DIA 2010 Productivity in Latin America Chapter 13: The Political Economy of Productivity Prepared for presentation at RES Working Sessions. October 21 st 2008

THE QUESTION The rest of the report will tell which (extant or missing) policies constitute key obstacles for higher productivity in Latin America While policies seem to be the main driver, there may be also some politically induced economic actions which may affect productivity E.g, Microsoft comes to DC This chapter will attempt to explain the (political) reasons behind those policies (and choices) The ultimate objective of the chapter is to help the overall report to produce recommendations that include (rather than ignore) the politics behind the policies. (And to do that at the country level)

THE QUESTIONS (1)  Some more specific questions the chapter will try to answer (will be more comprehensible after the framework) How does the policymaking process affect productivity related policy demands? What is the role of the socioeconomic actors (business, labor unions,etc) in the determination of public policy in LAC? How does the economic structure of the country affects the articulation of the “real actors” in the policymaking process?

THE QUESTIONS (2) What is the role of different political institutions in the articulation of the transactions between the political and the “real” actors? How much does the organization of interest groups depends (or is affected by) the political/institutional organization of the country? What are the characteristics of the arenas in which public policies are decided and how do they affect the productivity-related policies? What can we suggest in each case given all of the above?

Inputs for the chapter Parallel development of: A framework and a set of general and comparative insights (started in Murillo, Scartascini and Tommasi) 8 country-case studies Argentina, Brazil, Bolivia, Chile, Colombia, Costa Rica, Mexico, Venezuela (hopefully) Externalities from other work for the DIA Work by (and with) associated researchers E.g., Ben Ross Schneider

This presentation Format quite different from final chapter Focus on what we are doing How we are doing it / thinking about it Pending (analytical and empirical) tasks Only very tentative “empirical findings” At this stage, the presentation may not yet be crisp enough Final chapter will have More “empirical findings” using the country studies Recommendations (“political economy” caveat)

The Framework in a Nutshell

THE FRAMEWORK Productivity POLICIES POLICYMAKING INSTITUTIONS political (State) actors The Policymaking Process (PMP) INTEREST GROUPS “real” actors Socioeconomic Structure Political Institutions

THE FRAMEWORK Building Blocks The framework uses a number of building blocks Some pre-existing ones 1. Studies of the PMP and the features of policies 2. Role of political institutions in the determination of policies 3. Models of interest groups behavior and rent- seeking A bit US centered Some good applications in trade policy 4. Role of veto players in the reform process 5. Organization of “real actors” (businesses, unions, etc)

THE FRAMEWORK INTEREST GROUPS ”real” actors POLICYMAKING INSTITUTIONS political (State) actors POLICIES Productivity Socioeconomic Structure Political Institutions PMP and the features of policies 2.Political institutions and policies 3.Interest groups and rent-seeking 4.Role of veto players in the reform process 5.Organization of “real actors” 1 3 Reduced form PI

THE FRAMEWORK Building Blocks Some we are developing further Especially the integration of these pieces 1. Country-centered general equilibrium view Understand public policies as outcome of general politico-economic equilibrium (please don’t try Persson-Tabellini or Grossman-Helpman at home). Specific policies interpreted in the context of the overall “vector of policies” and political dynamics In some cases, some sectors may have to be sacrificed for the greater good Consequently, it is not good idea to look only at marginal policies and reforms (or lack thereof)

THE FRAMEWORK Building Blocks 2. Feed-back effects Most literature looks only in one direction Interest groups affect policies (short run) Interest groups affect politics (very long run) Our approach is broader Here we look at these (also in the medium term) and we also look at how politics (and institutions) shape the formation of groups

THE FRAMEWORK Building Blocks 3. The role of time Path dependence Group organization Past policies (from past politics) are the status quo Intertemporal considerations Role of horizons

THE FRAMEWORK Building Blocks 4. Arenas Developed countries political economy analysis takes as given things that here are variable In developed countries, transactions take place in institutionalized arenas (e.g., the legislature). It is not always the case in LAC While in some countries they take place in formal arenas they may also take place in the streets and other informal settings. Different arenas imply different tokens of exchange, different types of transactions, enforcement mechanisms, etc.

THE FRAMEWORK The determinants of policies In real politics, policies are chosen for a number of reasons/characteristics, 1. (only) one of which is whether they are productivity enhancing (Y+) or not (Y-) 2. Its temporality (how early benefits and cost accrue) 3. Its distributional features (who gains/loses) We will see later how characteristics (2) and (3) will interact with the features of the PMP, and of the distribution of “real” power to determine whether some Y+ / Y- policies are adopted in equilibrium

THE FRAMEWORK INTEREST GROUPS ”real” actors POLICYMAKING INSTITUTIONS political (State) actors POLICIES Productivity Socioeconomic Structure Political Institutions Lets look inside some of these boxes and arrows before attempting to put everything together

THE FRAMEWORK INTEREST GROUPS ”real” actors POLICYMAKING INSTITUTIONS political (State) actors POLICIES Productivity Socioeconomic Structure Political Institutions

From PMP to (features of) Policies (without details of specific socieconomic actors) Previous work (such as the IPES 2006) analyzed how the workings of political institutions in the PMP shape the features of public policies (such as volatility or credibility). PMPs that favor inter-temporal transactions and cooperative policymaking are characterized by good government capabilities (e.g., long term horizons, capable bureaucracies, enforcement technologies, etc). These characteristics may be associated with better policies directly. POLICYMAKING INSTITUTIONS political (State) actors POLICIES

From PMP to (features of) Policies (without details of specific socieconomic actors) Also, PMPs that favor inter-temporal transactions and cooperative policymaking tend to have better policy features. These features of policies (in themselves) might matter for productivity: Volatility Adaptability Coordination This (institutionally driven) “supply” will affect what interest groups demand POLICYMAKING INSTITUTIONS political (State) actors POLICIES

The features of policies and productivity For example, let’s see a brief sketch on how volatility affects policy demand Interest group deciding to demand Y+ (“public goods”) or Y- (“rents”) Productivity enhancing (“public goods”) Y+ Ports, infrastructure, healthy competition policy Productivity decreasing (“rents”) Y- Inefficient barriers, subsidies that induce misallocation of resources Under some conditions Rents are a spot transaction Public good provides higher long term benefits If policies are unstable in this polity, interest groups might prefer to demand rents rather than public goods.

THE FRAMEWORK INTEREST GROUPS ”real” actors POLICYMAKING INSTITUTIONS political (State) actors POLICIES Productivity Socioeconomic Structure Political Institutions

The “Demand” of Public Policies The demand of public policies depends on the interests of those that would be ultimately affected by the policies Caveat: “Demand” is a shortcut since sometimes the arrow goes the other way and groups and coalitions are put together by the polity in order to extract political rents. The extent of one or the other depends on policymaking institutions INTEREST GROUPS “real” actors POLICYMAKING INSTITUTIONS political (State) actors

The “Demand” of Public Policies Who are the interest groups? According to the specialized literature and the country studies they are: Different groups of voters Different types of business actors Different levels of aggregations Business as firms, Business as sector, Business as capital Different types of organization Unions Social movements, etc. INTEREST GROUPS “real” actors POLICYMAKING INSTITUTIONS political (State) actors

THE FRAMEWORK INTEREST GROUPS ”real” actors POLICYMAKING INSTITUTIONS political (State) actors POLICIES Productivity Socioeconomic Structure Political Institutions

The “Demand” of Public Policies Different economic structures matter for demand Different groups have different demands E.g., Multinationals needs are different than large local firms which are different from the small firms’ Who has the stronger voice matters E.g., demand will be tilted towards the preferences of the group with more power Certain things can only be demanded if coordinated E.g., certain public goods may need coordinated actions. How much do the economic or geographic structure facilitates collective action may determine demand. INTEREST GROUPS ”real” actors Socioeconomic Structure

The “Demand” of Public Policies Interest groups preferences do not translate directly into policy demands and policy demands do not necessarily imply changes in policies It depends on: How interest groups organize How many At what level Are they stable or not How they articulate with the policymaking process In which arenas do they participate (executive, legislature, street) What types of transactions do they engage in INTEREST GROUPS ”real” actors Socioeconomic Structure

THE FRAMEWORK INTEREST GROUPS ”real” actors POLICYMAKING INSTITUTIONS political (State) actors POLICIES Productivity Socioeconomic Structure Political Institutions

Articulation Different ways in which interest groups link with the political structure, has potential implications for Y+/Y- Let’s look at two of them here. Arenas of exchange Different arenas generate different outcomes In some countries transactions take place at the legislature while they take place with the bureaucracy or the president in others In some, negotiations take place at the federal level. In others, at a decentralized one. Each one provides certain bargaining possibilities and tokens of exchange In some arenas it may be easier to provide pork, in another regulations, and so on.

Articulation The electoral connection The characteristics of the party system may matter for the stability of the relationship More stable relationships may provide possibilities for internalizing certain demands It may also provide a more stable arena for exchanges. For example, in Chile transactions take place within the coalition instead of outside Inclusiveness and representativeness of electoral system Under some institutional conditions, the power of the interest groups may be higher E.g, politicians have a lower electoral connection so they can cater more freely to interest groups

Articulation A brief note on public opinion We are aware of the relevance of public opinion The preliminary evidence in the country studies shows that it matters Politicians cater to perceived interests of citizens and groups (and they build coalitions through messages that affect those perceptions) Brazil’s demand for macro stability Argentina’s use of public opinion by the president Previous work has captured part of the issue, which makes us wonder how much time to spend on it. The Political Economy of Reforms (Lora, etc) IPES 2009 Stokes (and others) on deliberative democracy

Putting everything together. What would a model look like? How could a model explain differences in the content of policies (e.g., a higher demand for ‘public goods’ instead of ‘rents’) based on the previous ‘pieces’? Basically, Policymaking Low government capabilities Volatility, low adaptability, lack of coordination Economic structure High fragmentation, peak associations with low survival rates, etc Articulation (determinants of incentives) Loose electoral connections, institutional fragmentation, lack of enforcement mechanisms, etc. might tend to favor Y- over Y+

Putting everything together. Conceptual messages By moving from a fragmented view, some conceptual messages arise (which are compatible with our previous theoretical work) 1. Taking a picture is not enough for understanding the reasons behind productivity Powerful actors today may not be powerful tomorrow Powerful real actors today may want to affect political institutions in order to remain powerful tomorrow Politicians may want to alter institutions in order to gain power and influence over the interest groups

Putting everything together. Conceptual messages 2. Looking at the partial equilibrium margin could provide a distorted view of the vector of policies. In a country with a relatively good equilibrium, both good and bad policies are possible Politicians try to isolate certain sector or policy areas from negotiation, put good institutions in place, and so on. E.g., fiscal or monetary policy. Regulatory framework However, there may be some sectors or areas in which they decide to let “politics play their role”. They give the ministries to the coalition, they use those areas for generating transactions, they buy votes with pork, etc.

Putting everything together. Conceptual messages 3. The articulation of political and business interests may not only happen at different arenas but it may also change over time In some countries, the articulation is stable Interest groups know who to talk to and what is their role (Chile) In some others, it is not. Political actors pick different alliances at different moments in time The president (or other powerful political actor) may decide who to work with in order to extract as much rents as possible. (Argentina)

Putting everything together. Conceptual messages 4. Some countries reach stability and cooperative outcomes at certain levels (deep institutions, policymaking transactions) while others do not In some countries, the relationship between real and political actors is sustained by the institutional framework E.g., Chile’s electoral system favors transactions within the coalition In some countries, the relationship is independent of the institutional framework (institutions change but the outcomes are similar) It may be the case in Mexico and Venezuela In some countries, the relationship is unstable E.g., Argentina In some countries, transactions have moved from the institutionalized arenas to non-institutionalized ones. E.g., Bolivia

Putting everything together. Conceptual messages 5. It may also be the case that results are different according to the level of government at which transactions take place. Some groups have a say at the national level (e.g. finance sector), so they affect the policies that are decided at that level (e.g., general macro policy) Some groups have a say at the subnational level (e.g., industries). Therefore, they ask for policies decided there, such as: Tax benefits (which may generate problems for tax changes when coordination is necessary across state lines) Infrastructure (difficult to coordinate across states) If interest groups and the political organization differ in their level of aggregation, exchanges may become more difficult (e.g., teachers unions in Mexico)

The country studies Very preliminary results The preliminary work shows great promise Country studies seem to cover the full range of possibilities It is important to note that we are not going to concentrate on explaining variations in productivity at the country level We are going to be looking at the vector of policies instead. Basically, whether c: country; i: sector; t: time, where Yc,i,t can take the values Y+ or Y-

The country studies Very preliminary results Some rough approximation by comparing set of countries shows the following characteristics Stability in the PMP vs. PMP in flux Chile vs. Bolivia Capture: interests vs. political agents Mexico vs. Argentina Decentralized vs concentrated role of interests Brazil vs. Colombia (or Costa Rica) Institutionalized arena vs de-institutionalized Brazil vs. Bolivia Transactions in different arenas Chile vs the rest

Putting everything together. Practical messages 1. What are the main political/institutional constraints that may limit the adoption of policies that are productivity enhancing 2. Suggestions on how to put together public policy packages that: Are productivity enhancing Take into account the desires of certain key actors who may otherwise block the reforms, or affect its implementation and sustainability Have a positive probability of being implemented

Putting everything together. Practical messages 3. Suggestions to the Bank on how to facilitate the conditions in Suggestions about potential institutional changes that may facilitate the adoption of a vector of policies that is more favorable for productivity within the logic in Suggestions on pending work that may be warranted to fully understand the full scope of the phenomena.

Work ahead Keep working on the general framework Country studies: AR, BO, BR, CH, CO, CR, ME, and VE Synergies with other projects (e.g., PDP) and other researchers (e.g., BRS, Galiani, etc) The more information we get from the other chapters (and the sooner) it may be easier for us to bring this chapter to provide more fruitful results. We can help to explain why certain policies are enacted only once we know who benefits and what is their impact. We can only ask country teams to look into certain issues only as long as we know that that is the problem in the country.

DIA 2010 Productivity in Latin America Chapter 13: The Political Economy of Productivity