Political distortions, economic development, and policy experimentation: an agenda for political economy
Governments create opportunities for economic growth and development.
However, governments can also intervene in markets in ways that are detrimental for growth. For instance, they can offer advantages to certain firms in procurement or through preferential regulation instead of promoting competition. Politicians can allocate public investments inefficiently (by targeting regions or groups based on political considerations, for example) or apply discretionary contract enforcement to favor some stakeholders over others. We call such actions political distortions, as growth and development outcomes would be suboptimal due to political incentives and choices.
When and how do such political distortions arise? What types of policies can lead to improved government investment and public good provision in the presence of political incentives? What are their effects on market structure, concentration, and prices? What kinds of welfare and distributional impacts do political distortions have? And how can we design effective policies to minimize their negative impacts?
The Yale Economic Growth Center Mini-Conference on “Political Distortions and Economic Development”
The Yale Economic Growth Center organized a one-day mini conference on April 1, 2022 to discuss progress on these questions. The event followed Professor Leonard Wantchekon’s lecture “Political Distortions and Economic Development”, the 31st Simon Kuznets Memorial Lecture, which discussed and stimulated research on the topic.
The one-day mini conference consisted of three parts:
- Theoretical contributions: What are the economic outcomes we desire, and how do political incentives affect them?
- Empirical works: Quantifying the extent of political distortions in different markets and regions, and
- Institutional experimentation: What types of policies and/or political institutions can improve on current economic development and bring us closer to the “efficient” benchmarks?
The Role of Political Incentives on Firm Productivity, Markets and Economic Growth
A common theme in the conference was that while firms may grow because of investments in technological innovation or growing productivity, they may also benefit from political connections and protection that would insulate them from competition. Both margins may benefit firms, but political connections may be more harmful for consumers and imply that different regulatory policies are necessary.
The conference was a great place to discover theoretical and empirical literature about political distortions. My main take-away was the impact political distortions can have on market structure and discouraging innovation, which made me wonder how much political distortions undermine development.
– Yabo Gwladys Vidogbena
PhD Student at University of Houston, Department of Economics and former student at the African School of Economics
Dana Foarta presented a model where firms could increase their profits by undertaking costly technological innovations and/or by political protection. However, a firm with better technology than its competitors does not need as much government protection for the same profit. In this case, the government may “manage competition” by designing policies that discourage technological innovation by the leading firm. The latter then needs the government more. This leads to a “negative loop” between market and political incentives: the government discourages innovation, the leading firm invests less in new technology, leading to a stagnated technology, at the detriment of consumer welfare.