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What Does Government Do


The Importance of Public Finance ... personally or the bribe can be an illegal political or campaign contribution ... funds, which finance projects proposed by ... – PowerPoint PPT presentation

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Title: What Does Government Do

What Does Government Do?
  • Institutions and Politics
  • September 26, 2007

Readings for Today
  • Olson Big Bills Left on the Sidewalk
  • Kenny Why Arent Countries Rich?

  • Review of what govts can do
  • Today we focus on what govts actually do and why
  • Institutions and Governance Issues
  • Property and contracting rights
  • Corruptions
  • Democracy, Civil Society and Participation

  • What can governments do?
  • Transfers
  • Public works programs
  • Basic social services

The Importance of Public Finance
  • Governments raise money by taxing, borrowing, and
    foreign assistance
  • and spend (among other things) on
  • Defense
  • Infrastructure
  • Social policy, of which social services
    (education and health) are typically large share,
    but also social insurance and transfers
  • Administration (wages and salaries) and debt

Public Finance II
  • To what extent is spending progressive, ie.
  • Favors the poor
  • Has a positive effect on the distribution of
    income or assets, ie. reduces inequality

Conjectures and Questions I
  • Low total spending, low social spending or low
    basic social spending?
  • What is the political economy of
  • Raising taxes?
  • Reallocating total spending?
  • Reallocating social spending?

Conjectures and Questions II
  • Not just the level of spending, but the
    efficiency of spending problems of
    administrative capacity and corruption
  • What factors drive the allocation of spending?
  • Military spending bad neighborhoods or powerful
  • The burden of debt service for many poor
  • How to make spending more progressive involves
    politics and empowering the poor politically

Institutions and Governance I
  • A shift in the development policy community from
    getting policies right to getting institutions
    and even politics right
  • That the poor suffer not only from material
    deprivation, but from
  • Outright exclusion or even repression
  • Powerlessness lack of organization
  • The ineffectiveness and unresponsiveness of
    institutions, including parties and the

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Institutions and Governance II
  • The elusiveness of good governance and the
    problem of circularity countries, governments
    and projects that do well are well-governed
  • .but which institutions matter?
  • Social and community institutions and NGOs (to
    which we return)
  • Institutions of government

Three Institutional Issues
  • Property and contracting rights, which is closely
    related to
  • Corruption
  • Democracy, participation, and civil society
    increasing accountability

Property Rights and Growth I
  • Property rights
  • The exclusive right of individuals to use their
    resources as they see fit (as long as they do not
    violate others rights)
  • The right to transfer and exchange those rights
  • The enforcement of these rights

Property Rights and Growth II
  • Contracting rights
  • Freedom to contract, but also ability to enforce
    contracts (for example, through the courts)
  • Growth will be higher if individuals can reap the
    gains from investments and risks that they take
  • Incentives matter

Property Rights III
  • How to measure property rights?
  • Mostly subjective investor perceptions
  • Rule of law
  • Regulatory burden
  • But some innovative localized efforts how many
    steps to get a permit?
  • Findings countries that protect property rights
    do appear to experience higher growth

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Violations of Property Rights
  • The predatory state
  • Expropriation of investment by governments
    (nationalization, confiscatory taxation)
  • Excessive or burdensome regulation
  • The extortion racket of police and local
  • Private violations of property rights (Rule of
    Law I) crime, extortion and the lack of public
  • Weak legal protections of contract and lack of
    recourse (Rule of Law II) judicial system
    lacking in impartiality and access

Property Rights and the Poor I
  • Are property rights simply for the rich?
  • Hernando de Soto and the costs of the black
    market (The Other Path)
  • Legal permits for doing business are costly and
    time-consuming to secure (red tape)

Property Rights II
  • but absence of legal status means
  • Inability to issue shares, borrow from banking
    sector or secure insurance
  • Production must be fragmented and kept small to
    avoid detection, therefore not achieving scale
  • Illicit payments to both officials and gangs
    (extortion) to guarantee operations estimates 15
    percent of income in informal sector in Peru is
    paid in bribes and protection

Property Rights III
  • Erica Field on land titling in urban Peru
  • 2000 household survey found 60 percent of
    households had self-employed workers small
    stores or repair workshops
  • Land titling program (individual title plus
    incorporating communities) resulted in
  • Increased investment in property
  • Ability to move business--and labor--outside of
    the home (48 decrease in home business, 38 in
    home work)
  • Increase in borrowing and demand for credit
  • Profitability of businesses in titled households
    is 40 higher than in untitled

Corruption I
  • The diversion of public revenue and spending to
    private purpose
  • Kleptocracies with no or little distinction
    between the public and private spheres (Haiti
    under Duvaliers, Zaire under Mobutu, North Korea
    under the Kims)
  • Pork and patronage

Corruption II
  • The link to private actors bribery as an
  • payment by corporation or individual to a state
    official (politician or bureaucrat)
  • to obtain a benefit (medical services in Eastern
    Europe) or avoid a cost (regulations, fees,
    fines,taxes, and delay)
  • State official can benefit personally or the
    bribe can be an illegal political or campaign

What Determines the Level of Corruption?
  • Honesty and integrity of public officials the
    importance of meritocratic civil service and
    adequate pay
  • But also three other factors, each of which
    suggests other reforms to reduce corruption
  • Government interventions create at least the
    possibility of corruption the example of a
  • Discretion of officialswhy the traffic ticket is
    a bad model for public policy
  • Risk (the probability of being caughtconvicted

The Effects of Corruption
  • Clearly, slower growth because
  • Inefficient and uncertain interventions
  • Delays and red-tape
  • Inefficient uses of corrupt payments
  • But also, distortions in taxes and spending
  • and inequality and poor distribution of services

Democracy, Participation and Civil Society
  • Why would democracy matter for growth or the
  • A wider franchise politicians have incentives to
    compete for broader interests
  • But do the poor vote?
  • Are there parties that represent them?
  • Freedom to organize interest groups and NGOs
  • But do they?
  • Information the press as a check on government
    and source of information for politicians (Sen on
    famines experiments on information)

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Democracy and Growth
  • Przeworski et. al. test systematically no
    relationship between democracy and growth
  • On average, democracies and authoritarian regimes
    perform the same
  • But the range of performance--the variance--is
    wider in authoritarian regimes
  • miracles such as China, Korea, Taiwan, Chile
  • But also the worst disasters, such as Haiti,
    Romania, Zaire, Cambodia, North Korea

But What About Other Outcomes?
  • Democracies appear to have more equal
    distributions of income
  • Democracies have lower levels of infant mortality
    (McGuire) and better performance on a range of
    other human development indicators (Lake and
  • But the mechanisms are not clear more spending?
    More effective spending? More effective

And Not Just Democracy, but Participation
  • Participatory budgeting the case of Porto
    Alegre, Brazil
  • PT (Workers Party) wins mayoral election in
    1988, promises to increase spending in poorer
    neighborhoods and on basic services
  • Phase I Government provides basic information on
    allocation based on regional Quality of Life
    Index, and establishes participatory processes to
    choose representatives and consider spending
  • Phase II groups compete for projects, and visit
    all sites. Regional meetings decide which
    projects go forward

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Results and Conditions
  • 1989-1996, increase in access to potable water
    (80-98) increase in those served by sewer
    system (46-85) 100 increase in primary
    enrollment rates
  • Conditions for success
  • Cities have to have political autonomy and
    resources (decentralization)
  • Effective auditing and transparency to make it
  • Civil society organizations may matter who
  • Left or populist governments establish the

Community-Based Development I
  • The example of social funds, which finance
    projects proposed by communities
  • that have local participation in the
    identification, choice, design, and
    implementation of projects
  • To tap local knowledge, for example, in
    identifying beneficiaries of projects
  • To empower communities and the poor toward

  • But
  • Participation takes work effort away
  • and could even be like a tax on the poor
  • Moreover, participation can itself be
    controlled by dominant political forces in a
    village or by the bureaucracy

  • We have evidence of positive effects of
  • Vaccinations are higher in health facilities
    constructed by social funds in Zambia
  • Community-managed schools in El Salvador have
    fewer absences
  • Water projects in Indonesia, Sri Lanka and India
    have better performance
  • But as with participatory budgeting, there may be
    preconditions for participation working, or even
    getting chosen in the first place.

What to Know and Think About
  • Institutions matter, but how to reform them?
  • First, do no harm restricting the discretion
    of politicians and bureaucrats
  • Property and contracting rights are not only
    issues for the wealthy
  • But removing barriers and legislating property
    rights is not enough the need to build capacity
    and strengthen incentives within the bureaucracy
    through civil service reform
  • and among politicians by strengthening
    democratic institutions (legislatures), parties,
    and civil society groups at both national and
    local levels
  • Can outsiders do any of these things?
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