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THE POLITICAL OF ECONOMIC We should pay closer attention to the interactions between , , and other realms Jeffry Frieden

4 FINANCE & DEVELOPMENT | June 2020 We shouldpay closerattention to theinteractions between politics, economics, andotherrealms Jeffry Frieden Jeffry

T was likely to face a major pandemic and and amajor pandemic to face likely was world the that long have warned experts global pandemic requires a global response: response: aglobal requires pandemic global A cooperation. of worldwidepolitics ficult dif the illustrate pandemic to the responses times. difficult through them help subsidies—bailouts—to stantial andfor sub themselves, to benefit tions for excep pressed have business time, same the At passed. have dangers the before to normalcy areturn and restrictions hoping for relaxed experts, of recommendations the resisted have makers, some policy public, and ofmembers the Some realities. by tempered to be political continued has response world, policy the novel by the coronavirus. posed magnitude of the threat public health global for a unprepared world of most so the was And crisis. of afuture possibility abstract the to address capital , political and time, the to invest difficult find it next on the who haveto focus cymakers Yet poli preparedness. for greater called At the international level, international the At the across raced has pandemic the As considerations. Public health health Public considerations. other and economics, of politics, intersection the illustrates ingly he COVID-19 strik pandemic ------the global crisis—but they can be powerless powerless be can they crisis—but global the to response global acooperative coordinate to attempt World Organization Health the as institutions international off. Such worse everyone makes of cooperation lack the analysis, final the In countries. other on costs publics—imposes to national be may they as measures—popular of these supplies. Each essential hoarded and drugs, and of food export the banned countries, other from away resources diverted have constituents their from pressure under ers Yet policymak emergency. health public international to an way confront best the clearly is response international dinated Acoor borders. do not respect microbes response to the 2007–08 crisis financial 2007–08 to the response policy the Just as constraints. political and considerations, economic dations, recommen public health into account take have to decisions These cooperation. to favor international limited be can cerns con national what and raised, be it will how spent be and wherethem, money will when to loosen and to impose restrictions what measures: appropriate the about 2010). others and Goodman (see, for example, pressures political of potent nationalist face the in Every government faces tough decisions decisions tough government faces Every June 2020 | FINANCE &DEVELOPMENT - - - - 5

ART: ISTOCK / YEVHENII DUBINKO; JAMIE CARROLL varied from country to country in line with local past 100 years of US presidential (see, for conditions, so national policy example, Fair 2018). So why don’t elections work to responses to the COVID-19 pandemic vary for push politicians to choose the best ? health, economic, and political reasons. Where you stand Politics at play depends on where you sit This hotly contested policy response to a universal A basic economic principle is that any policy that is threat is no surprise to political . It good for society as a whole can be made to be good happens all the time. For example, just about every for everyone in society, even if the policy creates believes that small countries would be winners and losers. It requires only that the winners better off if they removed all barriers to . Yet be taxed just a bit to compensate the losers—and unilateral is practically unheard of, and everyone is better off. Economists use powerful tools no country in the world today pursues it. Why not? to clarify which economic policies are best for society. More generally, why do have so much So why should be controversial? trouble getting economic policies right? Why does A basic political economy principle is that the the advice of independent observers, analysts, and winners don’t like being taxed to compensate losers. scholars go so often unheeded? And the battle is joined, not over what is best for Politics is the usual answer, and the answer is society but rather over who will be the winners usually right. But that is too vague—like saying and losers. What is best for the country may not that some countries are rich and others poor due to be best for my region, or group, or industry, or economics. Exactly how does politics keep govern- class—and so I will fight it. ments from making better policy, even in the face Even in , plenty of citizens might of imminent crises? What does that tell us about agree that politics obeys the golden rule: those with how economic policy can and should be made? the make the rules. Special- groups do Political economy is about how politics affects seem to play an outsize role around the world, dem- the economy and the economy affects politics (see ocratic or not. These include wealthy individuals, box). Governments try to pump up the economy powerful industries, big banks and corporations, before elections, so that so-called political business and formidable labor unions. cycles create ebbs and flows of economic activity How else to explain why Americans pay two or around elections. By the same token, economic three times the world for sugar? There are a conditions have a powerful impact on elections. handful of sugarcane plantations and a few thou- Political economists have uncovered the simple sand sugar beet farmers in the United States—and (perhaps disturbing) fact that the rates of economic 330 million sugar consumers. You’d think that the growth and are all the information we 330 million would count for a lot more in politics to predict quite accurately the results of the than the several thousand, but you’d be wrong. For

WHAT IS POLITICAL ECONOMY? the early 20th century economics and were established as separate disciplines. , , and are widely For much of the 20th century this division reigned. With the regarded as the originators of modern economics. But they and problems of development, the purely called themselves political economists, and Mill’s Principles of Political Economy was the fundamental text of the discipline economic issues were daunting enough to occupy economists. By from its publication in 1848 until the end of the century. These the same token, the political problems of the era—two world early theorists could not conceive of the economic and political wars, the rise of fascism and —were so serious as to worlds as separate. require separate attention. Two trends divided the political from the economic analysis. By the 1970s, however, it was clear that the separation First, governments began to reduce their direct control over the between the economic and political spheres was misleading. economy. Second, different political forms emerged: Europe That decade saw the collapse of the Bretton Woods monetary went from almost exclusively monarchical to increasingly order, two oil price shocks, and —all highlighting representative, and highly varied, forms of government. By the fact that economic and political matters are intertwined.

6 FINANCE & DEVELOPMENT | June 2020 POLICIES, POLITICS, AND PANDEMICS

In the final analysis, the lack of cooperation makes everyone worse off. decades, subsidies and trade barriers have raised the supportive policies. Who is to say that their jobs price of sugar to the benefit of the sugar planters are less important than lower for consum- and farmers and to the detriment of everyone else. ers? There is no simple, widely accepted way to Why does a tiny group of sugar producers matter balance the benefits against the costs—is cheaper more than the rest of the country? A commonplace sugar important enough to bankrupt thousands of of political economy is that concentrated inter- hardworking farmers? Politics is, in fact, the way ests usually win over diffuse interests. The sugar society adjudicates among conflicting interests, producers are well organized and work hard to and maybe those with more at stake should have influence politicians. If they didn’t get favorable a bigger say. government treatment they’d go out of business, Political economists don’t usually take stands so it’s important for them to organize to lobby and on complicated moral and ethical issues of this fund politicians. The cost to consumers is estimated sort. They try to understand why societies choose at $2 billion to $3 billion a year. That’s a lot of to do what they do. The fact that sugar or car money—but it comes to a couple of cents a day producers have much more at stake and are much for the average American. No consumer is going better organized than sugar or car consumers helps to talk to an elected representative or threaten to explain why government policies favor sugar and vote for an opponent over a couple of cents a day. car producers over consumers. The fact that producers are concentrated while Some consumers are concentrated, though. Sugar consumers are diffuse helps explain trade protection. is sweet, and the corporations of the Sweetener A few automobile manufacturers can organize them- Users Association want it to be cheap as well. selves; tens of millions of car buyers can’t. That’s not Coca-Cola, Hershey, and the like have pushed all. and labor in the auto industry may hard to change American sugar policy. The fact not agree on much, but automakers and autoworkers that there are powerful concentrated interests on agree that they want to be protected from foreign both sides of the issue helps explain why prices . Politicians—especially politicians from aren’t even higher than they are. The same thing is areas where automobile manufacturing is import- true of industrial products. Steelmakers want pro- ant—have a hard time denying a common demand tection; steel users—like the auto manufacturers— of workers and owners in a powerful industry. don’t. Trade policy is not just a battle between big Perhaps this is not such a bad thing. Sugar farm- corporations and disunited ; it’s also a ers and autoworkers depend for their livelihood on battle among big corporations. Otherwise we’d expect

The economy was now high politics, and much of politics was activities of particular firms or industries can have an impact on the about the economy. nature and direction of their political activity. Over the past 50 years, political economy has become increasingly It uses the tools of economics to study politics. Politicians prominent in both economics and political science, in three ways: can be thought of as analogous to firms, with voters as consumers, It analyzes how political forces affect the economy. or governments as providers of and services Voters and interest groups have a powerful impact on virtually to constituent customers. Scholars model political-economic every possible economic policy. Political economists strive to interactions in order to develop a more theoretically rigorous identify the relevant groups and their interests, and how political understanding of the underlying features driving politics. institutions affect their impact on policy. All three methods have profoundly affected both scholars and It assesses how the economy affects politics. Macroeconomic policymakers. And political economy has a lot to offer both to trends can boost or ruin an incumbent’s chances. At the more analysts of how societies work and to those who would like to microeconomic level, features of the economic organization or change society.

June 2020 | FINANCE & DEVELOPMENT 7 Policymakers in democratic societies must always pay attention to the next election—otherwise they are likely to cease being policymakers.

every industry to be protected and trade to be tightly contributed to manufacturing decline. This helps limited everywhere. explain why presidential candidates have become In fact, there are plenty of powerful interests in increasingly protectionist, even though most favor of and . The Americans support openness to trade. world’s multinational corporations and interna- In addition, policymakers in democratic societies tional banks depend on an open flow of goods must always pay attention to the next election— and capital. This is especially the case today, when otherwise they are likely to cease being policymak- many of the world’s largest companies depend on ers. This helps explain why it can be difficult for complex global supply chains. A typical inter- governments to pay money now for policies whose national corporation today produces parts and benefits will be realized only in the long run—such components in dozens of countries, assembles as pandemic prevention and preparedness. them in dozens more, and sells the final products The mass of special and general interests in everywhere. Trade barriers interfere with these society is overwhelming. Institutions help make supply chains, which is why most of the world’s sense of them. First are social institutions—the biggest companies are also some of the biggest way people organize themselves. Some busi- supporters of freer trade. nesses, farmers, and workers are well organized, giving them more political clout. Farmers in rich A complex web countries are relatively few, are well organized, Special interests as well as voters on different sides and are almost universally subsidized and pro- of every issue fight their battles in the political tected. Farmers in poor countries are many, rarely arena. But the rules of politics vary a lot from organized, and almost universally taxed. Where country to country. The way a political economy is workers are grouped into centralized labor feder- organized affects who wins the battle over policy. ations, as in some northern European countries, A logical starting point is elections, at least in they play a major role in national policymak- democracies. Governments that don’t satisfy their ing. The ways in which societies organize them- constituents don’t remain governments very long. selves—by economic sector, region, ethnicity— So we might expect democracies to choose policies affect how they structure their politics. that benefit the economy as a whole. However, the Political institutions mediate the pressures constit- economy as a whole doesn’t vote. uents bring to bear on leaders. Even in authoritarian Politicians need votes from the people who countries, rulers have to pay attention to at least some decide elections. The decisive or pivotal voters part of public opinion. Political economists call this vary with a country’s electoral institutions and the “selectorate,” that portion of the population that social divisions. In most political systems, the best matters to policymakers. In an authoritarian regime, targets are swing voters, who might change their this could be an economic elite or the armed forces. vote in response to the policies of an incumbent In an electoral it would be voters and or the promises of a challenger. If the poor vote interest groups. No matter who matters, policymak- for the left and the rich vote for the right, for ers need their support to stay in office. example, the middle class could be decisive. In In democracies, the variety of electoral institu- recent American presidential elections, the most tions affects how policymakers feel constituent important swing voters have been in distressed pressures. Organized political parties can help industrial regions of the Midwest. Many voters extend the time horizons of politicians: while an in these areas believe that foreign competition individual politician may worry only about the

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next election, a party has to be concerned about The policy that economic analysis indicates its longer-term reputation. On another dimension, is best for the economy may not be politically where politicians are elected by the country as a feasible. To go back to free trade, virtually all whole, as in Israel or the Netherlands, the focus economists would recommend that a small is on national policy. Where politicians represent country’s best bet is to remove all trade barri- narrower geographic locations, as in the US House ers unilaterally. Yet it is almost certain that a of Representatives, the general view is that “all government that attempted to move to unilateral politics is local” (usually attributed to 1970s–80s free trade would face massive opposition from Democratic Speaker of the House Tip O’Neill). special interests and from many in the public These different electoral systems can drive politics who would regard such a move as dangerous. toward more national or more local concerns. The result might well be the collapse of the Electoral institutions affect the identity of the government and its replacement with one that people politicians need to attract to win an election. could be relied on to maintain and even expand The US Electoral College makes middle-of-the- trade barriers. In this case, pursuit of the first- voters in the Midwestern industrial states pivotal best policy could lead to a much worse outcome. in presidential elections, driving the emphasis on Politicians, analysts, observers, and just regular protection for manufacturing. In a multiparty par- people who are interested in economic policy are liamentary system, the pivotal voters may be the well advised to evaluate not only the economic supporters of a small party that can swing back and implications of policy but also their forth between coalition partners, such as the fringe political feasibility. If the pursuit of a first-best parties for the formation of Israeli governments. policy is bound to fail and perhaps provoke a Whichever voters the makes pivotal backlash, then truly the cure may be worse than are likely to have outsize influence over politics the disease. It makes more sense to consider the and policy. political realities the government faces and to struc- The character fo legislative institutions also ture policy with those realities in mind. It is better matters. For example, while a unitary parlia- to settle for second-best than to insist on first-best mentary system can deliver big and fast change, and end up worse—or, as folk wisdom has it, to in the US system change is let the perfect be the enemy of the good. more modest and slower. Federal systems—in Australia, Brazil, Canada, Germany, the United Bottom line States—give provincial or state governments a Political economy is the integration of political lot of power, while centralized systems allow the and economic factors in our analysis of modern national government to rule unchallenged. Some society. Inasmuch as just about everyone would governments have handed off control of important agree that politics and economics are intricately policies to independent bodies that are less subject and irretrievably interwoven—politics affects the to day-to-day political pressures—such as central economy and the economy affects politics—this banks and public health agencies. approach seems natural. It has proved itself power- These institutions matter because they affect the ful in understanding governments and societies; it weights that politicians give to different groups in can also be a powerful tool for those interested in society. Some sociopolitical institutions give labor changing governments and societies. Policymakers unions a great deal of influence; others privilege should hold these important lessons in mind today farmers; still others are dominated by business asso- as they tackle the COVID-19 pandemic. ciations. Political economists analyze the interests in play and how the institutions of society transmit JEFFRY FRIEDEN is a professor of government at and transform them into government policy. .

Second-best can be best References: All this matters to policymakers or observers or Fair, Ray C. 2018. “Presidential and Congressional Vote-Share Equations: November 2018 even just people who care about the economy Update.” Yale Department of Economics Paper, Yale University, New Haven, CT. because it can profoundly change the way we think Goodman, Peter S., Katie Thomas, Sui-Lee Wee, and Jeffrey Gettleman. 2010. “A New about policy and policy advice. Front for Nationalism: The Global Battle against a Virus.” New York Times, April 10.

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