Matters of State: Why Has Latin America Underperformed?

Transcription

1 Matters of State: Why Has Latin America Underperformed? Mauricio Cárdenas (based on joint work with Didem Tuzemen and José Tessada) Presidential Lecture LACEA Buenos Aires, Argentina, October 3, 2009

2 Outline I. Growth and State Capacities II. Understanding the Persistence of Weak State Capacities: Exclusion and

3 The long run divergence Average annual growth rates in: GDP Population GDP per capita LAC U.S. LAC U.S. LAC (A) U.S. (B) A-B ,77 2,67 0,55 1,94 0,22 0,73 (0,51) ,02 4,21 1,07 2,83 (0,05) 1,38 (1,43) ,91 3,77 1,89 1,9 2,02 1,87 0, ,34 3,43 2,45 1,23 1,89 2,2 (0,31) ,34 3,06 1,99 1,07 0,36 1,98 (1,62) Note: Until 1870 exponential rates of growth of population weighted averages. After 1870 unweighted averages of country growth rates. Source: Maddison (2003:114) and Maddison (2003) data set. Taken from Przeworski and Curvale (2005).

4 I. The Development Problem Which seems to have worsened in recent times (GDP per worker) LAC/U.S. LAC/G LAC/EA Source: Own calculations based on Penn World Tables.

5 What we know about the causes of the long run growth problem Factor endowments: Comparative advantage in productive activities with large economies of scale (e.g., sugar, mining, etc.). Engerman and Sokoloff (1997, 2000, 2002). High pre-colonial levels of wealth, population density, and disease environment led to the adoption of extractive institutions with the power in the hands of small elites. Acemoglu, Johnson, and Robinson (2001). Lack of a well developed system of property rights did not allow LAC countries to take advantage of industrialization opportunities in the late 1700s and early 1800s. Acemoglu, Johnson, and Robinson (2002).

6 According to these models Latin America should have better institutions than other former colonies LAC versus Former Colonies All Asia Africa East Asia & Pacific South East Asia Original Determinants Urbanization in *** Pop. Density in 1500 (log) *** *** *** *** Fraction of Population in Temperate Climate ** ** ** Settler Mortality *** *** Settler Mortality (log) ** * *** Note: * p<0.1, ** p<0.05, *** p<0.01 for a one-sided test that the difference is equal to 0. Each cell contains the value of X(LAC)-X(i), where X is the variable denoted on the leftmost column of each row and i corresponds to the group denoted by the columns.

7 We need to better understand the mechanisms of institutional persistence 1. Much of the literature emphasizes the negative effects of elite-based rule on: Fiscal revenue (Sokoloff and Zolt, 2006). Property rights (Acemoglu and Johnson, 2005). Redistribution (Robinson and Sokoloff, 2003). Economic structure/industrialization (Dependency Theories) 2. Low development of democracy Slow extension of the franchise (the U.S. was 50 years ahead of Latin America). Prevalence of authoritarianism. Nominal democracies rather than real democracies. However. recent data on suggests a significant change.

8 A Model of State Capacities, and Exclusion Source:Przeworski and Curvale (2005)

9 A Model of State Capacities, and Exclusion Polity2 measure: Autocracy (-10,+10) Argentina Bolivia Brazil Chile Colombia Costa Rica Dominican Rep Ecuador El Salvador Guatemala Guyana Haiti Honduras Jamaica Mexico Nicaragua Panama Paraguay Peru Uruguay Venezuela year Source: Polity IV Project: Political Regime Characteristics and Transitions, (2008)

10 I. The Development Problem A Model of State Capacities, and Exclusion Average number of coups per country in LAC countries Sub-Saharan Africa Asia (non-middle East) LAC OECD Source: Coups d Etat, , Center for Systemic Peace (2007) year

11 I. The Development Problem Growth Inequality Explanations based on Institutional differences But the reproduction of economic inequality is resilient Argentina Bahamas Brazil Chile Colombia Costa Rica Dominican Republic Ecuador El Salvador Guatemala Honduras Jamaica Mexico Panama Paraguay Peru Venezuela Year Source: World Income Inequality Database. UNU-WIDER (2007).

12 A Model of State Capacities, and Exclusion Institutional persistence: The role of wars and States States make wars and wars make states (Tilly, 1990). require organization and efficiency. generate nationalism and unity. Not all wars are alike: Total vs. Limited. External (inter-state) and Internal (intra-state) wars generate opposite effects (Centeno, 2002; Besley and Persson, 2008). Latin America: Internal wars are common, external wars are rare (Centeno, 2002). But caution: Which came first, states or wars? (Tilly, 1990). War is not the only catalyst for state development. Proxy for the value of the public good.

13 A Model of State Capacities, and Exclusion Latin America: Absence of Total wars Cumulative Battle Deaths (thousands) 2400 USA and Europe 7000 Asia Internal External Internal External 1200 Latin America 120 Africa Internal External Internal External Source: Own calculations based on Correlates of War database.

14 A Model of State Capacities, and Exclusion While Internal are common and prolonged! Source: Own calculations based on Correlates of War database. No State has disappeared in LAC during the last 200 years and borders have changed little.

15 A Model of State Capacities, and Exclusion What a model on State Capacity should include: An explanation of why state capacities can remain low even under more democratic forms of government. A rationale for why externally unchallenged states can remain very weak. An understanding of the impact of political violence and internal conflict. Explain the failure of social revolutions to strengthen state capacities. Underpin some of the mechanisms through which income inequality reproduces itself.

16 A Model of State Capacities, and Exclusion The model is an extension of Besley and Persson AER 09 and EER 08 papers. State capacitates modeled as the result of investment under uncertainty. The goal of the model is to see how the optimal investment in state capacities is affected by : Political inequality Income inequality External conflict Internal conflict Model

17 A Model of State Capacities, and Exclusion Setting Two periods. Total population is normalized to unity, and consists of two groups A (in power) and B: Elites (minority), Citizens (majority), All individuals in a group are identical in preferences and income levels,,. All individuals derive utility from: Private consumption Public goods, G No saving; no discounting.

18 A Model of State Capacities, and Exclusion State capacities in the model In each period, group in power makes tax, government spending, and investment in fiscal capacity decisions. Tax rates are group specific and are allowed to be negative. Tax rates,, can be at most equal to the level of state capacity of the period,. Investment in fiscal capacity raises the government s ability to tax. Fiscal capacity is needed for: More public goods provision Redistribute income by taxing the other group more heavily In period 1, there is an initial stock of fiscal capacity, which does not depreciate.

19 A Model of State Capacities, and Exclusion Preferences Indirect utility of an individual belonging to group J, in period s is: The government budget constraints are: Given the linear structure of the utilities, we can analyze taxes and public goods provision decisions separately from the investment in fiscal capacity decision.

20 A Model of State Capacities, and Exclusion Key elements Investment in fiscal capacity in period 1,, determines the level of fiscal capacity in period 2. Investment is costly, and costs,, are assumed to be increasing and convex in the level of investment. The value (benefit) of public goods,, is a random variable which has i.i.d. realizations over time. This value determines the state of the world. Interpretation: Value of public goods: probability of external conflict. Provision of public goods: level of defense against the conflict.

21 A Model of State Capacities, and Exclusion Timing of events In period 1: 1. Nature determines: Value of public goods Which group is in power Whether there is internal conflict 2. Government chooses: Group specific tax rates Amount of government spending in public goods Investment in fiscal capacity 3. Individuals consume.

22 A Model of State Capacities, and Exclusion Timing of events Period 2: 1. Nature determines: Value of public goods: Which group is in power Whether there is internal conflict 2. Government chooses: Group specific tax rates:, Amount of government spending in public goods: 3. Individuals consume.

23 A Model of State Capacities, and Exclusion Period 1 maximization problem of the group in power (group A): where : the total weight group A gives to its own group s utility Normalization: Define: : the total weight group A gives to the other group s utility

24 A Model of State Capacities, and Exclusion Period 2 maximization problem of the group in power (group A): where : total weight group A gives to itself Normalization: Define: : total weight group A gives to B s utility

25 A Model of State Capacities, and Exclusion The distribution of the value (benefit) of public good determines two States of the World common interest states: Group in power will tax both groups maximally in order to provide public goods. Redistribution states: Optimal for the group in power to tax the other group maximally and appropriate the collected revenues. In both states there can be investment in state capacities

26 A Model of State Capacities, and Exclusion

27 A Model of State Capacities, and Exclusion Expected payoff for group A when they keep power in period 2 : Expected payoff for group A when group B takes over power in period 2:

28 A Model of State Capacities, and Exclusion Maximization Results Optimal Investment in Fiscal Capacity First, need to capture the uncertainty about who will rule in period 2: where: = Probability of group A keeping power in period 2. = Probability of group B taking over power in period 2. = Marginal cost of public funds in period 1, which takes the form:

29 A Model of State Capacities, and Exclusion Optimal Investment in Fiscal Capacity: Find the level of state capacities that maximize the ENP: The optimality condition for investment in fiscal capacity (OPT) is: Next we will study how investment in fiscal capacity varies with the level of external conflict, the probability of internal conflict, political and income inequalities.

30 A Model of State Capacities, and Exclusion Utilitarian Solution Assumptions: Political equality: Income equality: Lemma 1: Higher expected value of public goods in period 2 (threat of external conflict), a first order stochastically dominating shift in the value of public goods, increases investment in fiscal capacity. Lemma 2: Higher current value of public goods decreases investment in fiscal capacity.

31 A Model of State Capacities, and Exclusion Political Inequality: Lemmas 1-2 continue to hold. Political Inequality and Political Instability: and Lemma 3: When group s A probability of keeping power in period 2 is less or equal than its population share, higher political inequality decreases investment in fiscal capacity. (If otherwise, investment in fiscal capacity may increase.) Interestingly, this is the case regardless of whether the elites or citizens are in power.

32 A Model of State Capacities, and Exclusion Now add Income Inequality: Case 1: Elites rule: Lemma 3 continues to hold. The negative effect of political inequality on investment in fiscal capacity is amplified due to the presence of income inequality.

33 A Model of State Capacities, and Exclusion Lemma 4: Higher income inequality decreases investment in fiscal capacity. And, symmetrically, the negative effect of income inequality is amplified with political inequality.

34 A Model of State Capacities, and Exclusion Political and Income Inequality, and Political Instability (Cont.) Case 2: Citizens rule Analytical results are ambiguous for Lemmas 3 and 4 Need to show some simulations

35 A Model of State Capacities, and Exclusion

36 A Model of State Capacities, and Exclusion Effects of political inequality on investment is state capacity (for different levels of economic inequality)

37 A Model of State Capacities, and Exclusion Effects of economic inequality on investment is state capacity (for different levels of political inequality)

38 A Model of State Capacities, and Exclusion If valuation of public good in period 1 increases investment in fiscal capacity falls considerably

39 A Model of State Capacities, and Exclusion Final extension: Adding Internal Conflict In the redistributive states of the world, there can be an internal conflict with an exogenous conditional probability, given by D.

40 A Model of State Capacities, and Exclusion Internal Conflict When there is an internal conflict, the two groups fight and lose a share of their income. More specifically, each individual in each group loses share of their income, where. Lemma 5: Higher probability of internal conflict decreases investment in fiscal capacity.

41 A Model of State Capacities, and Exclusion Simulation for Civil :

42 A Model of State Capacities, and Exclusion Predicted effects on State Capacities

43 State capacities 1. Protection against expropriation risk (ICRG). 2. Ease of doing business 2009 (Doing Business). 3. Government effectiveness (WBGI). 4. State s ability to formulate and implement national policy initiatives (Political Instability Task Force State Capacity Survey). 5. Policy Implementation and Enforcement Index (from Scartascini et al. 2009). 6. Tax revenue as % GDP, avg (from Baunsgaard and Keen, 2005). 7. Income taxes as % of GDP (idem). 8. Domestic tax revenue as % of total tax revenue (idem).

44 Regressors 1. : polity2 from Polity IV. Incidence is defined as the fraction of years the country has had a score of polity2 larger than 0 or 3 (only while country has been independent) 2. External : dummy that takes a value of 1 if the country has been involved in a interstate or extrastate war according to Correlates of War. Incidence is the fraction of years the country has been involved in any external war (only while country has been independent) 3. Internal : dummy that takes a value of 1 if the country has been involved in a intrastate war according to Correlates of War and that war took place in the territory of the country. Incidence is defined as in external wars 4. Gini index: Gini for total population, World Income Inequality Database, United Nations University-World Institute for Development Economics Research (UNU-WIDER), Legal Origins: taken from La Porta et al. (2008, JEL)

45 I. The Development Problem Protection Against Expropriation Risk (ICRG) NLD AUT CZEDEUNOR DNK SGP ITA ESP SWE TWN HUN BGR PRT SVK RUS KOR BHR CHN MNG QAT BRA POL GAB MEX ROM THA ALB OMN SAU IDN TUR ARE CIV KWT VEN DZA ECU EGY GIN MAR MOZ MWI TZA VNM PRY URY CMR JOR ZMB TGO TUN DOM SRB KEN GHA ARG PER PAN MMR AGO SEN NER BOL NIC HND SYR LBY SLV COG GTM NGA PRK BFA GNB IRN MDG UGA HTI MLI SDN ZAR LBR FRA JPN CHL COL GRC GBR BEL CYP CUB ETH PAK SLE BGD PHL CHE USA CAN FIN IRL NZL AUS ISR GMB BWA IND MYS PNG TTO ZAF CRI JAM LKA GUY ZWE LBN CHE AUT CZE DEU IRL NOR NLD USA DNK NZL BEL CAN FIN JPN SGP SWE ESP TWN AUS SVK HUN PRT BGR GMB CYP RUS ISR BHR BWA MYS CHN MNG IND CHL BRA PNG QAT POL GAB ALB CUB COL IDN MEXROM THA OMN SAU GRC TTO ZAF TUR ARE CIV CRI JAM KWT VEN MOZ MWI TZA URY ECU PRY DZA EGY GIN MAR CMR JOR DOM KEN LKA ZMB TGO TUN GHA ARG GUY MMR PAKSRB PER PAN ETH AGO SEN ZWE SLE BOL BGD NER NGA NIC HND LBN SYR COG LBYGTM SLV PRK BFA GNB MDG UGA IRN HTI MLI SDN LBR ZAR PHL ITA KOR VNM FRA GBR SOM SOM IRQ IRQ dem extwar CHE CZE DEU BEL CAN DNK GBR IRL NOR NLDUSA NZL AUT JPN FIN FRA AUS SGP SWE ITA ESP TWN SVK BGR HUN PRT CYP ISR KOR GMB RUS BHR BWA IND MYS CHN MNG PNG POL QAT CHL BRA GAB ROM THA GRC ALBCUB COL IDN MEX OMN SAU TTO ZAF TUR ARE CIV JAM KWT CRI VEN ECU EGY MOZ MWI TZA VNM URY PRY GIN MAR DZA CMR JOR KEN TGO TUN ZMB LKA GHA SRB DOM ARG GUY PAN ETH PAK PER SEN SLE PHL BOL BGD NER HND LBN COG NIC SYR LBY SLV GTM NGA PRK BFA GNB MDG IRN UGA HTI MLI LBR ZAR MMR SDN ZWE AGO CZE NLD FIN BEL CAN GBR NOR USA NZLIRL FRA JPN DNK SWE ESP AUSITA SGP BGRHUN TWN SVK ISR KOR HKG CHN IND MYS POL BHS CHL GRC THA IDN TTO ZAF TUR COL VEN JAM CRI EGY MWI TZA LKA TUN ARG DOM PAK SEN PAN PHL SLE BGD NGA SLVGTM IRN MDG LBR BRA MEX MAR ZMB KEN PER GAB SOM IRQ intram giniad Source: Own calculations, several sources.

46 I. The Development Problem Tax Revenue as % of GDP SWE SWE DNK DNK AUT NLD NOR FRA BEL FIN AUT NOR BEL FINNLD FRA SWZ GAB TUN MAR CIV MRT MWI TGO SEN BDI CMR CHN DZA JOR MOZ TZATHA GIN DOM BFA MLI CAF MDG IRN OMN SLV RWA PRY NER BHR BTN NPL TCD KWT ITA DEU LSO PRT ESP KEN URY COG EGY ZMB VEN IDN SGP SYR GNQ HND KOR BOL NGA PAN PER GHA BEN ARG UGA ECU HTI GTM MMR GBR GRC JPN CHL SLE ETH PAK COL BGD PHL BWA CAN IRL NZL GUY CHE AUS TTO USA JAM ZAF ZWE FJI GMB MUS MYS PNG LKA CRI COM IND BWA IRL LSO NZL GUY CHE DEU CAN GRC PRT SWZ GAB TTO JPN USA TUN JAM KEN URY ZWE ZAF COG FJI GMB MAR CHL EGY CIV MUS MYS PNG ZMB LKA MWI IDN MRT SEN SGP TGO VEN BOL SYR BDI CMR GNQ HND MOZ NGA CHN CRI DOM GIN PAK PAN TZA THA ETHDZA JOR BEN BFA COM GHA MLI PER SLE ARG CAF MDG OMN RWA COL SLV PRY IND BGD BHR BTN HTI NER UGA ECU IRN NPLGTM MMR TCD KWT ESP AUS PHL ITA KOR GBR dem extwar SWE SWE DNK DNK BEL AUT NLD FIN FRA NOR NLD BEL FIN FRA NOR DEU ITA GBR BWA CAN IRL LSO NZL GUY CHEPRT GRC ESP AUS SWZ GAB TTO JPN USA TUN JAM KEN ZAF URY COG EGY FJI GMB CIV CHL MAR MUS MYS PNG ZMB MRT MWI KOR SEN SGP TGOLKA VEN SYR CMR GNQ BOL HND IDN MOZ BDI NGA PAN TZATHA CHN CRI ETH JOR GIN DOM PAK DZA BEN BFA COM GHA MLI PER PHL SLE ARG CAF IND MDG OMN SLV PRY COL BGD BHR BTN ECU HTI NER IRN RWA NPL GTM UGA KWT TCD MMR ZWE ITA GBR CAN NZLIRL SYC ESP GRC AUS JPN USA TTO BRB TUN JAM ZAF CHN EGY FJI CHL KOR IDN MUS MYS VEN MWI SGP SENBHS NGA THA PAK DOM CRI PHL PAN TZA ARG SLE IND SLV MDG COL BGD IRN GTM NPL KEN MAR ZMB PER GAB SWZ intram giniad Note: Average , from Baunsgaard and Keen, Source: Own calculations, several sources.

47 Baseline Estimates Incidence of democracy up to 1975 (polity2>3, 20th century) Incidence of external conflict up to 1975 (20th century) Incidence of internal conflict up to 1975 (20th century) Gini index (log of avg ) Prot. Expr. Risk Doing Policy Imp. Govt. Effect. Business and Enf ** ** *** ** (0.536) (0.098) (0.268) (0.218) *** ** *** *** (0.939) (0.172) (0.483) (0.517) * ** (2.101) (0.387) (0.929) (0.928) ** *** (0.853) (0.138) (0.481) (0.442) R-squared N * p<0.1, ** p<0.05, *** p<0.01 Additional controls: legal origin dummies

48 Baseline Estimates (cont.) Incidence of democracy up to 1975 (polity2>3, 20th century) State's Policy Ability Tax Rev. Income Tax Dom. Taxes *** * (0.676) (2.882) (2.776) (6.394) Incidence of external conflict up to 1975 (20th century) Incidence of internal conflict up to 1975 (20th century) Gini index (log of avg ) * *** ** ** (1.728) (8.157) (7.505) (12.596) *** (3.242) (13.270) (11.755) (22.223) * ** ** (1.386) (7.530) (6.470) (10.869) R-squared N * p<0.1, ** p<0.05, *** p<0.01 Additional controls: legal origin dummies

49 Alternative: Less Strict Definition of (cont.) Incidence of democracy up to 1975 (polity2>0, 20th century) State's Policy Ability Tax Rev. Income Tax Dom. Taxes * (0.755) (2.536) (2.262) (6.142) Incidence of external conflict up to 1975 (20th century) Incidence of internal conflict up to 1975 (20th century) Gini index (log of avg ) * *** ** ** (1.884) (8.445) (7.687) (12.527) *** (3.416) (13.318) (11.583) (22.874) ** *** ** (1.416) (7.456) (6.276) (10.495) R-squared N * p<0.1, ** p<0.05, *** p<0.01 Additional controls: legal origin dummies

50 To Conclude 1. External and Internal have opposite effects on State Capacities, both theoretically and empirically. 2. Economic inequality is a major force behind low state capacities, especially in fiscal capacities. 3. Greater political equality has a positive effect on state capacities. 4. But only under stricter definitions of democracy there is a positive effect on fiscal capacities. 5. The negative effect of inequality on State Capacities is quantitatively larger under less strict definitions of democracy.