Economics versus Politics: Pitfalls of Policy Advice

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Daron Acemoglu; James A. Robinson (2013). Economics versus Politics: Pitfalls of Policy Advice. Journal of Economic Perspectives.

Type	working paper
Scope	Comparative and methods
Method	theoretical or conceptual
Period studied	1851–2012
Regions	Australia (Victoria), Sierra Leone, Ghana, Russia, United States, Brazil, England, South Africa (passing mention only)
Themes	comparative theory, unions strikes, politics ideology elections, business and state, resistance social movements, transition post apartheid
Citation key	acemoglu2013b

Argument

The authors argue that standard economic policy advice, which says market failures should be removed wherever possible, ignores how policies reshape future political equilibria. The existing political equilibrium may rest on the market failure itself. Removing the failure can therefore strengthen already dominant groups, weaken their counterweights, or violate political incentive compatibility constraints, which may lower efficiency or provoke backlash and violence. They set out a two-period framework and illustrate three mechanisms (rents and organization, inequality, incentive constraints) with cases: Australian and Sierra Leonean mining, US financial deregulation, Russian privatization, and Ghanaian and Sierra Leonean reform. The cases are illustrative rather than systematic tests, and the authors say so.

Evidence and method

Secondary literature and historical case studies: Australian gold rush histories (Hirst, Blainey), van der Laan and Reno on Sierra Leone, Johnson and Kwak on US finance, Treisman and Shleifer on Russia, and Bates and Herbst on Africa. It also uses a stylized two-period model in footnotes. No original archival or survey data.

Findings

• Core thesis: the political equilibrium may depend on the market failure, so removing it can be counterproductive. (p. 3)

  even when it is possible, removing a market failure need not improve the allocation of resources because of its impact on future political equilibria

• Policies that strengthen already dominant groups or weaken their counterweights are the most dangerous politically. (p. 6)

  it is policies that economically strengthen already dominant groups, or weaken those that are acting as a counterbalance to them, that are especially likely to tilt the balance of political power

• Weakening unions' wage-setting power reduces their political power, which matters for democratization (COSATU is named among the examples). (p. 7)

  policies reducing the effectiveness of unions in negotiating over wages and working conditions for their members will reduce their political power

• Unions are cited as pivotal in democratization, with COSATU's fight against apartheid as one example; this is the only South African reference. (p. 7)

  to the fight against the Apartheid regime in South Africa by the Congress of South African Trade Unions (COSATU)

• The Australian gold-rush licence system spurred miners' political organization and franchise extension. (p. 10)

  Under the 1853 Victoria Constitution, someone in possession of an annual mining license was deemed to have sufficient wealth to be eligible to vote.

• Monopolized mining in Sierra Leone left political parties elite-dominated, in contrast with Australia. (p. 12)

  they were formed by elites, particularly by the Paramount Chiefs and those connected to them, without the input of the broad mass of Sierra Leoneans

• US financial deregulation grew the sector's profit share and political power. (p. 14)

  Between 1980 and 2005, financial sector profits grew 800 percent in real terms, while nonfinancial profits rose by 250 percent

• Russian privatization concentrated ownership and contributed to authoritarian backlash. (p. 17)

  privatization failed to create the type of broad distribution of assets which would have provided the economic underpinning for the nascent democracy

• IMF-backed devaluation in Ghana was followed within weeks by a coup that reversed it. (p. 19)

  Two weeks after the announcement of the devaluation, Busia was overthrown in a military coup, which immediately reversed the devaluation.

• In natural states, eliminating rents leads to disorder rather than competitive markets. (p. 22)

  the appropriate counterfactual from eliminating rents is not a competitive market economy ... but a society in disorder and violence