Research Political Economy of Economic Development (Essay Sample)

POLITICAL ECONOMY OF ECONOMIC
The first part of these dissertation, comprised of chapters 2 and 3, uses a political-economic approach to economic reform issues. The term political economy refers to what has been called “new political economy” or “neoclassical political econ-omy,” which includes work done over the last decades under different names such as public choice or rent-seeking. Essentially, this approach is characterized by the application of common standards of analytical rigor to both economic and political behavior. Both in the economic and in the political sphere, agents are assumed to maximize welfare as they conceive it. Their behavior is assumed to be forward-looking and consistent, although they learn from past observations. Largely, then, the term political economy refers to the application of the economic method to a larger set of issues.
When applied to economic policy issues, this approach focuses not only on what policymakers should do if they were benevolent planners; it also tries to explain why policymakers do what they do. In doing so, it emphasizes the existence of credibility constraints and political constraints on the policymakers’ optimization problem. Political constraints are originated in the fact that policymakers are restricted in their choices by the actions of other political actors. Credibility constraints are given by the fact that the public knows (even if imperfectly) that the government pursues some objectives and that it does so subject to political and other constraints. It is important to notice that credibility constraints would arise even in the absence of divergent objectives between the different members of society, while political constraints can only be binding if political agents have conflicting objectives.
The experience of developing countries and former socialist countries with market-oriented reforms offers some salient topics for research under this approach. Questions about the rejection, delay, or reversal of welfare-improving reforms or its adoption in a economically suboptimal fashion have already motivated several recent papers (see the survey by Rodrik 1993). The varied fortune of countries experimenting with these reforms has made it clear that an understanding of the forces governing policymaking is necessary in order to devise policies with hope of success.
While the political economic literature in general postulates a framework of political institutions corresponding to that of the developed nations, approach-ing economic reform issues entails to recognize the peculiar political conditions prevalent in the reforming countries. While in the literature at large it is assumed that voting is the only or the most relevant form of participation with respect to macroeconomic policy issues (see, e.g., the text by Tabellini and Persson 1990), in developing countries electoral accountability can be less important as a political constraint than other forms of political involvement by the members of the pub-lic, such as lobbying by interest groups, public protests, and even violent actions, because democratic institutions are less common and tend to be fragile. In some cases, a veto game in which diferent groups have access to the decision making process in sets of issues can be a more appropriate representation of the institu-tional framework than a majority voting game. This has been the type of political participation assumed in the next two chapters.
The first question addressed in the dissertation is why countries experiencing economic difficulties often delay the adoption of unavoidable reforms even at the expense of increasing pains, and how these reforms finally come about. Previous work has explained this delay as a result of a disagreement between powerful interest groups about who will end up bearing the cost of these reforms. The essay “Political Conflict and the Timing of Stabilization” (chapter 2) extends this work by introducing private information about the expected costs of reform to each group, and proposes some modeling alternatives that could be closer to the actual experience of delayed reform in recent years, in the sense that they emphasize the existence of asymmetries in the political conflict about stabilization.
The second question addressed is what are the constraints that political fea-sibility imposes on the design of economic reform, assuming that a government has the will to go in that direction. The essay “Sequencing of Economic Reforms in the Presence of Political Constraints” (chapter 3) interprets the apparent bias toward radical (i.e., comprehensive and speed...