Forms of Democracy and Agricultural Policy Outcomes Alessandro Olper and Valentina Raimondi

1. Forms of Democracy and Agricultural Policy OutcomesAlessandro Olper and Valentina Raimondi III Workshop PUE&PIEC Treia, Macerata 3 - 4 Febbraio 2010

2. Introduction and objective We study how reforms inpolitical institutions affect agricultural protection Three main research questions • Does a reform into democracy affect the level of agricultural protection ? • Is this relationship conditional to the particular forms/detailsof democracy ? • Are the reform effects heterogeneous across different agricultural sectors ?

3. Main results • A democratization episode increase (decrease) agr protection (taxation) by about 3-4% points • This effect jump to 6-7% for transition toward proportional democracy, (0% for majoritarian) • No significant differences across forms of government (presidential vs. parliamentary), although presidential democracy often significant • Import-competingsectors and staple food crops are largely more sensitive to institutionally induce policy changes

4. Outline • Related literature and value added • Data • Econometric approach • Results • Discussion and interpretation • Limitations

5. Related literature Political institutions and policy outcomes • AggregatedCross-country studies: • democracy/autocracy similar policies: Mulligan et al (2004)... • forms of democracy matter: Milesi-Ferretti et al (2002),Persson and Tabellini (2003, 2004) ... • Aggregated Panel data studies: • democratization induce more liberal trade policies: Milner and Kubota (2005), Giavazzi and Tabellini 2005) ... • however, forms of democracy still matter, in line with cross-country evidence: Persson (2005), Persson and Tabellini (2006) • Agricultural protection studies: • democracy weak/or non linear effect: Beghin and Kherallah (1994), Swinnen et al (2000, 2001), Olper (2001, 2007)

6. Related literature • Some limits of previous evidence • Agr policy papers • weak link with theory • difficulty to understand the underline mechanism • all papers but one (Swinnen et al 2001) exploit ‘only’ the cross-country variation in the data • raising several identification issues • Aggregated trade policy papers • poor measure of trade protection (mainly the Sachs-Warner index) • results are sensitive to the openness index used (see Tavares, 2007)

7. Main value added • This paper • Better measures of (agr) trade policy: • Tariff equivalent of all distortions (World Bank Agdistortions data) • large panel: 74 countries/1955-2005, many commodities • More robust econometric approach • difference-in-difference regressions • less strong identification hypotheses • Focus on: • democratization effects (political reforms) • forms of democracy (electoral rules and government systems) • ‘sector’ heterogeneity (importable vs. exportable; staple food crops...tropical crops, etc.)

8. Outline • Related literature and value added • Data • Econometric approach • Results • Discussion and interpretation

9. Data on political reforms • Democratic reforms (Polity IV dataset) • We define a binary indicator democracy= 1, in each country-year where Polity2 > 0 (0 otherwise) • A reform into (or out of) democracy occurs when democracy switches from 0 to 1, and vice versa (overall 66 reforms: 41 into, 25 out of) • Forms of democracy(P&T 2003; DPI ...) • Government systems: presidential (pres = 1; 0 otherwise)and parliamentary (parl = 1; 0...) • Electoral rules: majoritarian (maj = 1; 0...)and proportional (prop= 1; 0...) • Interacting the democracydummy with forms of democracy dummies we can test for heterogeneity in reform effects

10. Dependent variable and controls • Dependent variable (World Bank) • Nominal rate of assistance (NRA) at product level • It is like a tariff equivalent, and is positive when agriculture is subsidized, negative when it is taxed, 0 when net transfers are zero • Other controls (World Bank, FAO...) • Lagged dependent variable (+) • Log per capita GDP (+) • Agric labour share (-) • Land per capita (+) • Log of population (+) • Conflict dummies (?) • Sectoral share (+/-) • Sample • 74 countries, many sectors, 1955-2005 period: > 25,000 obs.

11. A preliminary look of the data • Agricultural protection (NRA) • democracies vs. autocracies Smoothed average NRAs, and their 95% confidence interval • Strong level differences in NRA across democracies vs autocracies • The differences are decreasing for exportable but increasing for importable sectors

12. A preliminary look of the data • Agricultural protection (NRA) • Electoral rules: proportional vs. majoritarian Agricultural products Exportable products Importable products Smoothed average NRAs, and their 95% confidence interval • Proportional democracies protect more than majoritarian democracies • The differences are increasing overall and for importable sectors

13. A preliminary look of the data • Agricultural protection (NRA) • Government types: parliamentary vs. presidential Agricultural products Exportable products Importable products Smoothed average NRAs, and their 95% confidence interval • Parliamentary democracies protect more than presidential democracies • However, the differences are strongly decreasing over time, especially for importable

14. Outline • Related literature and value added • Data • Econometric approach • Results • Discussion and interpretation

15. Empirical approach • Difference-in-difference specification • Our focus is on the coefficient  f • It measures the reform effect bycomparing the changein protection before-after transition to the change in protection in the control group(countries with no reforms) • Identification issues • Absent any regime change, protection growth should be similar across treated and controls countries... • No heterogeneity of regime change effects. Differently the unexplained component of protection, ki,t, also includes the term (i,t – ) Si,t ...

16. Results • Democracy and agric protection: Baseline results

17. Results • Democracy and agric protection at sectors level Robust standard errors clustered by country-sectors in parentheses; ***p < .01; **p < .05; *p < .10.

18. Results • Democracy and agric protection at sectors level Robust standard errors clustered by country-sectors in parentheses; ***p < .01; **p < .05; *p < .10.

19. Results • Forms of democracy and agric protection Robust standard errors clustered by country-sectors in parentheses; ***p < .01; **p < .05; *p < .10.

20. Results • Forms of democracy and agric protection Robust standard errors clustered by country-sectors in parentheses; ***p < .01; **p < .05; *p < .10.

21. Discussion and interpretation • How this evidence fit theoretical predictions ? • Democratization: • the positive effect on protection is consistent with the median voter model (Lindert 1994, Acemoglu and Robinson 2000, Swinnen et al 2001) • in countries undergoing democratic transitions, average and median share of agr population is higher than 50% • Electoral rules: • the strong effect of proportional democracies is fully consistent with theory • theory predicts that proportional democracies (vs. maj) have larger gov speding, and larger transfers to broad groups (Persson and Tabellini 2003; Persson et al 2007)

22. Discussion and interpretation • Forms of government: • the ‘stronger’ effect of presidential democracies (vs. parliamentary) is contrary to theory • presidential countries should have lower gov. spending and smaller transfers to broad groups (Persson, Roland and Tabellini 1997, 2000) • Sectoral heterogeneity: • import-competing sectors and staple food crops are more sensitive to institutionally induce policy changes • probably because farmers in these ‘sectors’ are higher in number, have income close to the median, and/or are more able to form effective coalitions • We need further work to better understand these hypotheses

23. Conclusion and limitations • Is the observed association between forms of democracy and agricultural protection causal ? • We believe yes... • However it is also possible that reverse causation are at work • e.g. if constitutions are the endogenous outcomes of expected redistributive policies (see Ticchi and Vindigni 2009)

24. Conclusion and limitations • This rise potential issues • Countries with low assets inequality more likely to make transitions to proportional democracy (OECD) • Center-left government are more frequents in proportional democracies (OECD) • Then proportional rule effects could be confounded with center-left redistributive effects • Difficult to test ... but previous evidence goes in the opposite direction (Olper 2007) ...

25. Thank you

26. Other results • Estimated effect of other covariates • with country-sector fixed effects included, sector share variable may only capture within country variation • namely declining sectors are every where more protected !!

27. Other results • India vs China agri protection pattern • This it is a very good point and we need to add some discussion about it

28. Theory and testable hypotheses • Forms of democracy and public policies • Persson&Tabellini (2000, 2003); Grossman&Helpman (2005) ... • Alternative constitutional rules have different combinations of two key attributes: • Accountability and representativness • Majoritarian rule: (+) accountability (-) representativness (vis a vis proportional rule) • Presidential system: (+) accountability (-) representativness (vis a vis parliamentary system) • Different rules generate different political incentives and thus different policy outcomes...

29. Theory and testable hypotheses • Predictions about government spending Source: adapted from Persson and Tabellini (2003...)

30. Theory and testable hypotheses • Implications for agricultural protection • Prediction about the level of spending ‘translate directly’ to agr policy • Predictions about composition of spending need further qualifications • agric protection will be a broad or a narrow form of redistribution depending on the role agricultural voters play in total voters • In the data set variation in constitutional rules came from countries with agr labor share > 50% • Thus in our context agric protection have to be considered a broad form of redistribution

31. Theory and testable hypotheses • Summarizing • H1.A transition into democracy should affects positively agricultural protection, but its magnitude should be conditional to the forms of democracy • H2. A reform into a parliamentary democracy, as opposed to presidential, should result in a greater increase in agric protection • H3. A Reform into a proportional democracy, as opposed to majoritarian, should result in a greater increase in agric protection