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Thursday
Jan302014

Democracy vs. Inequality

President Obama’s State of the Union address promised a renewed focus on economic inequality in the last two years of his administration. But many have already despaired about the ability of American democracy to tackle increasing economic inequalities. Indeed, wage and income inequality have continued to rise over the last four decades during both periods of economic expansion and contraction. But these trends are not unique to the United States. Many OECD countries have also experienced increasing wage income inequality over the last several decades.

That these widening gaps between rich and poor should be taking place in established democracies is puzzling. The workhorse models of democracy are based on the idea that the median voter will use his democratic power to redistribute resources away from the rich towards himself. When the gap between the rich (or mean income in society) and the median voter (who is typically close to the median of the income distribution) is greater, this redistributive tendency should be greater.

Moreover, as Meltzer and Richard’s seminal paper emphasized, the more democratic is a society (meaning the wider is the voting franchise), the more redistribution there should be. This is a simple consequence of the fact that with ae wider franchise, expanded towards the bottom of the income distribution, the median voter will be poorer and thus keener on redistributing away from the rich towards herself.

These strong predictions notwithstanding, the evidence on this topic is decidedly mixed.

Our recent paper, joint with Suresh Naidu and Pascual Restrepo, “Democracy, Redistribution and Inequality” revisits these questions.

Theoretically, we point out why the relationship between democracy, redistribution and inequality may be more complex, and thus more tenuous, than the above expectations might suggest.

First, democracy may be “captured” or “constrained”. In particular, even though democracy clearly changes the distribution of de jure power in society, policy outcomes and inequality depend not just on the de jure but also the de facto distribution of power. This is a point we had previously argued in “Persistence of Power, Elites and Institutions”. Elites who see their de jure power eroded by democratization may sufficiently increase their investments in de facto power, for example by controlling local law enforcement, mobilizing non-state armed actors, lobbying, or capturing the party system. This will then enable them to continue their control of the political process. If so, we would not see much impact of democratization on redistribution and inequality. Even if not thus captured, a democracy may be constrained by either other de jure institutions such as constitutions, conservative political parties, and judiciaries, or by de facto threats of coups, capital flight, or widespread tax evasion by the elite.

Second, democracy may lead to “Inequality-Increasing Market Opportunities”.  Nondemocracy may exclude a large fraction of the population from productive occupations, for example from skilled occupations and entrepreneurship, as starkly illustrated by Apartheid South Africa or perhaps also by the former Soviet Union. To the extent that there is significant heterogeneity within this population, the freedom to take part in economic activities on a more level playing field with the previous elite may actually increase inequality within the excluded or repressed group and consequently within the entire society.

Finally, consistent with Stigler’s “Director’s Law”, democracy may transfer political power to the middle class—-rather than the poor. If so, redistribution may increase and inequality may be curtailed only if the middle class is in favor of such redistribution.

So theory may not speak as loudly as one might have first thought.

What about the facts? This is where the previous literature has been pretty contentious. Some have found inequality-reducing effects of democracy and some not.

We argue that these questions cannot be easily answered with cross-sectional (cross-national) regressions because democracies are significantly different from nondemocracies in so many dimensions.

Instead, we provide evidence from panel data regressions (with fixed effects) from a consistent post-war sample.

The facts are intriguing.

First, there is a robust and quantitatively large effect of democracy on tax revenues as a percentage of GDP (and also on total government revenues as a percentage of GDP). The long-run effect of democracy is about a 16 percent increase in tax revenues as a fraction of GDP.

Second, there is also a significant impact of democracy on secondary school enrollment and the extent of structural transformation, for example as captured by the nonagricultural share of employment or output.

Third, and in stark contrast to these results, there is a much more limited effect of democracy on inequality. Democracy just doesn’t seem to affect inequality much. Though this might reflect the poorer quality of inequality data, there is likely more to this lack of correlation between democracy and inequality. In fact, we do find heterogeneous effects of democracy on inequality consistent with the theories mentioned above, which would not have been possible if the poor quality of inequality data made it hard to find any empirical relationship.

Overall, our results suggest that democracy does represent a real shift in political power away from elites and has first-order consequences for redistribution and government policy. But the impact of democracy on inequality may be more limited than one might have expected.

Though our work does not shed light on why this is so, there are several plausible hypotheses. The limited impact of democracy on inequality might be because recent increases in inequality are “market induced” in the sense of being caused by technological change. But equally, this may be because, as in the Director’s Law, the middle classes use democracy to redistribute to themselves.

But the Director’s s Law is unlikely to explain the inability of the US political system to confront inequality, since the middle classes have largely been losers in the widening inequality trends.

Could it be that US democracy is captured? This seems unlikely when looked at from the viewpoint of our typical models of captured democracies. But perhaps there are other ways of thinking about this problem that might relate the increasingly paralyzing gridlock in US politics to capture-related ideas. 

Tuesday
Jan282014

Why Aid Fails

There is still a huge debate on the role of foreign aid in economic development.

For those interested, here is our take.

Thursday
Jan232014

Asian Democracy

Following on our recent post on Democracy’s Pains, Eric Randolph’s interesting article in The National provides more details on the pains of Asian democracy.

This extended quote from the article is informative: 

Having traditionally been seen as the main advocates and defenders of democracy, the middle classes can no longer be counted on to support it. Their protests helped bring down the elected governments of Joseph Estrada in the Philippines in 2001, Hugo Chavez (temporarily) in Venezuela in 2002 and Thaksin Shinawatra in Thailand in 2006. Even more worrying has been their willingness to turn to the army for help – Kurlantzick found that nearly half the military coups in developing nations over the past 20 years had significant support from the middle class.

The root of the problem in each of these examples was quite simple: democracy arrived in a country where the traditional elite was vastly outnumbered by the poor. That gave rise to populist leaders with reckless economic policies and a willingness to exploit nationalistic and religious chauvinism to win the support of the poor majority.

For the educated middle classes, the results of this equation can be horrifying, spawning opposition-crushing autocrats like Vladimir Putin, Islamist incompetents like the Muslim Brotherhood or corrupt demagogues like Chen Shui-bian in Taiwan. Suddenly, a military regime can seem like a pleasant alternative.

Tough times for democracy ahead.

Tuesday
Jan212014

Obama’s Choice

President Obama gave an important speech on National Security Agency’s (NSA) huge metadata collection program.

As is Obama’s style, it was an eloquent and measured speech. It did recognize the concerns about civil liberties and the need for checks on NSA.

But in substance, it looks like Obama’s choice will be to allow the NSA to collect and have access to unlimited metadata (and perhaps more).

Though there will be reviews, and in the future the metadata may stay on the servers of private phone and Internet companies, there seems to be no question that NSA will not be able to access this data or will face meaningful restrictions in its ability to collect such information.

In fact, Obama went further, declaring his unwavering support to the NSA and the intelligence community:

Nothing I learned since indicated that our intelligence community has sought to violate the law or is cavalier about the civil liberties of their fellow citizens.

This declaration might strain credulity, particularly in view of the fact that the NSA and the intelligence community were quite clearly cavalier about civil liberties and tried to hide it and routinely lied about it.

NSA director, Gen. Keith Alexander, for example, said clearly before Snowden’s revelations brought the whole thing to light:

the story that we have millions or hundreds of millions of those years on people is absolutely false.

Obama’s director of National Intelligence, the agency supposed to oversee the NSA, the CIA and the alphabet soup of US agencies, stated categorically in front of a Senate committee that the NSA does not collect any type of data at all on millions of Americans.

Cavalier enough?

Be that as it may, Obama’s declaration should not have come as a surprise given his presidency’s track record on civil liberties.

But it would come as a huge surprise to anybody who followed Obama’s meteoric rise to the presidency.

In the early 2000s, Obama appeared as a passionate defender of civil liberties. In 2003, as a candidate for the Senate, he was a fierce critic of the Patriot Act, calling it “shoddy and dangerous”. (See Ryan Lizza’s New Yorker article “State of Deception” for more details).

The turning point of Obama’s career was of course his moving speech to the 2004 Democratic Convention, where he took powerful aim at the Patriot Act, in particular, at its Section 215 in its so-called “library records provision,” which would become the justification for the NSA’s huge data collection on Americans and foreigners. Obama said:

We worship an awesome God in the blue states, and we don’t like federal agencies poking around our libraries in the red states.

As a senator, he then went on to co-sponsor the Security and Freedom Enhancement Act which would have clipped the wings, or even killed, Section 215 of the Patriot Act. He articulated the case against Section 215 in another one of his brilliant speeches, telling his Senate colleagues that it

seriously jeopardizes the rights of all Americans and the ideals America stands for.

But then everything changed when Obama became president. Obama appears to have put aside his doubts and concerns about the Patriot Act and civil liberties, and supported all of these programs with few scruples.

So what went on?

Of course we don’t know, but three possibilities present themselves, and reasoning about them is informative on whether we can ultimately trust the state and the politicians in charge of it to safeguard our civil liberties.

The first possibility is that after moving to the White House, Obama became aware of information he did not have as a senator, and this information convinced him that it was futile to worry about civil liberties, and led him to conclude that the intelligence community should receive carte blanche.

The second is that Obama’s scruples were about somebody else having the power to violate others’ civil liberties. Once he came to control that power himself as president, albeit indirectly, he became much more willing to tolerate it even if this meant jeopardizing civil liberties. Put differently, Obama became part of the state and it is in the state’s DNA to want to control information and power.

The third is that Obama did not abandon his concerns and sensibilities wholesale, but is a victim of a typical case of  “career concerns”. Any bureaucrat or politician worries about making choices leading to disastrous outcomes — especially if these choices will make them appear responsible in the eyes of the public. But equally problematic is the failure to take actions that could have prevented such disastrous outcomes. This naturally creates a tendency for aggressively taking preventive actions. Given the importance of a major terrorist attack against Americans for the legacy of any president, this means a huge bias towards supporting secret NSA or CIA activities in principle targeted at terrorists, but in reality severely damaging civil liberties and increasing the power of the state over its citizens.

Though we don’t know for sure, the first possibility seems a little far-fetched. The most likely explanation is therefore a combination of the second and third possibilities.

Whatever the details or the exact balance between the second and third possibilities, there is an ominous conclusion from this. However decent and restrained an individual might be, as soon as he ascends to a position of supreme power, he is likely to behave just like other powerful leaders and support the domination of the state or society with little regard to civil liberties.

But if so, it would be naïve for us to expect the state to police itself.

If the state will be restrained, if it will be responsible and accountable to its citizens and civil society, if it will respect civil liberties, it will not do this out of its own volition. It will do it because society will force it to do so.

If so, Obama will not pardon him and Obama will not thank him, but perhaps we should all thank Edwards Snowden.

Wednesday
Jan152014

Democracy's pains

Disillusionment with political leaders is spreading across the globe. In the United States, the approval ratings of the President and the Congress are at all-time lows, and probably for good reason. There is general dissatisfaction with the ruling class across much of Europe, particularly in the South. But this is much broader than a Western world phenomenon.

Protests and alternatives to the Congress Party’s domination of Indian politics are growing, fueling support for fringe activists such as Anna Hazare, the new anticorruption Am Aadmi (common man) party, and the prime ministerial ambitions of Narendra Modi.

In Turkey, hundreds of thousands poured into the streets in the summer to protest Prime Minister Erdoğan’s increasingly authoritarian rule, and the discontent is now spreading more broadly with the unfolding corruption scandals in which many of the leaders of Erdoğan’s ruling party appear to be implicated.

Discontent with the rule of establishment politicians is also growing in Bangladesh, Cambodia and Indonesia.

So what’s going on?

Two factors seem to be at work, one healthy, one unhealthy.

First, citizens seem to be increasingly unwilling to put up with the antics of unaccountable political elites, often all too willing to pursue policies that their voters do not approve of.

Protests against the ruling parties have the potential of bringing greater accountability in imperfect electoral democracies such as India or Turkey. Where the ballot box offers few attractive alternatives, non-electoral constraints on politicians have an important role to play.

The role of such protests is much greater in places like Cambodia where elections are fraud-ridden and Prime Minister Hun Sen rules in the manner of an autocrat.

The situation isn’t too dissimilar in the United States and Europe, even if some of the discontent, such as the Tea Party’s anti-government spending fervor or the anti-Europe backlash fanned by the UK Independence Party or other parties with anti-foreigner, anti-immigrant rhetoric in continental Europe, is fueled as much by confusion as by a viable alternative to policies that governments embattled by the financial and fiscal crisis have had to adopt.

All in all, even if the details vary across countries and even if some of the discontent is driven by confused notions and sometimes even by unsavory characters and ideas, a greater unwillingness by the masses to let their political elites run amok is broadly welcome. Democracy will function better, and has a better chance of approximating our ideal “inclusive political institutions,” when complemented by non-electoral constraints, which includes not just the media but also the willingness of ordinary people to get up and protest in the streets.

The second sort is quite different, however. In several countries, vocal and well-organized minorities are proving unwilling to accept elected governments that have brought to power previously disempowered groups.

In Egypt, the unwillingness of many urban, relatively well-educated Egyptians as well as parts of the elite to give time for the incompetent government of Mohammed Morsi to depart as it had arrived, through the ballot box, brought back the anti-democratic, repressive military back in full force, most likely destroying the prospect of democracy in this country for the next decade.

In Thailand, however many times Thaksin Shinawatra, or his sister Yingluck Shinawatra acting as his proxy, receives electoral support from the majority, many urban Thais, the military and parts of the state bureaucracy appear unwilling to accept such election results. Just as in Egypt, they seem to have a case when they complain of Thaksin Shinawatra’s patronage-based populism, corruption and authoritarian tendencies. But is the solution to dispense with electoral democracy?

The situation in Turkey is not entirely different. Though Erdoğan’s critics have a strong case, the current polarization owes as much to the unwillingness of parts of the Turkish elite, state bureaucracy and military to accept a government representing the underclass and the pious provincial businessmen as to Erdoğan’s increasingly authoritarian rule.

Though the conundrum of patronage-based elections under imperfect institutions has no simple solution, a good case can be made that the way to increase the inclusivity of political institutions is not to ignore the ballot box, but to utilize it, together with protests when necessary. But so long as elites and a vocal minority refuse to accept electoral results they don’t like, the path to a healthy democracy and truly inclusive institutions will be long, arduous and perhaps blocked for a long time.

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