|Economic Policy and Political Myopia.
T.S. Aidt S. Engerman
J. Dutta R. Salih
The aim of this project, which was completed August 31 2003, was to investigate “short-termism” or myopia, in making of economic policy. This was done at a theoretical level, and at an empirical level, as well as by evaluating instances of myopic policy-making as in-depth case studies.
Theoretical underpinnings have been explored in a series of studies that analyse dynamic aspects of policy myopia arising in economies with rational voters and self-interested politicians. The common theoretical theme in this work is electoral accountability, i.e., the extent to which rational voters can hold elected politicians accountable for policy choices made while in office and the extent to which they can and will use the incentives provided by elections to promote efficient economic policies and to limit myopic behaviour by politicians. The studies cover a range of topics, including growth conflicts; corruption and entry restrictions; capital taxation; the use of efficient policy instruments in environmental regulation; and the role of turnout uncertainty in elections and other sources of governance uncertainty. The core theoretical work on policy myopia has been circulated in the working paper Policy Myopia. The paper considers the following question: are democratic governments likely to be short-sighted in their policies and should rational voters tolerate, or even expect their elected representatives to behave myopically. It is demonstrated that policy myopia, understood as over-investment in public services with the property that provision levels can be observed immediately (as opposed to later), is accepted by voters only in societies where electoral accountability is sufficiently imperfect.
We have constructed and analysed three datasets, two historical and one contemporaneous. Advised by Professor Stanley Engerman, we have constructed a panel dataset (from secondary sources) with information on (central) government expenditures, indicators of democracy and other relevant economic variables for 12 Western European countries covering the period 1830-1939. The other historical dataset is collected from primary sources (British Parliamentary Papers) under the direction of Professor Martin Daunton and Professor Stanley Engerman, and consists of a panel of 75 municipal boroughs in England and Wales (1865-1888). Fiscal data on spending and taxation have been matched with data for the extension of the local government franchise. The contemporaneous dataset contains information on fiscal outcomes and indicators of the quality of democracy in 80 countries in 1995. These datasets are in themselves important research outputs.
Despite the differences across time and space, the three datasets are telling a very similar story: the spread of democracy or the quality of democracy is not enviably associated with an expansion of government spending. On the contrary, both historically and today, democratisation holds, in many cases, government spending, in particular on public services, back. In the paper Democracy comes to Europe: franchise expansion and fiscal outcomes 1830-1939, we investigate the role of democracy in explaining the level and pattern of public spending in 12 European countries from 1830-1839. During the second half of the 19th century, democracy gradually spread across Europe. Economic theory suggests that this should have an impact on the composition of government, with an increase in total spending as the net result. We find that the impact of the franchise (both the gradual lifting of economic and social restrictions and the female suffrage) had a surprisingly small (economically speaking) impact on fiscal outcomes and in some cases even contributed to delaying the expansion of government that took place towards the end of the period. In the paper Policy Myopia, we report results from a cross-country study of 80 democracies in 1995. Here, the question is not so much the spread of democracy as such, but rather the link between the quality of democracy, as measured by indicators of political accountability, and public spending on transfers, public services (including health and education) and public investments. Surprisingly, we find robust evidence of a negative correlation between spending on public services and investments and the quality of democracy. The final bit of evidence comes from the panel of 75 municipal boroughs in 1865-88. One of the proximate causes for the reduction in the quality of life observed in the mid-late 19th century Britain was under-provision of local public goods (sanitation, for example). Our main interest lies in quantifying the role of political institutions in explaining variations in provision of local public goods across municipal boroughs, thereby indirectly explaining variations in the quality of life. The local voting franchise was for various institutional reasons very unevenly extended across space, as discussed in Aidt and Daunton (2003). This variation – along with time series variation – makes it possible to test what has become known as the entrenchment hypothesis: public spending on urban sanitation were blocked by a middle class of small shopkeepers and landlords. Thus, in boroughs with a restricted franchise, the elite could circumvent this resistance directly and promote higher spending (as in Birmingham). Likewise, in boroughs with a wide franchise, the elite could form a coalition with skilled workers and again promote improvements in the urban environment. However, in boroughs with a franchise in-between, such as in Leeds, spending could be block by the rate paying middle class. Preliminary statistical analysis provides some evidence in support of this idea and thus, in support of the notion that democracy does not enviably lead to higher spending.
Dr Aidt and Dr Dutta have presented work at numerous seminars and conferences, including seminars at Copenhagen, Warwick, Royal Holloway, Newcastle, Odense, Birmingham, Nottingham, Exeter, Berkley, Durham, Leister, Penn state, CEPR, Aarhus, and the IMF. A conference on “Public Expenditure and Electoral Politics” was organised in Cambridge in August 2002, with participation of economic theorists and economic historians from the UK and abroad.
Aidt, T., and J. Dutta, Transitional Politics: Emerging Incentive-based Instruments in Environmental regulation. Forthcoming in Journal of Environmental Economics and Management, 2003.
Aidt, T., Dutta, J., and Loukoianova, E., 2002, Democracy comes to Europe: franchise expansion and fiscal outcomes 1830-1939. Resubmitted to Journal.
Dutta, J., 2000, Growth Conflicts. University of Birmingham, Department of Economics Discussion Paper: 00/15 November 2000; 21.
Aidt, T. and J. Dutta, 2001, Policy compromises: corruption and regulation in a dynamic democracy. Memo. Under revisions for submission.
Aidt, T. and F. Magris, 2002, Capital taxation and electoral accountability, Cambridge Working Papers in Economics, 0318. Under journal review.
Aidt, T., J. Dutta and E. Loukoianova, 2001, Policy myopia. Cambridge Working Papers in Economics. Under journal review.
Aidt, T. and J. Dutta, 2002, Strategic consensus: performance voting with electoral uncertainty. Memo.
Aidt, T. and J. Dutta, 2003, Strategic consensus and governance uncertainty. Resubmitted to journal.
Aidt, T. and J. Dutta, 2003, Growth and Governance or Why is Growth so Bad for Rent Seeking. Memo.
Aidt, T. and M. Daunton, 2003, The local franchise and public spending in England and Wales 1865-1888. memo.
Daunton, D. 2002, British taxation from the Napoleonic wars to the First World War, memo.
Public spending and political institutions in 12 Western European countries, 1830-1938.
Fiscal outcomes and the local franchise in 75 municipal boroughs in England and Wales, 1865-1888.
Fiscal outcomes and the quality of democracy in 80 countries in 1995.