Political Foundations of Economic Management

Economic development

• Factors promote growth and development

• Political stability

• Political consensus

• Political freedom

• Economic freedom

Financial crisis

• Cope with causes and consequences of financial crisis

• political liberalization

• broad-based economic reform

Puzzle of uneven growth

Puzzle of uneven growth

• In 1960 the East Asian developing economies had lower per capita income than developing economies in either Latin America or sub-Sahara Africa

• 1975-90 real GDP per capita grew 5% a year for East Asian developing economies– 0.04% for Latin America– 0.3% for sub-Sahara Africa

Crisis in South Korea

• corporate failures in 1997– Hanbo Steel, Sammi Steel, & Kia automobile

• capital flight

• credit downgrading

• currency depreciation

Adjustments in South Korea

• reform of banking system

• improvement in financial sector

• modification of labor laws

• modification in social security program

South Korea’s Recovery

South Korea’s Recovery

Taiwan and Singapore

• less damage from (or less vulnerable to) financial crisis

• economic growth slowed down

• solid macroeconomic fundamentals– current account surpluses– export of goods and services– low inflation rates

Lessons from Philippines

• In 1950s, best performer and most promising economy in East Asia

• 1960 - 1997, lowest growth rate (1.4% on average) in East Asia

• two periods of negative growth– 1983 - 1986 and 1991 - 1992– political turmoil and military coups

Economic growth

• accumulation of reproducible capital

• decisions by individual economic agents– investment– consumption

• conditioned and constrained by politics– political instability– political polarization– government repression

Political uncertainty

• political instability– likelihood of the current regime being

replaced in the future

• political polarization– degree of polarization between opposing

political parties

• uncertainty in the consistency of public policy reduces agents’ incentive to invest

Government repression

• Political structural factor– political freedom

• human rights• civil rights

– economic freedom• property rights• special interests

– security of agents’ gain from investment– impose social cost on economic growth

Theoretical hypotheses

• Ceteris paribus,– the lower the probability of the survival of the

current regime,– the more polarized the policy positions of

opposing parties,– the more repressive the government,

• the lower the growth rate

Political instability

• 0.33 revolutions per year on average– 0.14 without the Philippines

Political freedom

• 1975 - 1990 average political freedom level– OECD economies 0.946– Latin America 0.5– East Asia 0.454– sub-Sahara Africa 0.215

Democracy and growth

Democracy and growth

Democracy and growth

Robert J. Barro 1996

• “Democracy and Growth”, in Journal of Economic Growth, volume 1, pages 1 - 27, March 1996.

• The middle level of democracy is most favorable to economic growth

• The lowest level comes second

• The highest level comes third

Economic freedom