Political Economy Problems

Political Economy ProblemsPolitical Economy GV307 Spring 2020 Assignment 4 Due on March 17 2020 at 9 AM —follow the instructions for FASER. All of your work should be your own. In Word or other word processing format (can be converted to pdf), please! 1. 5 % According to Treisman (2007) what is the strongest predictor/correlate of the level of corruption across countries? (Limit your answer to 15 words/symbols) 2. Consider the utility function below where a firm gets positive utility from its market income (theta) plus a government provided subsidy R. However, the firm can only gain this subsidy by paying a campaign contribution to the government (C). The higher the campaign contribution, the higher fraction of the government subsidy the firms receives, represented by the term RC. However, paying the campaign contribution involves an opportunity costs represented by C squared. 𝑈𝑓𝑖𝑟𝑚 = 𝜃 + 𝑅𝐶 − 𝐶 2 a. 10 % What level of campaign contribution maximizes the firm’s utility? (Hint: Use first-order-condition). Show calculations. b. 5 % According to the previous result, what happens to the level of campaign contribution, as the size of the government subsidy increases? Limit your answer to 20 words/symbols. 1 2.1 Now consider the government’s utility function below, where the government get utility from the campaign contributions paid by the firm C (as determined by the firm’s maximization of its utility with regards to C) and popular support (rho) which is declining with the level of subsidies (R) provided to the firm. 𝑈𝑔𝑜𝑣𝑒𝑟𝑛𝑚𝑒𝑛𝑡 = 𝐶(𝑚𝑎𝑥𝑈𝑓𝑖𝑟𝑚 ) + 𝜌 𝑅 a. 15 % What level of subsidies maximizes the government’s utility, when taking into account the firm’s provision of C? (Hint: Use first-order-condition and remember the solution from 2.a.). Show calculations. b. 5 % According to the previous result, when is the government more likely to increase the level of subsidies? Limit your answer to 40 words/symbols. 3. Consider the extend form game below, where and autocrat has the choice between accepting an aid-for-policy deal, and the elite has to make the choice between replacing or not replacing the autocrat. Pay-offs for the autocrat are on the left and pay-offs of the elite is on the right. If the autocrat stays in power, she gets 2, if not she gets 0. If the autocrat accepts the deal and stays in power, the gets an additional A which is the value for the aid program. If the policy is implemented (which only happens if the autocrat accepts the deal and stays in power), it imposes a cost (P) on the elite. If the elite does not replace the autocrat, it receives a pay-off of R. If it replaces the autocrat, it gets WR, where W is the winning coalition size, which can vary from 0 to 1. 2 a. 5 % Given that that the autocrat has accepted the aid-for-policy deal, under which circumstances will the elite choose to replace the autocrat? Limit your answer to 20 words/symbols. b. 10 % Which conditions need to be fulfilled in order for “accept aid-for-policy” and “do not replace autocrat” to emerge as the Nash equilibrium? Limit your answer to 20 words/symbols. c. 5 % According to the model above, in which type of autocratic political systems are the autocrat more likely to accept aid-for-policy deals? Limit your answer to 20 words/symbols. 3 4. 5 % According to the results in Mesquita and Smith (2009) do former colonies of OECD countries receive more or less aid than other countries conditional of receiving aid in the first place. Limit your answer to 15 words/symbols. 5. 10 % According to Ross (2008) which are the three mechanism causing oil production wealth to decrease female labor market participation in developing countries? Limit your answer to 100 words/symbols. 6. a. 5 % According to model 1 in table 2 from Li (2009), what are the effects being a democracy on the annual number of expropriation acts? Limit your answer to 25 words/symbols. b. 5 % According to model 2 in regression table 2 from Li (2009) and the associated text, what explains the difference between the level of expropriations in democracies and autocracies? Limit your answer to 20 words/symbols. 7. Consider the model developed by Johns and Wellhausen (2016). a. 5 % Under what conditions does the government break the contract? Limit your answer to 55 words/symbols. b. 5 % What does an increase in 𝑖 (economic link between the target and partner firm) do to the probability that the government will honor its contract and why? Limit your answer to 40 words/symbols c. 5 % What does an increase in v (target firm value) do to the probability that the government will honor its contract and why? Limit your answer to 80 words/symbols 4 Political Economy GV307 Week 19 Outline of today • The Resource Curse. – With an special focus on one type of resource: Oil (and natural gas). Home-work from last week • Based on the table below from Hariri (2014), what is the effect of democratization (the process of going from being an autocracy to being a democracy) on economic growth (Hint: Size and statistical significance)? The resource curse • Very popular (and debated) concept in political economy and development studies. – People don’t agree (as you shall see today). • Basically, the idea that the abundance of natural resource wealth can be a “curse” with regards to socio-economic and political development. – High development: Basically the adoption of modern Western-style societies: Representative democracy, high income per capita (based on industrial production in both agriculture, goods and services), substantial middle class (with “middle-class values”), modern nuclear family, emancipation of women etc. • Remember the Anna Karenina quote. – Somewhat of a paradox (why should plenty of natural resource make you worse of?). • Today, we mainly focus on oil and natural gas, although some have argued that it exists for other resources as well (diamonds, minerals, timber, palm oil etc.). – Some also argue that the resource curse exists for some resources and not for others. Why the resource curse? • Some basic features of natural resources (especially oil and natural gas) which could be a source of “underdevelopment”. – They are worth a lot of money! • • • Without being industrialised processed: No need to develop industrial production. They sell at high prices at the international market: Which leads to a appreciation of the national currency which makes other exports non-competitive: “Dutch disease”. However, their prices also fluctuate heavily on the international market. – They require high capital investment but relatively little labour input. – These issues above(could?) lead to less industrialization in resource-rich countries. – They provide easy revenue for the government without it having to: • • Tax its ordinary citizens (or its economic elites). Develop a relatively competent bureaucracy. • Consequently, countries with abundance of natural resource wealth (could) end up with: – No industrial production (relative to its GDP per capita). – A less skilled population (relatively to its GDP per capita). • Which could mean that natural resource-abundant countries could end up poorer in the end. – Higher inequality. – Relatively big but non-tax-funded governments (which could have implications for political accountability and democracy). • E.g. remember the correlation with corruption. – Weak bureaucratic capacity. • Critique of this: Rest on the idea that natural resource are somehow exogenous. – Of course geography matters but the decision whether to extract these or not could be endogenous. Critique of the resource curse Oil and democracy • One of the most debated issues in the resource curse is the effect of oil (and natural) gas wealth on the level of democracy and persistence of autocratic governments. • Popular argument both among (some) researchers and even pundits and policy-makers: – “The problem is that the good Lord didn’t see fit to put oil and gas reserves where there are democratic governments” – Dick Cheney (former US vice president). • Basically, many researchers argue that countries which have an abundance of oil and natural gas are less likely to transition from autocracy into democracy, that autocrats stay on for longer in oil-rich states and maybe that oil and gas wealth may even undermine democracy and lead to autocracy . – These are a bit different issues but should show themselves in a positive correlation between oil (and natural gas) wealth and autocracy. Why should oil wealth lead to less democracy • According to one of the most important scholars in the field, Michael L. Ross, it is basically a fiscal mechanism. • Oil (and gas) wealth provide the government with easy money without having to resort to taxation. – Either the government directly collects this money through state-owned national oil companies or through contracts with international oil companies (or other private companies). • These funds are often secret and/or easy to hide. – This money can be used for repressive measures and patronage and public goods which the citizens (and elites) get without having to pay taxes: • Lowers the demand for accountability and political influence. • “No taxation without representation” but the reverse might also be true. Break 5 minutes Evidence for oil and autocracy • Various scholars have done statistical analyses of oil and gas wealth (usually some measure of oil and gas production value) and democracy and have generally found this correlation between oil wealth and lack of democracy/persistence of autocracy. – Oil might also influence the type of autocracy. E.g. Fails (2019) suggest that oil leads to more personalist autocracies. • However, also some sceptics, including Stephen Haber and Victor Menaldo (2011) who, based on a very long panel of countries argue that the oil might even (if anything) be beneficial to democracy. Haber and Menaldo (2011) results Ross and Andersen (2014) counter-argument • The resource curse is a recent phenomenon (post 1980). • Remember that the mechanism behind oil and autocracy is fiscal: Access to easy non-tax revenue. • However, historically, oil revenues were not captured by the national governments but international oil companies (which usually were located in coloniser states). – And there were very few significant producers of oil before World War II. • It was only after a wave of nationalisations in the oil industries in the 1960s and 1970s in developing countries that national governments in autocratic or new democracies began to really get access to these revenues through national oil companies and other schemes which relied on government ownership of the resource. – Thus, the resource curse in (lack of) democracy only appeared afterwards. – Oil states were “plundered” by international oil companies before the 1970s but democratically did not differ from non-oil states. Ross and Andersen (2014) results Break 5 minutes Oil and the relative status of women • Another argument about how oil can have an impact on societies comes from Ross (2008) who argue that oil wealth also impact the status and role of women in societies. – And that this accounts for much of the laggard status of women in the Middle East (and perhaps the Muslim world more broadly). • Argument: – Female labour market participation increase female empowerment (own wage, ability to form organizations, network, learn organizational skills, improves the incentive/ability for women to get education etc.). – In many developing countries, women are often excluded from traditional trades and work areas. However, light export-oriented manufacturing (e.g. garments industry) might provide women with job opportunities. – However, abundance of oil wealth makes export-oriented manufacturing less competitive (Dutch Disease) and may instead drive up demand for male labour in other non-traded industries (e.g. construction). • These effects drives down female labour market participation rates in developing countries both by less availability of “female” jobs and by increasing household wealth through male labour earnings. • Thus, oil wealth can sustain keeping women in non-public spheres (the home) and thus sustain patriarchal norms and practices. • Perhaps especially in developing countries and countries where there are already strong patriarchal norms and women are from the start mostly excluded from public life. Ross (2008): Results Ross (2008) results What have we learned today • The resource curse is the idea that natural resource wealth might hinder economic, social and political (“positive”) development. – Effects might differ between types of natural resources but much research efforts has gone into the effects of oil and natural gas. • A large literature argues that oil decrease the likelihood of democratic transitions/make autocracy more persistent, since it provides the government with non-tax revenue which enables to government to provide patronage and public goods without the accountability demandgenerating effects of taxation. – There are some arguments about the robustness of this argument. – Counter-argument is that the resource curse in oil wealth only started after about the 1980s when governments starting getting more revenue from the oil sector. • Oil wealth might also have an impact on various other societal outcomes, including the status of women. • The economic, social and political effects of oil remain a much debatable issue among political science and political economy researcher. – Problem of the (potential) endogeneity of oil (and other resource) wealth. – Might be contingent on other factors (some of my own research). • Also important of policy-makers and activists working to dampen to (potential) negative effects of oil wealth. Home-work Government Decide patronage (P) level: P<=R Population Not protest Protest Government Grant democratic rights 1, 2 2,P Not grant democratic rights 0,0 Questions to consider: • Under which circumstances will the population choose not to protest? • What role does R (rents) play for which equilibrium you end up with? Next week • Foreign Aid and Development • Read: – Oatley (2005): Chapter 16 and 17. Bueno de Mesquita and Smith (2007). Bueno de Mesquita and Smith (2009). Bueno de Mesquita and Smith (2012). MacFarquhar (2011). Political Economy GV307 Week 20 Outline of today • Foreign Aid and Development. – Huge topic! – Today we mainly focus on political-economy aspects of it. • E.g. how political factors can we explain differences with regards to which countries receive aid and how much. • Also, we move into a more international realm of politics and we shall see how (?) international politics shape the foreign aid that countries receive. • Short term mid-term evaluation. Foreign aid • Very broad concept! • Basically, some sort of transfer (of money or other goods) from foreign (usually richer) entities to other (usually poorer) countries. • Can be: – Bilateral: From (rich) country to (poor) country. – Multilateral: From a group of countries to individual or group of countries. • Which can also be directed through some of international organization such as the International Monetary Fund (provides loans), World Bank (provides funding for development projects) etc. – Non-governmental or at least public money transferred through some sort of nongovernmental organization. • E.g. Oxfam, Red Cross etc. – Directly from individual to individual? Huge in terms of the net-transfer of money • https://data.worldbank.org/indicator/DT.ODA.ALLD.CD?start=1960&e nd=2017&view=chart Types of foreign aid • Direct transfer of money: – Either as “gifts” or loans (sometimes tied to specific projects). • Military aid: – Money, material, direct military presence. • E.g. US military aid to Israel and Egypt. Also foreign presence and aid to either rebels or governments during civil wars (development aid or anti-development aid?). • Emergency relief: – Often after natural disasters and during mass displacement (e.g. during civil war). • Development projects: – Infrastructure, health etc. What are the impacts of (development) aid • Usually the (official) motivation for a lot of aid project is to promote development. – Higher GDP growth. E.g. infrastructure and financial development. Remember the role of capital (and savings) in economic growth. Better health. E.g. vaccination programs. Better education. • Many individuals projects might be successful. • However, the net impacts of (development) aid remain hugely contested both among practitioners and even more among researchers. – Perhaps the most contested issue is whether aid actually increase (long-term) economic growth. • • Huge debate. E.g. between economists William Easterly and Jeffrey Sachs (old debate by now). A lot of ideology and interests (many people, organizations and companies both in the developed world and the developing world rely on development aid for their incomes and jobs. • Remember that aid comes in many forms. – Not all aid is about GDP growth. Especially in very poor regions, some development goals might be in conflict with others. • In my opinion: One of the problems with the UN Sustainable Development Goals. • Political economy might also explain why aid does not always fulfil its purposes (or why development might not be the real purpose in the first place). – Today we only scratch the surface of this large (but potentially also controversial literature). Focus on Bueno de Mesquita and Smith’s research. Break 5 minutes The political economy of foreign aid: Who gives and who gets aid? • Bruce Bueno de Mesquita and Alaistair Smith (2007; 2009) use selectorate theory (Bueno de Mesquita et al. 2003) and the logic that donor countries can use aid to extract policy concessions from receiver countries to explain why some countries give aid and why some countries receive (accept) aid and to what extent. • Aid for policy logic: – A donor country can tie aid receipts to specific policy conditions which help (certain parts of) the donor country. • Market access for donor firms, investment requirements (e.g. green energy: Denmark is huge on development projects focused on renewable energy), alliances/ideology (e.g. communist or anticommunist allegiance during the Cold War), votes in the UN security council (de Mesquita and Smith 2012), human rights, women rights, workers’ rights etc. • Can be good for the receiver country’s population but not always and may sometimes make them worse off or lead to inefficient use of resources. The preferences of (parts of the) donor countries are not necessarily the same as in the receiver country (e.g. rights of sexual minorities or minorities in general). Selectorate theory • Selectorate theory: Core concepts: – The political leader wants to survive in office (potential for challengers/rivals). – There is some sort of selectorate (group of people) which can influence leader survival (=replace the leader with a challenger). – The part of the selectorate needed to secure political survival is called the minimum winning coalition. – Political institutions (and regime type) determine the size and nature (who is included in) of the selectorate and the minimum winning coalition. E.g. Democracies have larger selectorates and larger minimum winning coalitions. – Political leaders need to reward their supporters in the minimum winning coalition to stay in power. • Can be done through a mixture of private and public goods. • The leader is budget-constrained but various factors might soften this budget constraint and enable the l …