Political Foundations of Economic Management Economic development Factors

Political Foundations of Economic Management

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

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

Puzzle of uneven growth

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

Crisis in South Korea • corporate failures in 1997 – Hanbo Steel, Sammi Steel, & Kia automobile • capital flight • credit downgrading • currency depreciation

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

South Korea’s Recovery

South Korea’s Recovery

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

Lessons from Philippines • In 1950 s, 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

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

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

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

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

Political instability • 0. 33 revolutions per year on average – 0. 14 without the Philippines

Political freedom • 1975 - 1990 average political freedom level – OECD economies – Latin America – East Asia – sub-Sahara Africa 0. 946 0. 5 0. 454 0. 215

Democracy and growth

Democracy and growth

Democracy and growth

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

Economic freedom