Political economy
Table of Contents
1. Theory .............................................................................................................................................. 2
1.1 The median-voter theorem (MVT) ............................................................................................ 2
1.1.1 Condorcet-winners and the MVT ....................................................................................... 2
1.1.2 An application to taxation ................................................................................................... 3
1.2 Lobbies ....................................................................................................................................... 5
1.2.1 The common agency model ................................................................................................ 5
1.2.2 Lobby size and lobbying intensity ...................................................................................... 6
1.3 Resistance to reform .................................................................................................................. 9
1.4 Who wants trade liberalization: Heckscher-Ohlin vs. Ricardo-Viner ..................................... 10
1.4.1 Ricardo-Viner ................................................................................................................... 10
1.4.2 Heckscher-Ohlin ............................................................................................................... 10
2. Empirical evidence......................................................................................................................... 11
2.1 Trade and income inequality.................................................................................................... 11
2.2 Voting on trade liberalization .................................................................................................. 13
2.2.2 Switzerland and the EU : The EEA and bilateral agreements .......................................... 14
2.2.3 Cross-country evidence ..................................................................................................... 16
2.3 Democracy and growth ............................................................................................................ 18
2.4. Can policies change politics ? ................................................................................................. 21
References .......................................................................................................................................... 22
1
1. Theory
Objectives :
o Understand how a majority-voting system aggregates preferences
o Understand the role of lobbies
1.1 The median-voter theorem (MVT)
1.1.1 Condorcet-winners and the MVT
A Condorcet winner is a policy that cannot be defeated in a two-alternative simple-majority vote.
That is, a Condorcet-winning policy is such that one cannot find an alternative that is more
attractive for a majority of voters.
Assume the following conditions :
o No more than two alternatives
o One-dimensional policy issue
o Single-peaked preferences
Under those three conditions there is always a Condorcet winner, and the winer is the policy
preferred by the « median voter », i.e. the voter with preferences located just on the median of the
distribution of preferences. An illustration of the MVT’s logic is given in Figure 1.
Figure 1
The median-voter theorem
Definition
Suppose that policy can be represented by a single number (e.g. rate of a uniform tariff) and let p be
the policy preferred by the median voter. Then half the electorate want a policy higher than p and half
want a policy lower than p.
Theorem
If two policies, A and B, are subjected to
a vote, and A is the policy preferred by
the median voter, then A is sure to win
Half the
whatever B.
population
(by def. of
the median)
Policy preferred by
the median voter
2
Distribution
of voters’
preferred
policies
Less than
half the
population
Policy preferred by the
average voter
Suppose that two perfectly opportunistic candidates for office choose their platform endogenously
with the sole objective of maximizing their chance of being elected. A “platform”, in a onedimensional setting such as the MVT’s, is just a point on an axis. Then both candidates choose to
position their platform right at the point preferred by the median voter. Faced with two identical
platforms by two equally opportunistic politicians, voters are just indifferent and toss a coin before
voting. Each candidate then has a ½ chance of being elected.
This sounds a bit silly but it has a very important implication. Under democracy there is a tendency
for political programs (platforms) to converge to a point situated in the middle of the preference
space, because extreme positions mean sure defeats.
1.1.2 An application to taxation
Consider a public infrastructue project that would provide a per-capita benefit B, B being
interpreted as the size of the project—say, a municipal swimming pool. Suppose that the cost of the
project is just its size, B, and that it is financed out of taxes. Budget neutrality requires that
additional taxes just cover the project’s cost, so T = B. Suppose that taxes are proportional to
individual income yi at a constant rate , to be determined.
The tax rate is determined by the budget constraint  Y  B , so
 BY
(1)
Where Y is national income and each individual ends up paying  yi  Byi / Y . Let the utility
function be common to all agents and denoted by U  B  with U’ > 0 and U’’ < 0.
Individual preferences
The project’s optimal size, for an individual with income yi , solves the following maximization
problem
max B U  B  
Byi
Y
(2)
with first-order condition
U'
yi
Y
(3)
Thus, the optimal size of the swimming pool is decreasing in income, even though preferences are
identical. In order to fix ideas, suppose that U  B   ln  B  . Then (3) becomes
1 yi

B Y
Taking the total differential with respect to B and yi gives

1
1
dB  dyi
2
B
Y
or
3
(4)
dB  B 2

0
dyi
Y
Generalizing, what this says is that rich people want « less government » (a smaller swimming
pool) even though they enjoy it just as much as poor people ; the reason is that with proportional
taxation they pay more for it. If taxes are progressive, of course the argument is reinforced. Thus,
the general positioning of right-wing and left-wing parties on the size of government is pretty
straightforward to understand in this context. How does the democratic choice compare in this
regard to the choice of a “benevolent dictator”, i.e. with welfare maximization?
Aggregation of preferences
A benevolent dictator would maximize the sum or average of individual utilities (it’s the same)
which gives, in our example with U(B) = ln(B), a first-order condition (FOC) that boils down to B
= N. This can be seen as follows:
y 

max B  i U  B   i B 
Y 

(5)
which is equivalent to
max B NU  B  
B
 yi
Y i
Y
or
max B NU  B   B
Which, with U(B) = ln(B), gives FOC
N
 1 ou
B
Bdictator  N
(6)
By contrast, a majority vote between two candidates will give, as per the previous section, a policy
outcome that is just the policy preferred by the median voter :
max B U  B  
ym
B
Y
(7)
Where Ym is the median voter’s income. Again setting U(B) = ln(B), this gives
Bmedian voter 
Y
ym
(8)
How can (7) and (8) be compared ? Note that N  Y / y ; so (7) implies that B  Y / y . If the
income distribution is unequal, ym  y ; so Bmedian voter  Bdictator . Democracy generates more
spending and taxes than what is socially optimal in the sense of the average voter. Moreover, a
4
more unequal society will be characterized by a larger difference between the social optimum and
the democratic outcome.
What happens when the MVT’s assumptions are violated ?
o More than two alternatives : strategic voting
o More than one dimension: No more median voter
o Multiple-peak preferences: The Condorcet paradox
In sum, the MVT’s logic is that there is a force of convergence that pulls political platforms toward
the center of the spectrum, although whether that is verified empirically (historically) or not is
unclear.
1.2 Lobbies
The MVT’s main puzzle is why political parties do not always converge to common, centrist
positions. Lobbies with extreme preferences may be part of the explanation, as politicians need to
finance their campaigns and for that need money from lobbies. But that explanation leads to another
question—the symmetric from the previous one: what don’t lobbies pull parties and governments
toward extreme policies? The common-agency model provides one possible explanation.
1.2.1 The common agency model
What is an agency (principal-agent) model? It is a representation of the relationship between
o The owner of a firm, called « principal », who is risk neutral and maximizes the return from the
firm
o The employee, manager or other, called « agent » who is risk-averse and also effort-averse.
Moreover,
o The agent’s effort is unobservable by the principal,
o The firm’s performance, π, is a stochastic function of effort, in the sense that a higher level of
effort shifts the distribution of π to the right. Formally,
E  e  eH   E  e  eL 
(9)
where eH is a high level of effort and eL is a low level.
Under those conditions, the principal offers the agent a peformance-based contract where the firm’s
performance is taken as a proxy for the unobservable effort :
w  f  
(10)
where w is the agent’s wage. The derivative of the function f is called the power of the incentive,
with a high derivative meaning a powerful incentive. The optimal contract is a function f such that
o The agent accepts the contract: if u(.) is his utility function,
E u  w e  eH   w0
(11)
o Given that the agent accepts the contract, it is optimal for him to set effort at the high level:
5
E u  w e  eH   E u  w e  eL 
(12)
The common-agency model used in political economy differs from this basic model in several
dimensions. The principals (there are now several) are the lobbies. The common agent is the
government. The « wage » now takes the form of campaign contributions or bribes. There is no
hidden action, and the government is neither risk-averse nor effort-averse. The key ingredient in the
common agency model is rather the divergence in the lobbies’ interests which creates competition
between them. They offer the government incentive schemes that work at cross-purposes, as shown
in Figure 2.
Figure 2: Aggregating incentives
Contributions
Incitatifs lobby
Incitatifs lobby 1
Incitatifs agrégés
Politique (e.g. tarif douanier)
A purely rent-maximizing government will maximize the sum of contributions (bribes) from all
lobbies, given by the red curve in Figure 2. Given the shape of the contribution functions, here the
maximum is reached toward the center of the figure.
Moderate policies (those in the middle of the horizontal axis in Figure 2) can then emerge from the
balance between lobbying pressures rather than from the intrinsic benevolence or quality of the
government, which here is purely opportunistic (the government acts as if it was auctioning out
policies).
One implication of the common-agency model is that what matters to give rise to good policies is
open access to the government, as distortions come from imbalances between lobbying forces.
1.2.2 Lobby size and lobbying intensity
How does lobby size affect the incentives for lobbying and therefore their intensity ? In order to get
a first answer, consider a so-called “Ricardo-Viner” model where production takes place using a
mixture of a sector-specific factor Si and a mobile factor L that can be allocated to production in
sector 1 or 2. The quantity of mobile factor employed in sector i will be called Li . Consider a sector
producing in competition with imports, with a production function Yi  f  Si , Li  with
6
f
 0,
Li
2 f
0
Li 2
(13)
The unit cost of the mobile factor is w. Let pi be the domestic price of good i. As good i is
competing with imports, letting pi* be its world price and ti the tariff on imports, profit in sector i
is
 i  pi* 1  ti  f  Si , Li   wLi .
Profit maximization implies the first-order condition
f
pi* 1  ti 
w
Li
(14)
(15)
Consider now the effect of a change in the tariff on equilibrium profits. Differentiating totally (14)
with respect to ti , taking into account the endogenous adjustment of mobile-factor employment, we
get
d i
f Li
L
 pi* f  Si , Li   pi* 1  ti 
w i
dti
Li ti
ti

 L
f
 pi* f  Si , Li    pi* 1  ti 
 w i
Li

 ti
(16)
= 0 by the first-order condition
 pY
*
i i
which is simply Hotelling’s lemma, and
d 2 i d  pi Yi 

 0.
dti 2
dti
*
(17)
So
o The larger is an industry (in terms of output), the more it benefits from trade protection
o The higher is the tariff, the higher is its marginal benefit to the lobby : there are increasing
returns to lobbying.
So far we assumed that the lobby cared only about industry profits. But the lobby may also
internalize some of the welfare effects of its demands. What does the resulting trade-off depend on?
Let us assume that all individuals in society have identical preferences given by a so-called quasilinear (QL) utility function. A QL utility function is of the form
U  c0 , c   c0  u  c 
(18)
where u . is an increasing and concave function [say, ln(.)], c is consumption of the good we are
interested in, and c0 is consumption of all other goods lumped together. QL utility functions have
several very useful properties:
7
o (P1) The indirect utility function (which is the “maximized-out” utility once all choices have
been made) is just the sum of income and consumer surplus;
o (P2) At the optimum, if p is the price of good 1, u '  c   p (the marginal utility of income, ,
can be normalized to one).
o (P3) The derivative of social welfare with respect to an import tariff is just the tariff times the
derivative of the import demand function. That is, let M '  dM / dt ; then
dW
 tM ' .
dt
(19)
Consider now the collective utility of the lobby members. Their income is the sum of profits plus
their share of tariff revenue, which is proportional to their share in the population, α. That is,
I L     tM . Let us also normalize as before the good’s world price to one, so its domestic price
is just 1 + t. Then
VL     tM   N u  c   1  t  c 
(20)
Let us now use lower-case letters for per-capita variables and upper-case letters for aggregate
variables; so for instance c is consumption per head and C is total consumption. N is the
population’s size.
The FOC for the tariff is
d  1 t c 


dt


dV
dc 
 dc
 Y    M  tM '    N u ' c  1  t  
dt
dt
dt
p
d ( tM )


dt




dc


 Y    M  tM '    N  u ' 1  t    c 
dt
 0 by P2

 Y   M   tM '  Nc
(21)
C
 Y    M  C    tM '
But C  M  Y so M  C  Y Using this and property P3 of QL preferences,
dV
 Y  Y   tM '
dt

1    Y
Lobbying component


dW
dt
Welfare component
So the effect of the tariff on the lobby’s welfare has two components :
o One that reflects profit effects (the “lobbying component”)
o One that reflects consumer effects (the “welfare component”).
8
(22)
The second one is weighted by the lobby’s size in the population, α, while the first is weighted by 1
- α. Thus, the smallest is the lobby, the less it cares about welfare and the more it cares about its
own private interests; i.e., the more aggressive/extremist it becomes as a lobby. This can be thought
of as implying that fragmentation into small special-interest groups induces political polarization.
Also, in the extreme, a foreign multinational has substantial economic interests in the country but
has measure zero in the population (   0 ); it is thus the most extreme lobby.
1.3 Resistance to reform
Consider now a reform that benefits one sector of the economy which accounts for a minority of the
voters when the reform is being debated. The reform could be the building of a regional
infrastructure, say a bridge, that essentially benefits one region of the country, or a currency
devaluation that benefits export-oriented sectors.
Suppose also that the reform is costly to the rest of the population, either because it is financed by
taxes (the bridge) or it raises the cost of living (the devaluation). Finally, suppose that the reform’s
benefits outweigh its costs, making it desirable from an aggregate welfare standpoint. The questions
studied by Jain and Mukand (2003) is, under what conditions will the reform be acceptable to the
median voter ?
Given that the reform benefits a minority, while beneficial for society as a whole, it has a negative
payoff for the median voter. In order to make it acceptable, the government needs to promise that
the beneficiaries will be taxed once the reform’s benefits have appeared and that the proceeds of the
tax will be redistributed so as to make everyone better off.
Now suppose two key ingredients :
i.
ii.
Between the time the reform is debated and the time the taxes are put in place, there is an
election, creating uncertainty ;
The reform will change the allocation of resources (say, labor) in favor of the beneficiary
sector. For instance, in the case of the bridge, population will migrate to the beneficiary
region ; in the case of the devaluation, the nontradeable sector will shrink while the tradable
sector will expand.
The argument is this.
o If the reform is small enough to leave the majority unchanged, the beneficiaries will still be a
minority after the reform and the taxation bill will be maintained. If the pre-reform median voter
can anticipate this, she will vote in favor of the reform.
o If the reform is large enough to shift the majority, the median voter will then be among the
beneficiaries and the taxation bill will be amended or nullified. If this can be anticipated, the
pre-reform median voter will now reject the reform—even though it is beneficial for society as a
whole. This is a case of reform gridlock.
o If the reform is very large, even though the post-reform median voter will be a beneficiary and
block the taxation, the pre-reform median voter may expect that she will be among the
« migrants » to the beneficiary sector ; if the probability of migration is sufficiently large, she
will then vote in favor of the reform even though she doesn’t believe in the taxation promise.
9
This interesting story (demonstrated in a relatively complicated model) illustrates how reforms can
be blocked because of a mixture of uncertainty about who will be the ultimate beneficiaries and
lack of credibility of inter-temporal compensation promises.
1.4 Who wants trade liberalization: Heckscher-Ohlin vs. Ricardo-Viner
We will now explore individual preferences toward trade liberalization with a view to the following
question : What do trade models suggest about who is opposed or in favor of trade liberalization,
and does evidence based on voting patterns or survey suggest that preferences indeed form
according to the distributional logic of trade models ? We will do this using two work-horse trade
models : the Heckscher-Ohlin model and the Ricardo Viner model. Roughly, under HeckscherOhlin, political fault lines follow factor-ownership ones ; under Ricardo-Viner, they follow
industry-of-employment ones. Let us see why.
1.4.1 Ricardo-Viner
The Ricardo-Viner model is often exposed with the mobile factor being labor and the fixed factor
being capital. Then there isn’t much of a political-economy story to tell. Suppose instead that
workers have skills and that those skills are firm- or industry-specific. Then workers have a vested
interest in how their industry of employment is doing. Similarly, think of the residual claimants in
each sector as holding a mixture of liquid financial assets (mobile) and dedicated machinery (not so
liquid, hence not so mobile). Then capitalists also have a vested interest in the profits of thier
industry of investment. One should therefore expect coalitions of workers and capitalists lobbying
for protection of their industry. Such « populist » coalitions have been often observed e.g. in
Argentina, but in other countries with strong corporatist structure (e.g. sector-specific unions).
1.4.2 Heckscher-Ohlin
In a Heckscher-Ohlin (HO) model, factors are mobile across sectors. Therefore their allegiance
cannot be defined by their sector of use. We need to derive the effect of trade liberalization on the
price of factors depending on what these factors are rather than where they are used. The
fundamental distributional property of the HO model are spelled out in the Stolper-Samuelson (SS)
theorem.
The Stolper-Samuelson theorem
Consider a two-good, two-factor HO model where the two factors are labor and skills (instead of
the usual labor and capital). The hitech good is intensive in skills while the lotech good is intensive
in labor.
Suppose that we want to assess the effect of trade liberalization in a skill-abundant country. In that
country, trade liberalization will induce a rise in the relative price of the hitech good (the exported
one) and a drop in the relative price of the lotech good (the imported one). For simplicity, instead of
varying the two prices simultaneously, we will raise the price of the hitech good while keeping that
of the lotech one constant.
The question answered by the SS theorem is, how does the rise in the hitech good’s relative price
affect the relative price of skills vs labor ? Let w be the price of « pure labor » (think of this as a
10
market-determined minimum wage) and r the « price of skills » (i.e. the difference in the salary of a
skilled occupation and the minimum wage).
Let also a i j be the unit factor requirement of sector j in factor i, i.e. how much of factor i must be
expended to produce one unit of good j, with i = L, S (labor or skills) and j = LT, HT (lotech or
hitech). If HT is relatively skill-intensive,
aLHT aLLT

aSHT aSLT
(23)
Perfect competition implies that price equals unit cost, i.e.
aLHT w  aSHT r  p HT
aLLT w  aSLT r  p LT
(24)
unit cost
In our experiment, the price of hitech goes up ( dp HT  0 ) while that of lotech is unchanged.
Differentiating totally (24),
aLHT dw  aSHT dr  dp HT
aLLT dw  aSLT dr  0
(25)
Solving this gives
dr
a2
  2L  0 ;
dw
aH
(26)
That is, the (equilibrium) minimum wage and the skill premium move in opposite directions.
Substituting this in the first differential gives
dr
dw
dw
 a LT  
 aSHT  LLT   dw
 aS  
dp HT  aLHT dw  aSHT

  aLHT

(27)
Thus,
dw

dp HT
1
a
HT
L
a
HT
S
 aLLT 
 LT 
 aS 

1 aSHT
0
aLHT aLLT

aSHT aSLT
(28)
Thus, the minimum wage goes down, which implies, by (26), that the skill premium goes up. Thus
2. Empirical evidence
2.1 Trade and income inequality
11
Prima facie evidence is that the skill premium has indeed been growing in Western countries as
they opened up ; this is particularly true of the United States during the period where the US
economy opened up substantially, i.e. starting in the 1970s.
Figure 3: Wage inequality in the U.S. during the “great opening”, 1969-1993
Moreover, the rise in wage inequality seems to correlate with a rise in the skill premium
Figure 4: Evolution of remunerations by skill level, U.S., 1961-93
So far, so good : « stylized facts » seem to support a causal story running from increasing trade
openness in the US to a rising skill premium. However several facts do not square out at all with
that story. First, the same forces playing exactly in the opposite direction in the South should have
led to shrinking income inequality. That’s not the case, especially in Latin America.
Second, even in the North, an expanding hitech sector and a shrinking lotech sectors are compatible
with a fixed endowment of skills and labor only if all sectors become less skill intensive, as in
12
Figure 5. Yet that’s not what the empirical evidence suggests : All sectors have become more skill
intensive in OECD countries in the last half-century.
All in all, the evidence actually fails to support a causal chain running from trade openness to rising
inequality. Not that the SS theorem is wrong : it’s just that empirically, its quantitative contribution
to rising inequality in Northern countries is small, by far, the dominant cause of the rising skill
premium is skill-biased technical change (technical change that raises the demand for skills while
the supply does not increase as fast, leading to an excess demand for skills).
Figure 5: Adjustment of skill intensity as a reaction to structural adjustment
Intensité en qual.
Avant
18
15
Secteur HT
Secteur LT
Production
Intensité en
qual.
Après
25
8
Secteur LT
Secteur HT
Production
Note : Production is measured on the horizontal axis, and skill intensity (skilled workers per unit) on the
vertical one. The country’s endowment of skilled labor is fixed throughout at 33.
2.2 Voting on trade liberalization
How do people form their positions vis-à-vis trade liberalization ? In this section we consider the
results of voting analyses and surveys.
2.2.1 CUSFTA
Beaulieu (1990) looked at a Canadian election that was held largely on the question of a free-trade
agrement with the US, CUSFTA. Here the dependent variable is a binary one : in favor or against
CUSFTA, and based on an exit poll. Table 1 shows how it correlates with individual characteristics
like educational level.
Table 1: Regression on CUSFTA-related election exit poll, Canada
13
Dep. var.: "in favor of CUSFTA"
Regressors
Education
Completed high school
Tech/college
University
Occupational skills
Semi-skilled occup.
Skilled occup.
Region
Atlantic
Québec
Ontario
Political/Union
Trade Union member
Conservative
Obs.
Pseudo-R2
Coeff
signif.
Coeff
signif.
0.163
0.467 ***
0.567 ***
0.298 ***
0.478 ***
-0.378 ***
-0.383 ***
-0.149
-0.268
0.144
-0.234
-0.278 ***
1.514 ***
-0.267 **
1.492 ***
1'463
0.11
1'463
0.11
Source : Beaulieu (1990)
2.2.2 Switzerland and the EU : The EEA and bilateral agreements
Here we look at municipality-level votation results on the EEA (1992) and the subsequent bilateral
agreements. The idea is to see whether average scores correlate with relevant economic variables at
the municipality level.
First, from a Ricardo-Viner perspective, we look at sectors predicted to come out winners or losers
from trade liberalization with the EU. We use predictions from a Computable General Equilibrium
(CGE) model set up by the University of Geneva. (Table 2)
Table 2: Winning and losing sectors as predicted by the UoG’s CGE model
14
Secteur
Agriculture
Construction
Machines
Electronique
Métallurgie
Bois
Chimie
Alimenation et tabac
Imprimerie
Energie, gaz, eau
Horlogerie
Ciment
Cuire et plastique
Textile
Papier
Confection habits
Autres services
Commerce
Transport, Télécoms
Hôtellerie
Banques
Assurances
Santé
Qualif.
Ex (%) Imp (%)
P
P
G
G
P
P
G
P
N
N
P
G
G
N
N
N
G/P
G/P
P
G
N
N
n.a.
n.a.
56.11
43.27
37.68
12.6
53.69
7.4
7.67
n.a.
87.34
87.34
60.5
61.4
24.7
27.1
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
59.34
40.94
38.38
28.2
51.8
16.7
12.73
n.a.
73.47
73.47
73.3
53.3
37.8
78.2
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
NTBs
RCA EU
RCA
RoW
ESI
PSI
n.a.
n.a.
2-3
2-3
1-2
1
1-2
1-2
1
n.a.
1
1
1-2
2
1
1-2
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
-1
0
-1
-1
1
-1
-1
n.a.
1
-1
-1
1
-1
-1
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
0
1
0
0
1
-1
1
n.a.
1
-1
0
1
-1
-1
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
0
1
0
0
1
-1
-1
n.a.
1
-1
0
0
-1
-1
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
-1
1
0
0
1
0
1
n.a.
1
-1
-1
0
0
0
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
Prévisions status quo
Valeur ajoutée
Emploi
BAK
GM
BAK
GM
-2.2
-0.1
-0.4
0.3
-0.9
0.2
2.1
1.2
1.8
-1.7
2
-0.5
0.7
-1
0.9
0.3
1.6
1.4
1.9
1.4
1.6
2.5
2.3
Ex
Part des exportations, 1991 (exportations/valeur brute production)
Imp
Part des importations, 1991 (importations/demande intérieure)
NTBs
Importance des barrières non tarifaires (1=faible,2=moyenne,3=élevée), 1991
RCA EU
Avantage comparatif par rapport à l'UE, 1991
-0.31
2.71
1.11
3.01
0.05
0.18
2.25
-0.93
1.73
0.8
2.76
-0.54
-0.36
-1.03
1.96
0.2
2.57
1.96
2.39
0.55
1.98
2.02
3.04
-2.5
-1.1
-3.8
-3.2
-2.9
-0.4
-0.3
-0.3
-0.5
-0.7
-0.5
-1.7
-0.9
-4
-2
-2.8
1.4
0.4
-0.5
-0.6
-0.2
2.1
0.4
Prévisions adhésion à l'EEE
Valeur ajoutée
Emploi
BAK
GM
BAK
GM
-0.81
0.7
-0.09
0.69
-0.94
-0.62
0
-1.23
-0.26
0.8
0.25
-1.03
-1.84
-2.01
0.21
-0.6
1.3
0.95
1.08
0.15
0.48
0.71
1.11
-1.9
1.3
2
3
1.2
1.3
3
1.6
2.5
0.1
2.9
0.6
2.3
-0.3
1.4
1.1
2.2
2.1
2.7
2
2.4
2.9
2.6
-0.32
3.27
1.62
3.99
1.75
-0.62
3.81
-2.29
2.75
0.99
2.99
-0.38
-0.32
-1.16
1.91
-0.34
3.32
1.82
3.96
-0.07
3.16
2.33
3.35
-2.3
-0.4
-1.3
-0.4
-0.6
0.9
0.5
0.1
0.1
2
0.6
-0.9
0.8
-3.1
0.1
-2.3
1.3
0.5
-0.4
-0.3
0.8
2.1
0.5
-2.94
0.95
-0.37
0.49
2.03
-3.32
0.08
-3.35
-0.82
0.74
0.19
-1.46
-2.08
-3.1
0.16
-0.83
1.15
0.21
1.92
-0.87
0.84
0.97
1.03
RCA RoW Avantage comparatif par rapport au reste du monde,1991
ESI
Indice de spécialisation dans les exportations, 1991
PSI
Indice de spécialisation dans la production, 1991
avec:
1 = avantage comparatif de la Suisse
0 = pas d'avantage comparatif de la Suisse
-1= désavantage comparatif de la Suisse
BAK
Prévisions du BAK (1992) pour la période 1991-2000 (taux de croissance annuel)
GM
Prévisions de Graf, Mettler (1991) pour la période 1995-2000 (taux de croissance annuel)
G
Gagnant
N
Neutre
P
Perdant
G/V
Sous-secteurs avec différentes évaluations
Source : Anson Cadot, 2003
Then we look at average scores on the bilateral agreements (proportion of yes votes) and how they
correlate with various explanatory variables, including employment shares in winning and losing
sectors, at the municipal level (Table 3).
Table 3: Résultats de régression par municipalité, Suisse
15
Dep. var.: "in favor of bilateral accords with EU" (trade liberalization)
Regressors
Education
Employment shares
Predicted winner (from CGE)
Predicted loser
Other economic
Unemployment rate
Political
Right wing
Yes to Swiss participation in US missions
Social, cultural and demographic
German-speaking
Protestant
Altitude * remoteness
Women
Obs.
Pseudo-R2
Coeff
signif.
0.086 ***
0.254 ***
-0.366 ***
-1.987 ***
-0.007 ***
0.257 ***
-0.071
0.311
-3.E-06
-1.916
***
***
***
***
2'745
0.79
Unit of observation: commune
Insignificant coefficients: nearby autobahn, age
Constant omitted
Source : Anson Cadot, 2003
2.2.3 Cross-country evidence
Now we generalize on these observations and look at the relationship between education and profree-trade attitudes, across different country income levels (Figure 6).
Figure 6: The relationship between education and pro-free-trade attitudes, across income levels
Trade policy and factor endowments (i)
Unit of observation:
individual (data from
national surveys)
prob (pro free trade)
γ
Unit of observation:
country (regression
coefficient estimated on
national survey)
case A
γ>0
education
prob (pro free trade)
γ=0
GDP per capita
case B
education
prob (pro free trade)
γ<0
case C
education
Source: Mayda and Rodrik, 2002.
16
Figure 7: Evidence from the ISSP
Source : Mayda and Rodrik (2005)
Figure 8: Evidence from the World Values Suvey
Source : Mayda and Rodrik (2005)
These results are paradoxical : individuals respond to surveys and vote as if they had in mind the
distributional effects of trade liberalization with « Southern » countries as predicted by the
17
Heckscher-Ohlin/Stolper-Samuelson logic. Yet, the empirical literature suggests that those effects,
while well-established theoretically, are small, the largest contribution to the rising skill premium
being technical change. It seems that trade is over-charged with distributional effects in the mind of
voters.
2.3 Democracy and growth
We saw earlier in this chapter that democracy may generate policies, in particular in terms of
redistribution, that depart from welfare maximization. How about the dynamics: Does democracy
foster pro-growth policies? On one hand, the checks and balances that characterize democracies
should help punish bad policies and limit the distortions linked to rent-seeking and corruption
because of better transparence (Olson 1993). On the other hand, redistributive policies are known to
be typically anti-growth and could be a factor of instability. So what does the evidence say?
As usual, the early wave of empirical work was based on cross-sections of countries and yielded
ambiguous results with weak identification (see e.g. Barro 1996), the key identification problems
being the usual ones relating to endogeneity of democratization: Whatever the true effect of
democracy on growth, changes in growth are likely to feedback to regime changes (reverse
causation) and both are likely to be affected by common shocks (say, terms-of-trade changes or
weather shocks) through economic and political channels.
Panel-data estimates control for some of those problems, through only weakly, and Rodrik and
Wacziarg (2005) find that democracy enhances growth. Their definitions are:
1 in the first 5 years after a democratic transition
New democracy (ND)  
otherwise
0
1 in the following 5 years after a democratic transition
Established democracy (ED)  
otherwise
0
Democratic transition  ND  ED
and same thing for autocracies, both defined based on Polity scores. Results are shown in
Table 4: Effect of democracy on growth, within (FE) estimator
18
Source: Rodrik and Wacziarg (2005)
Interestingly, the effect is even stronger for low-income countries, ethnically fragmented ones, and
in sub-Saharan Africa where one would expect democracy not to work too well because of
institutional under-development:
Table 5: Effects are stronger in unlikely settings
19
However, the result seems to break down when looking at democratic transitions (Figure 9). What
the average growth profile suggests is a collapse of growth preceding the democratic transition
(perhaps causing it) but no discernible growth acceleration after the transition.
Figure 9: Time profile of growth around democratic transitions
Source: Rodrik and Wacziarg (2005)
20
Thus, the notion that democratic transitions are systematically followed by bad economic outcomes
in poor or institutionally weak countries is dispelled; however, the (converse) notion that
democracy comes with a “growth dividend” does not seem to be supported by Rodrik and
Wacziarg’s evidence either. Freund and Jaud (2015) do find an effect for democratic transitions, but
it seems to be driven by regime change rather than democracy per se, as autocratic transitions (from
democracy to autocracy) are both significant and of comparable magnitude in their positive effects
on growth (in fact, autocratic transitions seem to have a slightly larger effect). Why should regime
change yield a growth dividend? If the pre-transition regime is autocratic, Papaioannou and van
Zanden (2012) show that years in office correlate negatively with economic growth, what they call
the “dictator effect”. The argument is that as a dictator grows older he stops listening to anyone
except his inner circle of “yes men” which typically shrinks in size as and becomes increasingly
corrupt. If the pre-transition regime is democracy, the argument is less clearcut, but Rodrik and
Wacziarg’s graph strongly suggests that regime change is endogenous to poor performance. In a
nutshell, if there is a regime change, it must be because the previous regime, whether it was
democratic or autocratic, was incompetent. The key argument is the endogeneity of the regime
change to poor performance rather than the virtues of the new regime.
2.4. Can policies change politics ?
The political-economy approach briefly presented in this chapter suggests that policies should be
viewed as endogenous to the motivations of politicians and the types of institutions and incentives
they face rather than as instruments. Does this mean that we can’t do anything to improve policies,
because they are governed by politics ?
In their chapter 10, Banerjee and Duflo report interesting experiments that suggest otherwise. What
they show is that the way politics works can be affected by projects designed to raise awareness or
to give a fairer share of power to women.
For instance, temporary affirmative-action quotas for women in politics can have persistent effects
on female representation in legislative bodies. This has been observed in the State of West Bengal
in India, with the proportion of women in the State legislature rising from 10% to 13% after a quota
was imposed during one cycle only, and to 17% after a quota was imposed during two consecutive
cycles. Similar observations have been made in an experiment in Mumbai (Bhavani 2009).1 The
intuition of these experimental results is that Affirmative Action quotas can change the perception
of women in politics : kicking the polity out of its traditional equilibrium makes it possible for
evidence to chase prejudice.2
Also, a recent experience in Nigeria (Vicente 2012) showed that an awareness campagin generated
a significant reduction in electoral violence, a rise in the participation rate, and, counter-intuitively,
a reduction in the score of smaller political parties (because in Nigeria they were the most related to
violence).
Bhavani, Rikhil (2009), « Do Electoral Quotas Work After They Are Withdrawn ? Evidence from a Natural
Experiment in India » ; American Political Science Review 103(1), 23-35.
2
One experiment made it possible to measure the effect of quotas on prejudice. In a sample of vilages, some villagers
chosen at random were exposed to a political speech read by a male voice while others were exposed to the same
speech red by a female voice. Then they were asked if they found the speech convincing. The the score difference
between the male and female voice was lower by a significant amount in villages with AA quotas compared to others
(Banerjee Duflo 2011, p. 261-2).
1
21
Thus, our « positive » approach to politics should not be viewed as a reason to be fatalist ; politics
generates policies in a predictable way, but it can be changed through changes in institutions or
through changes in voter attitudes.
References
Barro, Robert (1996), “Democracy and growth”; Journal of Economic Growth 1, 1-27.
Freund, Caroline, and M. Jaud (2013), “Regime change, democracy and growth”; mimeo.
Jain, Sanjay, and S. Mukand (2003), “Redistributive Promises and the Adoption of Economic
Reform”; American Economic Review 93, 256-264,
Mayda, Anna Maria, and D. Rodrik (2005) “Why are some people (and countries) more
protectionist than others?”; European Economic Review 49(6), 1393-1430.
Olson, Mancur (1993), “Dictatorship, democracy, and development”; American Political Science
Review 87, 567-576.
Papaioannou, Jason, and J. van Zanden (2012), “The dictator effect: How long years in office affect
economic development in Africa and the Near East”; CEPR discussion paper 8962.
Rodrik, Dani, and R. Wacziarg (2005), “Do democratic transitions produce bad economic
outcomes?”; American Economic Review 95, 50-55.
22