Governance Crisis and the Andean Region: A Political Economy Analysis. Andres Solimano.

1. Governance and development outcomes. 2. Analytical framework

1. Governance and development outcomes. 2. Analytical framework for Governance 2.1 Basic Concepts. Hierarchy of institutions. Formal rules. Actual patterns of social behavior. 2.2 Three main variables a) Nature and stability of the political regime and the constitution. b) Quality of institutions. c) Patterns of social cooperation/conflict related to inequality and ethnic diversity.

Diagram Constitution and Political System Quality Of Institutions Social Cooperation/ Conflict Actual Governance Development Outcomes (economic growth, macro stability, Poverty, social equity)

a. Constitutions and political systems. Analytical traditions: Contractarian approach (Rosseau, Locke, Rawls, Nozick), Public Choice Theory (Buchanan, Tullock, Dixit, North), Collective Choice (Arrow, Sen). The social contract and the setting-up of the rules of the game. Playing the game. Rights and the political system: presidential and parliamentary systems. How well each system handles political crises? Probabilities of regime breakdown under presidential and parliamentary systems.

Presidential system: Fixed term. Legislative initiative of the president. Presidents appoints cabinet. Parliamentary system: Prime-minister chosen and removed by parliament. Parliament intervenes in the designation of the cabinet

a. Constitutions and political system. Setting-up the rules of the game. Playing the game. Presidential and parliamentary systems. How well each system handle political crises? Probability of regime breakdown under each system.

a. Constitutions and political system. b. Quality of institutions. Administrative branch, judiciary, parliament, central banks, budgetary process. Transaction costs approach (Dixit, North) (institutions are created to reduced transaction costs). Power and institutions (Olsen) (Institutions play a redistributive role and support power structures). Principal-agents problems (enforceability monitoring, flows of information). Dysfunctional aspects of institutions. Rent-seeking. Corruption. Violence.

a. Constitutions and political system. b. Quality of institutions. c. Social cooperation and conflict. Related to inequality of income and wealth and ethnic diversity. Conflict around shares of national income, conflict around taxation and public expenditure, conflict around political participation and power-sharing. Inequality, conflict, investment and growth.

Empirical Analysis For the Andean Countries (Bolivia, Colombia, Ecuador, Peru and Venezuela) a) Frequency of mayor constitutional reforms, presidential crises and political regimes (The whole 20 th century and the period, see table G1). Number of constitutions ( ): Venezuela (8) Ecuador (7) Bolivia (5) Peru (4) Colombia (1) Average (5) Comparison to Chile, Uruguay, Costa Rica and OECD countries (se table G2). Frequency of presidential crisis ( ): Bolivia (16 crisis), with 11 taking place between Ecuador (10 crisis), mostly in the 1970s and 1990s. Colombia (2 crisis both in the 1950s).

Empirical Analysis (cont.) Presidential crisis and political regime: high frequency of presidential crisis in both authoritarian regimes and in democracy. e.g. Bolivia in the 1970s had a high frequency of political crisis under authoritarian regimes. In the 1990s Ecuador had a high frequency of presidential crisis under democratic regimes. High frequency of regime breakdown in Peru, Ecuador and Bolivia in the last decades. In contrast, we find a low frequency of regime breakdown (high continuity of democracy) in Colombia and Venezuela since the 1960s. Comparison of frequency of crisis in parliamentary regimes (e.g. Italy, Germany, UK) with frequency of crisis in presidential regimes (Andean Countries, most of Latin America, the US, others).

Quality of governance a) World-Bank (qualitative, survey-based, ) Kaufman, Kraay and Zaido-Lobatón index computed for over 150 countries. Six categories of the index: Voice and accountability. Political instability and violence. Government effectiveness. Quality of regulation. Rule of law. Control of corruption.

Andean countries rank lower in most of the 6 dimensions than Chile/ Uruguay/ Costa Rica, lower than the average of Latin America and lower than OECD.

Quality of governance b) World-Economic Forum-Harvard University (based on surveys) Growth Competitiveness Report, 75 countries including developed, developing countries and transition economies. Growth Potential = F [technology index, quality of public institutions index, macroeconomic environment index]. Index of Quality of Public Institutions: Contract and law sub-index Corruption sub-index

Table G-4 shows a positive correlation of the rankings of growth potential and the ranking of quality of public institutions. The place of the Andean countries is similar in both rankings.

Social Inequality, Ethnic Diversity and Conflict Inequality, as measured by Gini coefficients is high in all Andean countries. Share of indigenous population in total population is high in Peru, Bolivia and Ecuador but low in Colombia and Venezuela. Social conflict seems correlated with high inequality, the relationship between conflict and ethnic diversity is an open question. It is mediated by political participation of indigenous groups.

Social Inequality and Ethnic Diversity Inequality, as measured by Gini coefficients is high in all Andean countries. Share of indigenous population in total population is high in Peru, Bolivia and Ecuador but low in Colombia and Venezuela.

The Growth Record The annual growth record of the Andean country in the period was, on average, 1.2 percent lower than the (average) rest for Latin America. This is correlated with the governance problems documented in the paper

Conclusions Several measures of frequency of constitutional change, presidential crisis, quality of institutions and income inequality shows important government problems in the Andean region. This is correlated with a just moderate growth performance and various indicators of political and economic instability. In presidential regimes a political crisis can lead to a regime breakdown. In the Andean region this was the case in Peru, Bolivia, Ecuador in recent decades. In Colombia and Venezuela this was not the case since the 1960s. However, there are some destabilizing trends currently in Venezuela. Parliamentary regimes, in principle, seem to de-link political crisis from turning into regime breakdown and constitutional crises. Both democratic and authoritarian regimes had their fair share of presidential crisis. Authoritarian regimes are not more stable than democracies in the Andean region.

Conclusions (cont.) There is a close correlation between various indicators of quality of institutions and growth potential. High social inequality seems correlated with slower growth. This feature holds in the Andean group. The impact of ethnic diversity on growth performance is still an open question.

Governance Crisis and the Andean Region: A Political Economy Analysis. Andres Solimano.