Table Of ContentMarkets and Politicians
Politicized economic choice
STUDIES IN PUBLIC CHOICE
Series Editor: Gordon Tullock
University of Arizona
Tucson, Arizona, USA
Previously published books in this series:
Bowman, Mary Jean
Collective Choice in Education
Buchanan, James M. and Wagner, Richard E.
Fiscal Responsibility in Constitutional Democracy
McKenzie, Richard B.
The Political Economy of the Educational Process
Auster, Richard D. and Silver, Morris
The State as a Firm
Kau, James D. and Rubin, Paul H.
Congressmen, Constituents, and Contributors:
The Determinants of Roll Call Voting in the
House of Representatives
Ordeshook, Peter and Shepsle, Kenneth
Political Equilibrium
Tullock, Gordon
The Economics of Special Privilege and Rent Seeking
The intersection of economics and politics is one of the most important areas
of modern social science. "Studies in Public Choice" is devoted to a
particularly crucial aspect of this intersection -- the use of economic
methods and analysis on matters which are traditionally political in nature.
Prominent scholars, such as Duncan Black, Kenneth Arrow, Mancus Olson,
Vincent Ostrom, William Riker, and James Buchanan, have contributed to
the development of the study of public choice. The aim of this series is to
promote the growth of knowledge in this important and fascinating field.
Markets and Politicians
Politicized economic choice
Edited by
Arye L. Hillman
Bar-Ilan University, Israel
Springer Science+Business Media, LLC
Library of Conllress Cataloginll-in-PubUcation Data
Markets and politicians : politicized economic choice I edited by Arye
L. Hillman.
p. cm. - (Studies in public choice)
ISBN 978-94-010-5728-8 ISBN 978-94-011-3882-6 (eBook)
DOI 10.1007/978-94-011-3882-6
1. Economic policy. 2. Politicians. 3. Social choice.
I. Hillman, Arye L. II. Series.
HD87.M275 1990
338.9-dc20 90-19545
CIP
Copyright © 1991 by Springer Sciclllce+Buain_ Media New York
Originally published by KIuwer AI:adcmic Publishen in 1991
Sofh:over reprint or1he Iwdeover Ist edition 1991
Ali rights reserved. No part of this publication may be reproduced, stored in a retrieval system or
transmitted in any form or by any means, mechanical, photocopying, recording, or otherwise, without
the prior written permission of the publisher, Springer Science+Business Media, LLC
Printed an acid-free paper.
CONTENTS
CONTRIBUTING AUTHORS vii
INTRODUCTION xi
I: ECONOMIC POLICIES AND POLITICAL MOTIVES
A. Theoretical Perspectives
1. Economic policies and political competition 1
Heinrich W. Ursprung
2. Voluntary collective action 27
Joel M. Guttman
3. Factor income taxation in a representative democracy 43
Wolfgang Mayer and Jun Li
B. Policy Choices
4. Macroeconomic stabilization policy: Does politics matter? 63
Martin Paldam
5. Accidental freedom 93
Gordon Tullock
6. Europe 1992: From the common to the single market 113
Peter Holmes
II: MARKETS AND SOCIALISM
A. Market Socialism in Eastern Europe
7. Markets and ownership in socialist countries in transition 137
Manuel Hinds
8. Socialism in less than one country 169
Adi Schnytzer
B. Transitionary Policies
9. Restoring property rights 179
Marton Tardos
10. Liberalization dilemmas 189
Arye L. Hillman
C. Economic Change in China
11. The failure of recentralization in China: Interplays among
enterprises, local governments, and the center 209
Kang Chen
12. Market-oriented reform and fiscal policy 231
Mario I. Blejer and GytJrgy Szapary
vi Markets and Politicians
III: INTERNATIONAL ECONOMIC POLICY
A. International Trade
13. The political-economy perspective on trade policy 263
Robert E. Baldwin
14. The economics and political economy of managed trade 283
Wilfred J. Ethier
15. Changes in trade-policy regimes 307
James H. Cassing
B. International Monetary Transactions
16. Foreign-exchange markets and central-bank intervention 319
Manfred Gl1rtner
17. The political economy of the international debt crisis 339
Ngo Van Long
18. Foreign-exchange market liberalization: Anatomy of a failure 357
Ben-Zion Zilberfarb
CONTRIBUTING AUTHORS
Robert E. Baldwin, University of Wisconsin, U.S.A.
Mario I. Blejer, International Monetary Fund, Washington, D.C.
James H. Cassing, University of Pittsburgh, U.S.A.
Kang Chen, The World Bank, Washington, D.C.
Wilfred J. Ethier, University of Pennsylvania, U.S.A.
Manfred Gartner, St. Gallen School of Economics, Switzerland
Joel M. Guttman, Bar-Han University, Israel
Arye L. Hillman, Bar-Han University, Israel
Manuel Hinds, The World Bank, Washington, D.C.
Peter Holmes, University of Sussex, U.K.
Ngo Van Long, McGill University, Canada
Jun Li, University of Cincinnati, U.S.A.
Wolfgang Mayer, University of Cincinnati, U.S.A.
Martin Paldam, Aarhus University, Denmark
Adi Schnytzer, Bar-Han University, Israel
Gyorgy Szap<1ry, International Monetary Fund, Washington, D.C.
Marton Tardos, Hungarian Academy of Sciences
Gordon Tullock, University of Arizona, U.S.A.
Heinrich W. Ursprung, University of Konstanz, FRG
Ben-Zion Zilberfarb, Bar-Ilan University, Israel
ACKNOWLEDGEMENTS
Many of the papers in this volume were presented at the
Bar-Ilan Conference on Markets and Politicians at Bar
Ilan University, Israel, in June 1989. Joel Guttman was
co-organizer of the conference, and Gershon Alperovitch
as departmental chairman was also instrumental in
organization.
INTRODUCTION
Arye L. Hillman
There has been much economic theorizing directed at providing the
politician with guidance in the design of policies that will amend market
outcomes in ways that achieve specified efficiency or equity objectives. It
has been common practice in economic models to portray the politician
who implements the policy recommendations as a mechanistic individual
who behaves as would a benevolent dictator to maximize a prespecified
conception of social welfare or the utility of a representative consumer.
The self-interest and discretion that is attributed to firms and consumers as
optimizing agents is absent from the motives of such a politician.
Economic policy choice is thereby depoliticized.
How well depoliticized economic theory fares in explaining or
predicting economic policy choice depends naturally enough upon how
politicized is the economic system in which economic and political agents
function. The papers in this volume recognize that politicians may exercise
sufficient discretion so as not to behave mechanistically in correcting
market inefficiencies or in pursuit of a somehow specified just income
distribution. Since politicians are viewed as self-interested optimizing
agents, just as are utility-maximizing consumers and profit-maximizing
producers, the choice of economic policies is politicized.
Coverage is provided of a broad spectrum of economic policy choice
where markets and politicians interact. Section I is concerned with policy
determination in western market economies, Section II with the introduction
of markets into economies in transition from socialism, and Section III with
international transactions.
Heinrich Ursprung (Chapter 1, Economic policy and political
competition) begins by reviewing how in past literature political influences
on policy choice have been integrated into models of representative
democracy. The role of political competition in the determination of
economic policies is developed in a model of contenders for elective office
xii Markets and Politicians
who make policy pronouncements to maximize the value of their campaign
contributions relative to contributions received by opponents, and thereby
maximize their probabilities of election. The model encompasses
recognition of the public-good nature of the economic benefits and costs
associated with candidates' policies. The preferences of voters, or the
median voter, do not here directly determine policy outcomes, which are
responsive to campaign contributions. The campaign contributions in turn
are sought to influence voters' perceptions of the attractiveness of the
candidates and the policies they propose.
Joel Guttman (Chapter 2, Voluntary collective action) compares
explanations for the observed conjunction of cooperation and self-interest
in individuals' collective behavior. Such collective behavior is central to
the activities of political coalitions of individuals seeking to achieve
common economic objectives.
Wolfgang Mayer and Jun Li (Chapter 3, Factor income taxation in a
representative democracy) demonstrate how individual interests are reflected
in political choice of taxes levied on factors of production, when
individuals differ with regard to the tax system that they regard as optimal
and seek different patterns of expenditures of tax proceeds.
Martin Paldam (Chapter 4, Macroeconomic stabilization policy: Does
politics matter?) looks at macroeconomic policy. A literature on "political
business cycles" has proposed that macroeconomic policies are subject to
political manipulation that is directed at maximizing probabilities of
reelection of incumbent governments. Two types of business cycles have
been described, election cycles over one election period, and partisan cycles
that encompass two election periods under different governments. Paldam
reviews theories of the political business cycle, and presents empirical
results of tests in seventeen countries.
Gordon Tullock (Chapter 5, Accidental freedom) uses an historical
account to make the case that economic freedom in the U.S. arose
fortuitously. The U.S. did not proceed free of attempts to regulate
domestic market activity and protect domestic producers. Tullock recounts
how the constitutional guarantee of free trade among the states thwarted
attempted state-imposed monopolies, including state socialism, and how
domestic regulation of economic activity and U. S. international trade policy
have been subject to different influences over time.
Peter Holmes (Chapter 6, Europe 1992: From the common to the
single market) sets out the political motives underlying the economic
policies aimed at creating a post-1992 single European market. Since the
intent of the policies underlying the post-1992 "single market" is to all
intents and purposes the same as that of the Treaty of Rome that sought to
establish the "common market", why should the single-market conception
