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What Does Government Do

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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


1
What Does Government Do?
  • Institutions and Politics
  • September 26, 2007

2
Readings for Today
  • Olson Big Bills Left on the Sidewalk
  • Kenny Why Arent Countries Rich?

3
Outline
  • 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

4
Review
  • What can governments do?
  • Transfers
  • Public works programs
  • Basic social services

5
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
    service

6
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

7
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?

8
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
    militaries?
  • The burden of debt service for many poor
    countries
  • How to make spending more progressive involves
    politics and empowering the poor politically

9
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
    bureaucracy

10
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12
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

13
Three Institutional Issues
  • Property and contracting rights, which is closely
    related to
  • Corruption
  • Democracy, participation, and civil society
    increasing accountability

14
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

15
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

16
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

17
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18
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
    authorities
  • Private violations of property rights (Rule of
    Law I) crime, extortion and the lack of public
    security
  • Weak legal protections of contract and lack of
    recourse (Rule of Law II) judicial system
    lacking in impartiality and access

19
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)

20
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
    economies
  • 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

21
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

22
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

23
Corruption II
  • The link to private actors bribery as an
    exchange
  • 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
    contribution

24
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
    license
  • Discretion of officialswhy the traffic ticket is
    a bad model for public policy
  • Risk (the probability of being caughtconvicted
    punished)

25
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

26
Democracy, Participation and Civil Society
  • Why would democracy matter for growth or the
    poor?
  • 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)

27
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29
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

30
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
    Baum)
  • But the mechanisms are not clear more spending?
    More effective spending? More effective
    administration?

31
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
    priorities
  • Phase II groups compete for projects, and visit
    all sites. Regional meetings decide which
    projects go forward

32
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33
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
    credible.
  • Civil society organizations may matter who
    participates?
  • Left or populist governments establish the
    parameters

34
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
    self-help

35
CBD II
  • 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

36
Participation
  • We have evidence of positive effects of
    participation
  • 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.

37
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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