Download Political Foundations of Economic Management

Political Foundations of
Economic Management
Economic development
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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
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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
– Latin America
– East Asia
– sub-Sahara Africa
0.946
0.5
0.454
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