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Hall and Soskice contd

• Focus is on variation in national political
  economies among advanced capitalist nations
• But Bringing the firm back in. The importance
  of firm structures and relations between firms
  and other actors
• Strategic interaction as a central concept. How
  do economic actors solve coordination problems?
  (Markets vs coordination)
• The role of institutions in reducing uncertainty
  and allowing for credible commitments
• 1) How do firms exchange information?
• 2) How are firms monitored?
• 3) How are firms sanctioned when deviating from
  cooperation?
• 4) How do institutions provide opportunities for
  deliberation among firms?
• The importance of informal rules, history and
  culture
• Multiple equilibria. How do we arrive at one
  particular?
• Contingencies and incomplete contracts trust,
  norms and common culture as the glue that makes
  cooperation possible

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The basic ideal models Coordinated and Liberal
market economies
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Some examples of institutional complementarities

• Education and industrial organization
• Long term labor contracts and investment in
  specific skills only when firm is relatively
  certain that the worker will stay, is it
  profitable to invest in specific skills, and when
  firm has invested in specific skills, profitable
  to keep existing labor
• Financial system and labor protection
• Bank loans with long time horizon enable firms to
  keep workers in recessions, less possible if uses
  stock market (capital access depends on short
  term balance sheets). If flexible labor markets,
  flexible capital markets might work better since
  resources distributed to firms that are doing
  well, and new firms.
• See pages 28 and 32 for the whole list of
  possible complementarities
• A more general (but less convincing) theoretical
  argument
• Majoritarian democracy goes better together with
  a liberal market economy and consensual democracy
  with coordinated market economy.
• Strong government under majoritarianism? producer
  groups cannot enter into cooperative schemes with
  government.
• Dominant governments and the problems of
  investing in specific assets (which are crucial
  in coordinated economies, think specialization
  human capital for instance)

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Some points..

• Coordinated vs liberal as two poles on a
  dimension... Continuous spectrum
• Different types of coordination sectoral as in
  Germany vs large cross-sectoral conglomerates as
  in Japan
• Solving the coordination problem markets, prices
  and contracts vs negotiation, deliberation,
  repeated trade and reputation
• Social policy and type of economy Coordinated
  economies with specific human capital and
  inflexible labor markets need for social
  insurance since it is very costly to lose job.
  Business role in constructing social policy
• Comparative institutional advantage in terms of
  production sector and type of innovation
• Liberal economies better at radical innovation
  (decentralization, lower barriers to entry,
  flexible capital). Sectors argued to be fitting
  biotechnology, ITC..
• Coordinated economies better at incremental
  innovation (longer time horizons, stability,
  specialized labor, networks and learning).
  Sectors argued to be fitting mechanical
  engineering, consumer durables

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Some criticisms..

• What is theory, what is description and what is
  evidence?
• Observe Germany and US? construct theoretical
  model? argue that the model is valid on the basis
  of evidence from Germany and US
• If case is not fitting, like Japan, create new
  category (vertical coordination)
• How do we know when we are wrong?
• Some claims seem to be made to fit the model It
  is for example not obvious why all the industries
  mentioned are either suited for radical or
  incremental innovation (Where would you place the
  movie industry? Why is aircraft manufacturing so
  different from transport?)
• Bottom line This is as HS themselves recognize
  the start of a larger research project, and the
  criticisms are therefore a bit unfair. However,
  important to read claims critically, and know
  that we are dealing with an idealized model
  blended with empirical description.

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Politics and economic growth (Scruggs)

• How do labor market structures and color of
  government affect economic growth?
• The orthodox economic argument decentralized
  labor markets and small states better for growth
• The heterodox argument a positive role for
  government and strong labor unions in
  facilitating growth
• An everlasting political debate and many
  classical theoretical arguments, but what do the
  data tell us?
• Favorite quote by Stephen Colbert I am not
  constrained by the data. I can believe whatever I
  want!

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Unions, wages and inflation

• From macroeconomics excessive wage demands
  result in inflation, which (perhaps) hurts other
  aspects of the economy
• Labor unions wage demands
• In this PD game, the equilibrium is High wage,
  High wage, but the unions would have been better
  off (Pareto-improvement) coordinating at low
  wage, low, wage
• The hump-shape thesis
• Countries with large, encompassing unions that
  internalize the externalities related to
  excessive wage demands will have low
  inflation/good performance.
• Countries with weak unions will also have low
  inflation due to little bargaining power.
• Countries with medium-sized unions (sectorally
  divided for example) will have high inflation

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The interaction argument

• Congruent regimes have higher growth/better
  performance than incongruent regimes
• leftstrong unions rightweak unions
  leftweak rightstrong
• The benefits of leftstrong social/class
  compromise
• Only under system with social insurance and
  extensive public goods will strong labor unions
  say goodbye to militancy and accept restraints on
  wage demands
• Earlier empirical studies strong interaction
  effect between color of government and strength
  of unions. Leftstrong found to do equally well
  as or better than rightweak. Both are better
  than incongruent regimes.

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Empirical evidence, 74-84
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Empirical evidence, 85-95
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Scruggs results

• Finds evidence of interaction effect
• However, leftstrong does equally well as
  rightweak from mid-70s to mid-80s, and performs
  worse in the following decade
• Time and the structure of the economic
  environment Do Liberal economies do better than
  Social democrat/ coordinated economies in the new
  global economic environment (globalization with
  fluid capital, rapid technological change in
  decentralized information sector etc.) ?
• Growth accounting indicates that even though
  leftstrong are not equally good as rightweak at
  technological change, they are better at capital
  accumulation and increasing employment

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Some methodological critiques of the study

• Strange arguments for not using panel data
  evidence, uses cross-section ?low n
• Separation into decades Are decades long enough
  to claim systematic evidence on differences in
  growth rates?
• Did Liberal economies increase their growth rates
  in 85-95, partly because of the poor performance
  in previous years?
• What about business cycles when using short time
  periods It makes a difference if a country
  begins the decade at the top of the business
  cycle and ends at the bottom.
• In any case better to use PCSTS over the whole
  time period and test for structural breaks
  (Chow-test).

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Economic voting (Powell and Whitten)

• Do voters vote with their pocket books?
• Alternative explanations and complementarity
• Other factors also affect voting patterns social
  cleavages and voting.
• But some voters are susceptible to vote for
  different parties on the basis of economic
  performance. Economic swing voters.
• Earlier studies and a puzzle
• Within-nation studies show that economic
  performance affect voting patterns
• Few robust findings from cross-national studies
• The crudeness of aggregate tests a need for
  specifications.
• Variables of interest Unemployment, inflation
  and economic growth

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Important considerations

• Regressing (votest votest-1) on economic
  performance is a too crude investigation of the
  hypothesis that voters react to economic
  performance
• 1) If government had a good election result in
  t-1 (it won power!), there might be a natural
  adjustment in t, independent of performance. It
  looks as if governments performing well do not
  gain votes, but they actually do when compared to
  the real baseline (t-1 overestimates baseline)
• Additional point gaining 2 of the electorate is
  more difficult if you already have 98 of the
  electorate than if you have 50 ? control for
  size in t-1
• 2) Performance might be evaluated by voters in
  terms of how well other countries are doing? No
  absolute measuring rods. 3 inflation was a
  larger accomplishment in the 1970s than in the
  1950s (or late 90s)

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Important considerations contd

• 3) Left-wing governments might depend more on
  performance related to unemployment and right
  wing government on inflation. What do the core
  constituencies care about? Remember that
  disgruntled voters can choose not to vote!
• 4) The policy context The effects predicted to
  be larger in countries that have political
  systems that clarify responsibility for economic
  performance and thus generate political
  accountability
• Note Link this argument back to Przeworskis
  argument on the effects of political
  accountability and retrospective voting on
  incentives for politicians

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Elaborations

• Baseline model (replication of earlier study by
  Paldam) which does not incorporate considerations
  1-4, does generally not find significant results
  for economic performance
• Additional point not mentioned in study The
  problem of multi-colinearity Especially GDP per
  capita and unemployment are highly correlated?
  Difficult to find significant effects.
• Remedy for point 1 control for vote swing from
  t-2 to t-1
• Remedy for point 2 use relative performance as
  independent variables (relative to performance in
  other industrialized countries at time t, pooled
  cross section time series approach employed).
• Remedy for point 3 Differentiate between right
  and left wing governments in the analysis

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The political context, remedies for point 4

• Which governments are characterized by (more)
  clarity of responsibility for economic outcomes?
  (relate to Persson and Tabellinis paper..)
• General answer those governments that are
  perceived to have more unified control over
  policy making
• Incentives for politicians to blur lines of
  responsibility, share blame etc in bad times
• Specific structures that reduce clarity of
  responsibility
• Lack of voting cohesion in government party or
  parties weak, undisciplined political parties
• Participatory and inclusive committee system in
  legislature, especially when committees are
  strong
• Bicameral opposition (lack of majority in second
  chamber)
• Minority government
• Coalition governments

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Remedies for point 4 contd

• Constructs additive index ranging from 0 (New
  Zealand) to 5 (Switzerland), where high value
  implies less clear responsibility, and divides
  countries in analysis
• Electoral rules and accountability PR and the
  increased chance of coalition government?
  prediction less economic voting
• Lijpharts Consensual Democracies less clarity
  of responsibility because of various factors?
  prediction less economic voting

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Empirical results
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Empirical conclusions

• Economic voting significant only in countries
  with clear political responsibility
• In systems with clear responsibility
• High relative GDP per capita growth positively
  affects votes for incumbents
• High relative unemployment negatively affect
  votes of left-wing incumbents
• High relative inflation negatively affects votes
  for right-wing incumbents