Political Foundations of Economic Management

Economic development Factors promote growth and development Political stability Political consensus Political freedom Economic freedom

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

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 real GDP per capita grew 5% a year for East Asian developing economies –0.04% for Latin America –0.3% for sub-Sahara Africa

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

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

South Korea’s Recovery

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

Lessons from Philippines In 1950s, best performer and most promising economy in East Asia , lowest growth rate (1.4% on average) in East Asia two periods of negative growth – and –political turmoil and military coups

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

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

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

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

Political instability 0.33 revolutions per year on average –0.14 without the Philippines

Political freedom average political freedom level –OECD economies0.946 –Latin America0.5 –East Asia0.454 –sub-Sahara Africa0.215

Democracy and growth

Robert J. Barro 1996 “Democracy and Growth”, in Journal of Economic Growth, volume 1, pages , March The middle level of democracy is most favorable to economic growth The lowest level comes second The highest level comes third

Economic freedom