Political Foundations of Economic Management

1
Political Foundations of Economic Management
2
Economic development

• Factors promote growth and development
• Political stability
• Political consensus
• Political freedom
• Economic freedom

3
Financial crisis

• Cope with causes and consequences of financial
  crisis
• political liberalization
• broad-based economic reform

4
Puzzle of uneven growth
5
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

6
Crisis in South Korea

• corporate failures in 1997
• Hanbo Steel, Sammi Steel, Kia automobile
• capital flight
• credit downgrading
• currency depreciation

7
Adjustments in South Korea

• reform of banking system
• improvement in financial sector
• modification of labor laws
• modification in social security program

8
South Koreas Recovery
9
South Koreas Recovery
10
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

11
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

12
(No Transcript)
13
Economic growth

• accumulation of reproducible capital
• decisions by individual economic agents
• investment
• consumption
• conditioned and constrained by politics
• political instability
• political polarization
• government repression

14
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

15
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

16
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

17
Political instability

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

18
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

19
Democracy and growth
20
Democracy and growth
21
Democracy and growth
22
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

23
Economic freedom