The Political Economy of Productivity

The Political Economy of Productivity Actors, Arenas, and Policymaking Prepared for presentation at Brainstorming Session. IADB February 6, 2009

This research project • Lies at the intersection of two agendas: • 2010 Development in the Americas Report (DIA, ex-IPES) on “Productivity in Latin America” • Step in Political Economy agenda at the Research Department IDB • Political Institutions and Policymaking in L.A.

This research project • Lies at the intersection of two agendas: • 2010 Development in the Americas Report (DIA, ex-IPES) on “Productivity in Latin America” • Step in Political Economy agenda at the Research Department IDB • Political Institutions and Policymaking in L.A. • Actors, Institutions, and Policymaking in L.A.

This research project • Objectives: • Provide inputs for Chapter 13 of DIA2010 • Including (eventually) relevant country level recommendations • Put together material for a book similar to • Generate ideas and background material for academic papers

This research project • Now at an intermediate stage in which some inputs are in place • Background paper • Murillo, Scartascini, Tommasi (2008) • Drafts of 8 country studies • Argentina, Brazil, Bolivia, Chile, Colombia, Costa Rica, Mexico, Venezuela • Other inputs (transversales)

Purpose of this meeting • Share with a group of distinguished scholars • a sketch of our current ideas • our various doubts • about the general agenda • about the political economy of productivity • Get feedback • general methodological and conceptual issues • Latin American cases • broader comparative views • special emphasis on Asian experiences • (Possibly) set the basis for future collaborations

Structure of the meeting • Introduction • Synthesis of framework • Snapshots of country studies • Discussion of methodological issues • Framework in general • Specific components • Example: • BRS might provide specifics on articulation of business actors in PMP • PK might provide specifics on clientelistic linkages • Discussion in comparative perspective • Asian cases from the lens of this framework • Wrap up session • General discussion of the issues • Planning of next steps

Introduction

POLICYMAKING INSTITUTIONS political (State) actors Productivity THE FRAMEWORK Political Institutions Socioeconomic Structure “Real” Actors POLICIES

Socioeconomic Structure Political Institutions 6 2 5 POLICYMAKING INSTITUTIONS political (State) actors “Real” Actors 4 7 POLICIES 1 3 Reduced form PI Productivity Inputs from previous literature • Workings of political institutions, PM, and the features of policies • Political institutions and policies • Interest groups and rent-seeking • Role of veto players in the reform process • Organization of “real actors” • Economic structure, interests, social cleavages • Structure and dynamics of business-State relations

6 2 5 4 7 1 3 Reduced form PI Inputs from previous literature Socioeconomic Structure Political Institutions POLICYMAKING INSTITUTIONS political (State) actors “Real” Actors POLICIES • Political institutions (wks), PM, and the features of policies • Political institutions (rules) and policies • Interest groups and rent-seeking • Role of veto players in the reform process • Organization of “real actors” • Economic structure, interests, social cleavages • Structure and dynamics of business-State relations Productivity

POLICYMAKING INSTITUTIONS political (State) actors Productivity THE FRAMEWORKTemporal and causal issues The current picture “Real” Actors POLICIES

POLICYMAKING INSTITUTIONS political (State) actors Productivity THE FRAMEWORKTemporal and causal issues Socioeconomic Structure Inter-Temporal “Real” Actors POLICIES Past

POLICYMAKING INSTITUTIONS political (State) actors Productivity THE FRAMEWORKTemporal and causal issues Political Institutions (rules) Inter-Temporal “Real” Actors POLICIES Past

POLICYMAKING INSTITUTIONS political (State) actors Productivity THE FRAMEWORKTemporal and causal issues “Real” Actors POLICIES Status Quo

POLICYMAKING INSTITUTIONS political (State) actors Productivity Alternative arenas THE FRAMEWORK Arenas “Real” Actors POLICIES

“Real” Actors POLICIES POLICYMAKING INSTITUTIONS political (State) actors Productivity THE FRAMEWORK

Policymaking Institutions political (State) actors Real Actors Policies • Who are they • Where do they come from • Economic structure determinants • How are they organized • Collective action issues • Level of aggregation and encompassingness • Which are the instruments through which they might influence the PMP • Votes • Vote mobilization • Information • Campaign finance • Bribes • Threat to disrupt economic activity • Threat to violence • Which are the venues through which they enter political system and stages of the PMP • Electoral connection • Political party system • The president • Congressmen • National or local level • Bureaucrats • The Judiciary • Formalized “corporatist” arrangements • Back rooms • The street

Policymaking Institutions political (State) actors Policies Real Actors • Who are they • Where do they come from • Economic structure determinants • How are they organized • Collective action issues • Level of aggregation and encompassingness • Which are the instruments through which they might influence the PMP • Votes • Vote mobilization • Information • Campaign finance • Bribes • Threat to disrupt economic activity • Threat to violence • Which are the venues through which they enter political system and stages of the PMP • Electoral connection • Political party system • The president • Congressmen • National or local level • Bureaucrats • The Judiciary • Formalized “corporatist” arrangements • Back rooms • The street

Policymaking Institutions political (State) actors Policies Real Actors • We draw from a large and distinguished literature • Theoretical • American • Comparative • Latin American • We “put together” country-level equilibria • Various aspects of the workings of these political systems matter for policymaking (and for policies → productivity) • Do they “invite” encompassing or narrow articulations? • Do they provide for credible intertemporal exchanges? • Do they facilitate informed policymaking? • What type of interest do they tend to favor? • Are these outcomes stable?

Policymaking Institutions political (State) actors Policies Productivity Real Actors • Can be described by a number of “economic” and “political” characteristics • Aggregate effects • Productivity enhancing/reducing (Y+/Y-) • Its distributional features (who gains/loses) • Its temporality (how early benefits and cost accrue) • Other exhange properties • (Un)certainty about their effects • Easiness to sell • Other features • Are “chosen” in different polities taking these various considerations into account (varying degrees) • Impact on productivity • Across countries • Across policy areas

Different Hypotheses / Theoretical Constructs provide some (partial?) answers: • Winners / losers and correlation with Y+/Y- • Intersectoral • Interest groups vis a vis “general public” • Intertemporal story: longer horizons → Y+ • Status quo properties (Y+/Y-) and veto players • Certain Y+ public goods may need coordinated action to be demanded • Economic / geographic structure (and its institutional mediation) will facilitate that or not • Some arenas facilitate exchanges of some policies • Some political institutions (and modes of organization of actors) • provide more internalization • more stable arenas of exchange

Another angle of entry • Country “scripts” • Stories can be told (in principle) from several angles. • If President is the dominant agenda setter, can start from there • Preferences • (Stability) • How does put together “real coalitions” • How does he/she exchange with other institutional players

Introduction to country scripts • We have tried to come up with some leading questions that may provide hints to more commons scripts • We have also tried to use graphical representations to put together the stories in a way that is more natural for thinking in terms of equilibrium outcomes • Some caveats are in order: • We have prepared the following slides based primarily on the country studies we have, which are still in their infancy • In general, we are taking snapshots at the current situation • Mexico after democratization • Colombia under Uribe • Recent events in Bolivia • Venezuela under Chavez • We are highlighting those issues that are more relevant for the comparative exercise and reflect better some of the entry points and doubts we have on the framework

Actors / Aggregation Parties / Coalition Articulation Institutions / Formal Arenas Status quo President Transaction mechanisms Policies Congress Y + Y- Judiciary Other Bureaucracy Alternative Arenas

Actors • Economic structure • How is the economic structure (e.g., concentrated or diversified)? • Actors • Who are they (e.g., business, unions)? • What are their preferences? • What are their endowments/technologies (e.g.., votes, lobbying, riots)? • Aggregation • How are actors aggregated (e.g., are there any peak organizations)? • Articulation • Do they enter through formal or informal channels (e.g., Consultative groups or back rooms)? • How do they influence and at what level (e.g., national/sub-national level, President, Congress)?

Institutions • President • What are his/her preferences? What is his/her horizon? • Is he/she the agenda setter? • Congress • What is the degree of fragmentation and particularism? • Who do they respond to? • What are the preferences of the legislators? • Political Parties • At what extent are they natural aggregators of the programmatic interest of the relevant actors? • Other institutional actors • What is the role of the judiciary? • What is the role and characteristics of the bureaucracy –including regulatory agencies? • What other actors are important (e.g., Governors, other subnational agencies, local parties)?

Policies • Status quo • Is there a relevant status quo? • What is its origin (e.g., previous policies, constitutional reform)? • Policies • Are they volatile or stable? • Are they vertical or horizontal? • Are they of national or local scope? • What is their specific content?

Argentina • Economic structure • Economic structure is diversified. Rural and industrial groups, and labor unions have had their voice heard over time. • Actors • Rural associations, Industry, Banks, Unions, Movements (piqueteros) • They usually demand sectoral benefits (in a reactive fashion) • They cater some money (specific large groups) and lobbying (associations). Most of them use alternative arenas (e.g., protests) • Aggregation • Peak associations have seen better days… • Articulation • Most of the influence is through alternative channels • The Executive is the main point of entry. There is also some subnational lobby for certain issues.

Argentina • President • The president usually has a short term horizon which determines her preferences (build political support fast) • She is the agenda setter • Congress • Congress is relatively fragmented across parties and subnational constituencies • They respond first to the governor • They have local preferences (ensure the highest $$ for their state). Party discipline is higher when president losses popularity and is in free fall. • Political Parties • Peronist brand relevant across several margins. Political parties (in general) do not aggregate preferences, have low institutionalization and are generally non programmatic • Other institutional actors • The judiciary has generally been not independent and has not worked to enforce transactions • The bureaucracy is not professional and volatile • Governors are highly influential in the political game, particularly regarding fiscal issues

Actors / Aggregation Parties / Coalition Institutions / Formal Arenas Agenda setter Status quo: fiscal federalism President Short term horizon • Diversified economic structure • Used to have strong peak associations • Coalitions change: • At the President’s whims • Exchage rate policy • Usually reactive • Winners and losers according to relative prices and sunk investments • Voter’s preferences are highly volatile Other Rural Ability to transact cheaply unless: Fiscal federalism They want to throw him out Ind Policies Congress Peronist Small Bus Fragmented Allegiance to governors Non inst and non program urban Y + ? U Judiciary: Not independent Governors Y- Highly volatile Vertical (favor those in the changing coalitions) Uncoordinated Expropriate those with sunk investments Bureaucracy: Unstable P Last ditch veto Alternative Arenas Argentina recent

Argentina • Policymaking • Policymaking is very volatile. No intertemporal transactions • Each president builds a different coalition with political and real actors • Use of popular opinion to build support. • Extraction of rents from real actors according to relative prices and sunk investments. • Real actors not coordinated and volatile. Organizations’ influence change frequently. Last ditch veto: go to the streets • Status quo • There is no relevant status quo in most policy domains. • Policies • Policies are highly volatile • Policies tend to favor those in the coalitions and affect those outside. Coalitions change frequently, so do the policies. • Fiscal, exchange rate, trade, industrial, and social policies change frequently and do not necessarily favor productivity gains.

Bolivia • Economic structure • The economy has been traditionally concentrated in a few sectors • Most labor is in agriculture (40%). The non-labor intensive sectors use only 10% of workers to generate 50% of GDP. Public monopolies were privatized. • Reforms promoted wealth in some regions and K-intensive sectors • Actors • Labor unions, social movements, business associations, and K-intensive businesses • A high percentage of population used to have no voice • Aggregation • There are peak associations for labor (strong) and businesses (used to be strong). The last has lost its influence. Eastern (more prosperous) businesses do not participate. • Articulation • For those “inside” it used to be formalized through the parties and the coalitions. • Nowadays, influence is mostly through alternative channels • Increasing use of referendums (e.g., change in the hydrocarbon sector policy)

Bolivia • President • The president has a short term horizon • He is the agenda setter (nowadays, usually circumventing the formal channels) • Congress • Congress used to be the arena of negotiation. It had the ability to decide elections and block initiatives. Presidents had to built coalitions within Congress • Congress is now more fragmented across parties and subnational constituencies • Congress has lost its role to the street • Political Parties • Political parties used to be instrumental for coalition building • Other institutional actors • The judiciary has generally been not independent • The bureaucracy is in general volatile and non professional • Decentralization has increased the number of actors with influence in policymaking. Prefectos have gained power as well as root organizations.

Actors / Aggregation Parties / Coalition Institutions / Formal Arenas Status quo: Agenda setter President Short term horizon Low diversificartion Business and unions are strong before crisis; weak after crisis Bus Ability to make coalitions Policies Congress U Fragmented Coalitions (Congress pacts) Veto Y + Wash ConsensusReforms IFIs (post-crisis) Judiciary: Not independent Bureaucracy: Unstable Y- Pre-crisis policies Alternative Arenas Bolivia before Evo

Actors / Aggregation Parties / Coalition Institutions / Formal Arenas Agenda setter Status quo: Distribution of rents President Short term horizon Low diversified economic structure Coalitions are social and geographic MAS Bus Low ability to transact Policies Congress U other Fragmented Allegiance to regions Non inst and non program Y + Social ? Judiciary: Not independent Y- Highly volatile Uncoordinated Expropriate Barriers Distortions Bureaucracy: Unstable Referendum Alternative Arenas Bolivia recent

Bolivia • Policymaking • Policymaking has moved from the more formal arenas (particularly Congress) to alternative arenas such as the streets • There is no ability to conduct transactions among antagonistic groups • Senate tries to block laws put forward by the government • The president circumvents Congress by bringing people to the streets, calling referendums and constitutional assemblies, and issuing decrees. • Status quo • Distribution of rents; political organization of the country. • Policies • Policies are highly volatile • Policies generate distortions and reduce investments: • Change of contracts and re-nationalization of various previously privatized companies

Brazil • Economic structure • The economy is highly diversified. Even the large conglomerates (world scope) are small in Brazil. • Actors • Big businesses, local business associations, unions … • “Industrial” policy has been always important. • Existence of many entry points. They are now mostly lobbying at the local level and at the ministries. • Aggregation • Business actors tend to be associated at the local level (e.g., Sao Paulo manufacturers) • Articulation • Formal channels are not generalized • They tend to lobby the governor and use certain judiciary venues. They are not very successful at the national level

Brazil • President • Presidents care about the “fiscal imperative” and some long term policies • He is the agenda setter and has a medium term horizon • He has strong budgetary powers that make transactions easier and cheaper. • Hence, he dominates the policymaking process • Congress • Congress is relatively fragmented. Governing party has to form coalitions • Legislators respond usually to their constituency and try to cater pork • Political Parties • They aggregate some preferences as they tend to have more natural ideological constituencies. They are not neither highly institutionalized nor programmatic • Other institutional actors • The judiciary has become independent and is a good enforcer of the status quo • The quality of the bureaucracy is mixed across sectors • Governors play a very relevant role at the local level. Similarly, courts and the tribunais de contas enforce some of the transactions.

Actors / Aggregation Parties / Coalition Institutions / Formal Arenas Agenda setter President Status quo: Constitution of ’88: entitlements everywhere Fiscal imperative Highly diversified economic structure Large groups are still relatively small Organized at the state level Usually reactive Voters care about fiscal sustainability and “pork” Longer term horizon BB Ability to transact cheaply: High budgetary powers SP1 Policies Congress SP2 Fragmented Local interest Y + Fiscal sustainability Stable policies U Judiciary: Independent Local and national Governors Bureaucracy: Mixed across sectors Y- Highly taxes Low infrastructure Alternative Arenas Brazil recent

Brazil • Policymaking • President has incentives for financial stability and some long run policies • Legislators care about pork for locality • Hence, given the president’s tools in the budget process (contingenciamento) relatively cheap to buy some policies • Business actors are decentralized (Lijphart). Can’t counteract presidents policies. They act at the local level. • Status quo • Constitution of ’88 generated a lot of entitlements, hence, huge fiscal burden • Checks and balances work, hence, no way to evade the constitution • Policies • Some good policies for productivity: macro stability, better access to K, trade • Some bad policies: high taxes, low infrastructure

Chile • Economic structure • The economy is diversified • Actors • Businesses, unions, etc • Each has their own preferences but they get filtered in the coalitions • Votes, mobilization, and lobby (policy advice) are their main tool • Aggregation • Actors are articulated in peak organizations which are part of the political coalitions • Articulation • Groups, as part of the political coalitions, are part of the formal decision making • Their influence goes through the governing coalition and the opposition in Congress.

Actors / Aggregation Parties / Coalition Institutions / Formal Arenas Agenda setter Policies t-1 President Long term horizon Diversified economic structure Peak organizations Coalitions internalize demands Bus right High transaction ability Bus Policies Congress V R Low fragmentation Institutional V L Programmatic Y + Almost every policy Y- Only in some margins when the “wrong” group is over-represented: Education reform Corporate governance left U Judiciary: Independent Bureaucracy: Professional and technical U Alternative Arenas Chile today

Chile • President • The president is the agenda setter and has long term preferences which are those of the governing coalition • She has extensive powers • Congress • Fragmentation is low (at the coalition level) • Legislators respond to the party but have some geographical allegiance • They tend to internalize the long term preferences of the coalition • Political Parties • Parties are institutionalized and programmatic • Other institutional actors • Independent judiciary • Stable and capable bureaucracy • Think tanks provide sound (even if bias for their cause) advice

Chile • Policymaking • History, institutions, and transitional issues lead to very institutionalized PMP • Real actors are part of the governing coalitions • Mostly, business are in one coalition and labor in the other. • Most transactions take place within the coalitions, which internalize the benefits and costs. • Then, it is easy to make transactions across coalitions • Status quo • Previous policies matter (as long as there is no clear consensus that they have to be changed). • Policies • Very good for most policies Y+ over the last several years (number 1 in comparative perspective) • Limits seen today in some policy margins in which winners of the status quo are overrepresented within each coalition, becoming veto players.

Colombia • Economic structure • Increasingly diversified economic structure • Actors • Big economic groups, peak associations, Fedecafe, ANDI, unions (5% of labor force), think tanks, universities, armed groups. • In general, they tend to look for long term economic prosperity and sectoral benefits • They are increasingly using direct lobby and campaign financing (senators). • Aggregation • Actors are articulated in peak associations. The number has grown substantially. Economic groups have relevance in the associations. Fedecafe maintains differential access • Articulation • They enter through two main channels: i) consultative groups; ii) direct contact with president and/or legislators • Best entry point: the President.

The Political Economy of Productivity