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Unit 10 Women’s right to vote and the reduction in child mortality in the United States

10.9 How political competition affects government policy

We have now analysed two versions of the ‘rent-seeking government’ model. One describes a dictator who may be overthrown, as Louis XVI and Nicolae Ceausescu were, and the other represents a governing elite that is subject to electoral competition, with the possibility that another political party may defeat it in an election and become the new governing elite.

Over the course of the past 200 years we have experienced an increase in the degree of political competition around the world. Despite the incentives for a powerful elite to resist democracy, many countries have made this transition (as illustrated in Figures 10.13 to 10.16).

Why an erstwhile dictator might submit to political competition

This has happened in many cases because governing elites have found it in their interest to concede to a more competitive political system, or even introduce one on their own initiative:

Read more on South Africa’s and El Salvador’s transitions to democracy in this book: Elisabeth Jean Wood. 2000. Forging Democracy from Below: Insurgent Transitions in South Africa and El Salvador. Cambridge University Press.

  • South Africa: The population of European origin (those who were both business and governing elites) responded to waves of industrial strikes, community protests, and student stay-away-from-school demonstrations by extending the vote to all adult South Africans, irrespective of race.
  • El Salvador: After 10 years of civil war, and faced with an armed insurrection that they could not defeat, in 1992 the economic, political, and military elites of El Salvador conceded to the demands of their opponents that the country should adopt a democratic political system.
  • The United States: At the time of adoption of the US Constitution in the late eighteenth century, James Madison, the author of The Tenth Federalist Paper, thought that the only way to ensure stability was to recognize some of what we now call democratic rights (but not for enslaved people or those without property). He persuaded his fellow wealthy landowners (and slave owners) to take a chance on baby steps towards democracy for this reason—arguing, among other things, that the less wealthy would never be able to unify against the elite. The result was the ratification of the US Constitution in 1788, which, despite its recognition of slavery as a legal institution, is considered to be a landmark on the long journey to democracy.

Faced with unrest, one way the governing elite in an undemocratic political system could increase the stability of the system would be to use the coercive powers of the government to imprison and intimidate opponents who would expose the extent of the government’s political rents. Nevertheless, there are limits to the effectiveness of these ‘police state’ strategies, as illustrated by the white governing elite under apartheid in South Africa, who attempted to do this, and ultimately failed.

The elite of the Communist Party of the German Democratic Republic (East Germany) also discovered the limits to its ability to impose stability by force. Popular demonstrations and challenges to the government were successful, in part because the police and armed forces eventually could not be counted on to defend the incumbent government.

An alternative way to ensure stability is to introduce changes in the political system that make it more democratic, providing dissatisfied people with legal means to seek a change in government.

A greater degree of democracy will ‘flatten’ the duration curve, thereby reducing the size of the elite’s feasible set, as we showed in Figure 10.16. But greater democracy could also increase the stability of the political system, reducing the chance that the government would lose power for non-performance reasons. This would increase the expected duration at the point where taxes were only sufficient to finance public services \((T = C)\). In this case, as shown in Figure 10.17, it might allow the elite an even greater expected rent: point Q is on a higher isorent curve. Here, the higher expected duration of the government, due to increased stability, more than offsets the reduction in taxes required because the citizens have more power to dismiss the government for excessive rent-taking.

In this diagram, the horizontal axis shows duration, D, in years, ranging from 0 to 15, and the vertical axis shows taxes, T, in millions of dollars, ranging from 0 to 120. A horizontal line at 5 is labelled cost, C, and corresponds to rent = 0. Four downward-sloping convex curves represent isorent lines. Two straight, downward-sloping duration curves are drawn: the steeper one is labelled “less political competition” and the flatter one is labelled “more political competition.” Point M is the point of tangency between the steeper duration curve and the second-highest isorent curve. Point Q is the point of tangency between the flatter duration curve and the highest isorent curve.
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https://core-book-server.vercel.app/macroeconomics/10-government-as-economic-actor-09-political-competition-and-government-policy.html#figure-10-17

Figure 10.17 Effect of greater stability and competition: a case where the elite gains.

Exercise 10.9 Effects of cost-saving improvements to public services

Suppose the elite can introduce a policy that will provide the same level of public services at a lower cost. This would be called an increase in the effectiveness of the government. An example might be that the government could adopt teaching methods that are more effective, or find ways to motivate teachers to improve their teaching. Or the government could require that the construction firms that build public infrastructure, such as roads, compete with each other rather than collude in setting high prices.

  1. Which curves in the diagram will this change alter? Draw a figure depicting this new situation. Hint: The (absolute value of the) slope of the isorent curves is \((T − C)/D\).
  2. Explain why the governing elite would want to introduce these policies.
  3. Can you say if the elite will levy the same level of taxes, higher taxes, or lower taxes?
  4. Give some reasons why these policies might not be introduced.

Question 10.5 Choose the correct answer(s)

Consider Figure 10.17. Read the following statements and choose the correct option(s).

  • Moving from M to Q in the diagram is a Pareto improvement, improving outcomes for both citizens and the governing elite.
  • Increased competition will always improve outcomes for the governing elite.
  • Increased competition would make the elite worse off if they did not reduce tax rates in response.
  • The ‘substitution’ effect will cause the elite that is facing greater competition to charge higher tax rates.
  • Citizens benefit from both lower tax rates and longer expected durations (assuming that regime change is costly for citizens). The elite increases its total expected rent.
  • In this example, the total expected rent of the elite increases. But in other situations, such as that shown in Figure 10.16, the government ends up on a lower isorent curve.
  • In Figure 10.17, if the elite maintained the same tax rate following the shift in the duration curve it would still reach a higher isorent curve than they were previously on.
  • The substitution effect caused by the flattening of the duration curve will cause an elite to charge lower tax rates.

Evidence

There is evidence from various countries that the prospect of being removed from office affects what politicians do. For example, the introduction of village-level elections in China led to increased provision of local public services such as health services and schooling, and arguably a reduction in corruption.1

Even in undemocratic settings, the threat of losing office can discipline politicians. In China, provincial governors and Communist Party secretaries are not subject to review by voters but instead by higher officials in the central government. Governors and party secretaries are frequently promoted and almost as frequently fired. The records of all terminations over the period 1975–1998 show that those whose provinces experienced rapid economic growth were promoted, while those whose provinces lagged behind in growth were dismissed.2

How economists learn from facts Does electoral competition affect policy?

Think of a politician who wants to stay in office and knows that she must satisfy a majority of voters when seeking re-election. But she also has her own objectives: to advance a particular project that she favours, or to maintain good relations with wealthy individuals who will support her political campaigns or employ her when her political career is over. Does the threat of ‘give the voters what they want or get thrown out’ lead her to emphasize the public’s interests, instead of her own?

Just comparing the policies adopted by politicians in districts that are non-competitive (for example, there will be no other candidate for the seat) with those who face electoral competition will not answer the question. The reason is that competitive and non-competitive political districts, and the politicians who represent them, are different in so many ways that the comparison would mix the effects of political competition with the effects of these other differences.

Economists Tim Besley and Anne Case devised an ingenious way to answer the question.3 Some state governors in the US are limited to two four-year terms of office. This means that at the end of their first term they will face electoral competition when they ask voters to re-elect them. During their second term, the prospect of political competition does not affect them, because they are not allowed to stand for re-election.

Considered as an experiment, the ‘treatment’ is the prospect of electoral competition, the governors in the first term are the ‘treatment group’ and the same governors in the second term are the ‘control group’. As in any good experiment, other important influences are held constant. We are measuring the same individuals, in the same districts, under a treatment and a control condition.

They found that during their first terms (the treatment period), Republican and Democratic governors implemented virtually identical levels of total taxation per capita. But during their second terms (the control period), Democratic Party governors, who tend to favour more public expenditures and taxation, implemented much higher levels of taxation than Republicans did. And Republican governors, when not facing political competition, implemented much lower levels of the state minimum wage.

Whether Democrat or Republican, governors faced with electoral competition in their first term implemented very similar policies to those favoured by the ‘swing’ voters who tend to change who they vote for, and so tend to decide many elections—lower taxes and higher minimum wages. But they diverged according to their own political preferences or economic interests when electoral competition was removed.

  1. Monica Martinez-Bravo, Gerard P. i Miquel, Nancy Qian, and Yang Yao. 2014. ‘Political reform in China: the effect of local elections.’ NBER working paper, 18101. ↩

  2. Hongbin Li and Li-An Zhou. 2005. ‘Political turnover and Economic performance: The incentive role of personnel control in China’. Journal of Public Economics 89 (9-10): pp. 1743–1762. ↩

  3. Timothy Besley and Torsten Persson. 2014. ‘Why do developing countries tax so little?’. The Journal of Economic Perspectives 28 (4): pp. 99–120. ↩