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Political Instability as a Source of Growth

by Bruce Bueno de Mesquitavia Analysis
Wednesday, March 1, 2000

The U.S. government emphasizes the importance of stable political leadership as a necessary condition for economic growth. Contrary to this view, I show that high leadership turnover is strongly associated with high economic growth both in autocracy and in democracy. The effect of "unstable" leadership is stronger in democracies than autocracies because democratic political systems have institutions that promote competition over policy ideas rather than over the distribution of private benefits to cronies. Two institutions are shown to be particularly important in promoting such public goods as a fair legal system, transparent decision making and accounting, a strong national defense, and a healthy, growth-oriented infrastructure. These two institutions are a large selectorate (the set of people with a say in choosing leaders) and a large winning coalition (the set of people whose support keeps the incumbent in office).

Political leaders are eager to stay in office and, contrary to the neoclassical economic model, are not benign agents of the people in whose name they lead. Because autocrats depend on small groups of supporters, they emphasize the use of private benefits to their cronies as the means to gain political loyalty and stay in office. This means that they generally have little incentive to pay attention to the overall quality of their public policies.

Democrats, in contrast, require the support of a large coalition to stay in power. Because private rewards have to be spread thinly to many people, democrats find it easier to compete for office by providing public goods that benefit everyone rather than private benefits for a few cronies. This means that, in democracies, political competition is over policy ideas. Two effects follow from the fact that democratic leaders must build large coalitions: Democratic leaders provide better policies to improve their chances of surviving in office, and because competition is over policy ideas, they are more easily turned out of office in favor of a political challenger than are autocrats. Thus, autocrats have longer terms in office and produce less-efficient economic growth. The U.S. government emphasis on stable leadership as a necessary condition for growth is mistaken and can lead to global economic contraction rather than expansion.

The Case against the International Monetary Fund

via Analysis
Monday, November 1, 1999

In July 1944, delegates from forty-four nations gathered in Bretton Woods, New Hampshire, to design a postwar international monetary system that would promote world trade, investment, and economic growth. The framers created the International Monetary Fund (IMF or fund) to supervise the new "Bretton Woods monetary regime" that sought to keep national currencies convertible at stable exchange rates and to provide temporary, low-cost financing of balance-of-payments deficits resulting from misaligned exchange rates.

In reality, the framers of the Bretton Woods regime created an international price-fixing arrangement enforced by the IMF. After joining the fund, each member country declared a value for its currency relative to the U.S. dollar. The U.S. Treasury, in turn, tied the dollar to gold by agreeing to buy and sell gold to other governments at $35 an ounce; the inflation of the 1960s, however, made the U.S. commitment to sell gold at that price unsustainable. To preserve U.S. gold reserves, President Richard Nixon closed the gold window in August 1971, effectively uncoupling the dollar from gold and ending the fund's original mission of supervising a system of pegged exchange rates. Looking for a new mission, the IMF quickly evolved into a financial medic for developing countries. Beginning in the early 1970s, the IMF skillfully used a series of global economic crises to increase its capital base and financing activities.

Has the expansion of IMF financing activities alleviated the balance-of-payments problems of member countries and encouraged prudent, progrowth economic policies? The evidence, much of it supplied by the IMF, demonstrates that the fund does more harm than good. Historical studies as well as recent initiatives in Mexico, East Asia, and Russia reveal that IMF financing programs, which rarely prescribe appropriate economic policies or sufficient institutional reforms, are at best ineffective and at worst incentives for imprudent investment and public policy decisions that reduce economic growth, encourage long-term IMF dependency, and create global financial chaos.

It is time to scrap the IMF and strengthen market-based alternatives that would promote an orderly and efficient international monetary system. Key reforms include floating exchange rates, internationally accepted accounting and disclosure practices, unfettered private financial markets, and fundamental legal, political, and constitutional rules that would allow free markets to emerge and countries to achieve self-sustaining economic growth and development.

Capitalism and its Discontents: The Adam Smith Address

by Michael J. Boskinvia Analysis
Thursday, July 1, 1999

A review of episodes in economic and intellectual history indicates the superiority of a limited government market economy over the alternative models of economic organization. The siren calls of pundits, politicians, and even some economists in favor of communist central planning during the Great Depression; market socialism after World War II; and, more recently, massive welfare states and/or extensive government micromanagement of markets each ran afoul of their own problems and comparisons to the limited government (based on sound criteria) capitalist model. The limited government capitalist model, once again under attack from those who would greatly expand the role of government, needs its defenders, as the alternative models have proven historically, intellectually, and practically bankrupt.

Judicial Corruption in Developing Countries: Its Causes and Economic Consequences

by Edgardo Buscagliavia Analysis
Thursday, July 1, 1999

Many scholars have provided path-breaking contributions to the institutional analysis of systemic and systematic corruption. Descriptive studies focusing on corrupt practices and on the impact of corruption on economic development are abundant. Yet the literature has not yet isolated the main legal, organizational, and market-related causes of systemic corruption within the public sector in general and within the judiciary in particular.

This essay proposes a framework within which the institutional analysis of corrupt activities within the judiciary can be further understood in developing countries. First, an approach to the study of public sector corruption based on science, not on guesswork or intuition, must be verifiable if we are to develop reliable anticorruption policy prescriptions. Therefore, legal, economic, and organizational factors are proposed here to explain corruption within the judicial sectors of developing countries. Second, the economic theory of corruption should recognize that official corruption is a significant source of institutional inertia in public sector reforms. An account of the private costs and benefits of judicial reforms as perceived by public officials is also considered in this study.

The Economic Effects of the Liability System

by Daniel P. Kesslervia Analysis
Tuesday, June 1, 1999

Liability law has two principal objectives: compensation of parties injured in accidents and deterrence of negligent behavior of potential injurers. Considerable evidence, however, suggests that the current liability system in the United States achieves neither. The system has high transaction costs and fails to compensate injured parties appropriately. There is evidence that liability pressure has distorted firms' incentives for innovation. In the health care sector, liability pressure has led to defensive medicine--precautionary treatments with minimal medical benefit administered out of fear of legal liability.

This essay summarizes recent empirical research on the economic effects of liability-reducing reforms to tort law. The strategy of this research is to compare time trends in economic outcomes from states that adopted law reforms with trends in outcomes from states that did not, controlling for other determinants of the outcomes in question. Differences in trends between the two types of states provide an estimate of the effect of the reforms.

In general, this research suggests that reductions in the level of liability improve productive efficiency. But even if these studied reforms improve efficiency, they may not improve the performance of the system in terms of the compensation goal. The essay concludes with a discussion of the potential effects of a wide range of largely untried reforms to the liability system, some advocating radical changes to the allocation of responsibility for accidental injuries, that seek to address both compensation and deterrence goals.

Reforming Hazardous Waste Policy

via Analysis
Tuesday, June 1, 1999

Hazardous waste regulation in the United States under the Resource Conservation and Recovery Act has several significant problems. The regulations prioritize risks poorly, failing to set tougher standards for more-hazardous wastes. They have forced firms to spend billions of dollars on diverting waste from disposal on land, without convincing evidence of high health and environmental benefits. Finally, because the regulations raise the cost of legally managing wastes, they may encourage illegal dumping of wastes and thus actually hurt the environment more than they help it.

The program needs fundamental reform. Such reforms would relax the regulations and rely more on economic incentives. Setting up these incentives, however, requires some thought. Hazardous waste policy addresses a wide variety of substances, and its environmental effects depend on how facilities manage their wastes. Thus, traditional incentive policies, such as "green" taxes, must be tailored for this purpose. Taxes should be levied not on the wastes themselves but on the environmental releases from waste management facilities. These taxes would decentralize decisions and, perhaps more important, more clearly link the policy to its environmental goals. A modified deposit/refund (similar to bottle bills) could have similar benefits and would eliminate the policy's incentives for illegal disposal.

Welfare for the Well-Off: How Business Subsidies Fleece Taxpayers

via Analysis
Saturday, May 1, 1999

Federal subsidies to U.S. businesses now cost American taxpayers nearly $100 billion a year. If all corporate welfare programs were eliminated, Congress would have enough money to entirely eliminate the capital gains tax and the death tax. Alternatively, Congress could cut the personal and corporate income tax by 10 percent across the board. Either of these alternatives would do far more to enhance the competitiveness of U.S. industry than the current industrial policy approach of trying to help American companies one at a time.

Federal subsidies to corporate America take many forms: direct grant payments, below-market insurance, direct loans and loan guarantees, trade protection, contracts for unneeded activities, and unjustified special interest loopholes in the tax code. Despite their promises to downsize government, congressional Republicans have retreated from any serious attempt to reduce business subsidies. The Clinton administration has routinely requested budgetary increases for corporate handouts, including the Export Import Bank, the Overseas Private Investment Corporation, and the Commerce Department's Advanced Technology Program.

This study refutes common myths about corporate welfare programs: that they create jobs and promote growth; that they =`level the playing field=' with our foreign competitors; that they help small businesses; and that the payments are provided without regard to political considerations. The main effects of industrial policy programs are to undermine the free enterprise system and corrupt the political system. Congress should get businesses off the dole and use the savings to cut taxes, reduce the national debt or both.

Using Power and Diplomacy To Deal With Rogue States

by Thomas H. Henriksenvia Analysis
Monday, February 1, 1999

The end of the cold war a decade ago has ushered in a greatly transformed international landscape. Instead of a pacific era of peace and political harmony, the world, and particularly the United States, has been confronted with a menacing challenge of rogue regimes whose propensity for violence is matched by their intentions to disrupt regional stability, contribute to outlaw behavior worldwide, or to possess weapons of mass destruction. Ruthless rogues also endanger American interests and citizens by their active or passive sponsorship of terrorism. If left unchecked, rogue states like Iraq, North Korea, Iran, Libya, and others will threaten innocent populations, undermine international norms, and spawn other pariah regimes, as the global order becomes tolerant of this political malignancy.

As a major beneficiary of a global order of free markets, free trade, growing prosperity and spreading democracy, the United States, the world's sole superpower, must take the lead in confronting rogue governments, even though our allies may balk from time to time. Specifically, American power should be used to enhance the credibility of our diplomacy. Law and diplomacy alone are unlikely to affect rogue dictators. They must be reinforced with power. Four broad policy options, which in most cases should be combined rather than implemented individually, can be applied:

  • Sanctions and isolation to achieve containment of and inflict economic damage on a rogue state
  • International courts and domestic prosecution to bring rogue criminals to justice
  • Shows of strength and armed interventions to coerce or eliminate rogue regimes
  • Support for opposition movements or covert operations to oust rogue figures

Unless the United States addresses the challenge of rogue states with a combination of force and diplomacy, the new millennium will witness a widening of global anarchy, deteriorating progress toward economic development, and declining political reform. Dire consequences await the United States if it fails to react forcefully to international roguery.

The comments of my colleagues Charlie Hill, James Noyes, Henry Rowen, and Abraham Sofaer were helpful and are gratefully acknowledged along with those from Addison Davis, David Gillette, Bradley Murphy, Douglas Neumann, Piers Turner, and Robin Wright.

Bilingual Education: A Critique

by Peter J. Duignanvia Analysis
Tuesday, September 1, 1998

Bilingual education has been a subject of national debate since the 1960s. This essay traces the evolution of that debate from its origin in the Civil Rights Act (1964) and the Bilingual Education Act (1968), which decreed that a child should be instructed in his or her native tongue for a transitional year while she or he learned English but was to transfer to an all-English classroom as fast as possible. These prescriptions were ignored by bilingual enthusiasts; English was neglected, and Spanish language and cultural maintenance became the norm.

Bilingual education was said to be essential for the purposes of gaining a new sense of pride for the Hispanics and to resist Americanization. The Lau v. Nichols (1974) decision stands out as a landmark on the road to bilingual education for those unable to speak English: bilingual education moved away from a transitional year to a multiyear plan to teach children first in their home language, if it was not English, before teaching them in English. This facilitation theory imprisoned Spanish speakers in classrooms where essentially only Spanish was taught, and bilingual education became Spanish cultural maintenance with English limited to thirty minutes a day. The essay discusses the pros and cons of bilingual education.

Criticism of bilingual education has grown as parents and numerous objective analyses have shown it was ineffective, kept students too long in Spanish-only classes, and slowed the learning of English and assimilation into American society. High dropout rates for Latino students, low graduation rates from high schools and colleges have imprisoned Spanish speakers at the bottom of the economic and educational ladder in the United States.

This revolt, the defects of bilingual education, and the changes needed to restore English for the Children are covered in the essay. The implications of Proposition 227 abolishing bilingual education in California are also discussed.

The Congressional Response to Social Security Surpluses, 1935-1994

by John F. Coganvia Analysis
Saturday, August 1, 1998

Congress has before it more than two dozen proposals for reforming Social Security. Many proposals call for the creation of a large reserve fund within the federal budget. This fund is necessary, proponents argue, to keep the Social Security program solvent when the baby boom generation retires and begins to draw its benefits.

This essay presents a historical examination of the federal government's policy toward Social Security reserves. The historical review casts doubt on the viability of sustaining a large reserve policy. From time to time throughout the program's history, policy decisions, wartime economic conditions, and business-cycle expansions have created large reserves or projections thereof. Those reserves have generated pressures for greater spending. Congress has invariably responded by raising benefits or expanding eligibility.

These results contain an important implication for Social Security reform. Unless a method can be found for altering congressional behavior from its sixty-year norm, any attempt to ensure Social Security's solvency by building a large trust fund reserve will likely prove futile. A large reserve will lead to higher spending. In doing so, it will add to the burden of government borne by both current and future generations of taxpayers.