Post on 20-Jan-2016
transcript
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