Political Foundations of Economic Management

1. Political Foundations of Economic Management

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

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

4. Puzzle of uneven growth

5. 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

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

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

8. South Korea’s Recovery

9. South Korea’s Recovery

10. 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

11. Lessons from Philippines • In 1950s, 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

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

14. 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

15. 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

16. 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

17. Political instability • 0.33 revolutions per year on average • 0.14 without the Philippines

18. Political freedom • 1975 - 1990 average political freedom level • OECD economies 0.946 • Latin America 0.5 • East Asia 0.454 • sub-Sahara Africa 0.215

19. Democracy and growth

20. Democracy and growth

21. Democracy and growth

22. 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

23. Economic freedom