Institutions and Collective Choice in Developing Countries

Applications of the Theory of Public Choice

Mwangi S. Kimenyi, John Mukum Mbaku

• Publisher: Taylor & Francis
• Year: 2019
• Print ISBN: 9781138338692
• eBook ISBN: 9780429806308
• Edition: 1
• Topic: Economics
• Subtopic: Economic Policy
• Index: Economics

First published in 1999, this volume is written by seasoned public choice scholars and is intended to make a significant contribution to the debate on peaceful coexistence and sustainable development in developing countries. The book contains a rich mixture of analytical ideas and views on collective choice and macroeconomic performance in developing countries. This book breaks new ground in that it is the first comprehensive application of the theory of public choice to collective decision making in developing societies. It provides both students of Third World studies and policy makers in developing societies an in-depth analysis for institutions for collective choice. For countries undergoing major reform of their political and economic institutions, public choice theory can provide significant and useful insights, and help these societies design and adopt institutional arrangements that enhance peaceful coexistence of groups, the creation of wealth and sustainable development. Specifically, the book successfully shows that: (1) the application of economic theory to the study of public policy in the developing countries can provide important insights into collective decision-making; (2) the application of public choice theory to the study of developing societies can significantly improve the efficiency of bureaucratic and governmental systems, and consequently, promote economic, political and social development; and (3) public choice can help developing societies design and sustain effective laws and institutions for peaceful coexistence of groups and achieve sustainable development.

1 General Introduction

MWANGI S. KIMENYI AND JOHN MUKUM MBAKU

Traditionally, social scientists have studied the behavior of individuals from two distinct perspectives. Political scientists believe that the individual in the political arena seeks to serve some public interest. Economic science, on the other hand, studies the individual’s behavior in the market place and assumes that the economic man is driven by self-interest and seeks to maximize his or her own utility. Thus, there is a dichotomy in how these two social sciences view the behavior of individuals. Public choice dismisses this dichotomy and instead argues that the political individual and the economic individual are one and the same thing.

Public choice applies the concept of rational choice to the context of political and social choice and seeks to understand and explain public sector outcomes using tools and methods of economics. Like in economics, the primary behavioral postulate of public choice is that individuals in their various capacities—voters, elected officials, bureaucrats, regulators—are self-interested, utility maximizing agents. As is the case in economics, the method of public choice is individualistic.

The emergence of modem public choice (what has come to be known as the Virginia School of Economics) as a separate field of study is most closely associated with the publication of The Calculus of Consent: Logical Foundations of Constitutional Democracy by James M. Buchanan and Gordon Tullock in 1962 (Buchanan and Tullock, 1962). In The Calculus, Buchanan and Tullock applied economic tools and modeled politics as an exchange process much like exchange in the marketplace. They advanced the idea that politics is analogous to market exchange and that the actors are rational, egoistic, utility maximizing citizens. Using this behavioral postulate and focusing on gains from political exchange, Buchanan and Tullock formulate important principles of constitutional economics in democratic societies. They explain why specific rules for collective choice emerge from the interactions of self-interested individuals at the constitutional level. The Calculus also provides a clear exposition of the methodology of public choice and remains the seminal work on public choice, and as Charles K. Rowley has noted, The Calculus ‘is the jewel in the crown of the Virginia Political Economy, its most frequently cited and its best known contribution’ (Rowley, 1987).

Although The Calculus remains the undisputed seminal work in public choice, other writers have made important contributions. For example, the behavioral postulate of political man as a rational utility maximizing agent is to be found in the writings of Hobbes, James Madison, and Alexis de Tocqueville. Knut Wicksell’s work on public finance, which more specifically focuses on politics as exchange, is of special significance to the development of the theory of public choice, especially given the influence that this perspective had on Buchanan’s research. Other notable contributions include the use of economic tools by Kenneth J. Arrow (1951) and A. Bergson (1938) to explain the behavior of individuals in the public sector by incorporating individual utility functions assumed by economists. In addition, Duncan Black’s (1948a, b) work on committees, Anthony Downs’ (1957) analysis of political parties, and William Riker’s (1961, 1962) research on political coalitions are all notable contributions to the development of public choice. Two important additions to the subdiscipline that came shortly after the publication of The Calculus include works by Mancur Olson (1965) and by William A. Niskanen (1971).

During the last three decades, public choice has emerged from an obscure branch of economics to a major and well respected subdiscipline in the social sciences. It is probably accurate to say that the public choice revolution has been one of the most exciting developments in economics during the last three decades. The notoriety received by public choice is well deserved. During this time, public choice analysis has helped resolve outcomes that appeared paradoxical when analyzed from the perspective of political science or standard economics. In addition, public choice has resolved many questions that neither economics nor political science have been able to offer adequate explanations for. For example, the rent-seeking insight first provided by Gordon Tullock (1967) and extended by Anne O. Krueger (1974) has become a major component of research in public choice and in fact, in political science and, law and economics. Public choice analysis of the interest-group theory of government has proven to be a powerful tool in predicting and explaining public policy outcomes. Likewise, public choice analysis of the bureaucracy, the legislative process, political participation and growth of government, has demonstrated the relevance of the public choice paradigm.

Public choice is now well received by social scientists and policy makers in North America, Japan, and Europe. The success of public choice is largely the result of its ability to explain the behavior of the individual in the public arena. By abandoning the romantic public interest view of traditional public finance, public choice has provided a fruitful avenue for explaining institutions and policies. In addition, the success reflects the fact that the public choice paradigm has passed a market test. Researchers have now developed more formal theoretical models and the theoretical predictions of public choice have been subjected to rigorous empirical scrutiny. Where skepticism may have surrounded the underlying assumptions and theories, these advances and empirical work have helped to demonstrate the relevance of public choice. Leading scholars in the United States and Europe have devoted most of their research efforts to public choice and have made significant contributions. Some of the more notable public choice scholars include Peter Benholz, Geoffrey Brennan, James M. Buchanan, Bruno Frey, James D. Gwartney, Dennis Mueller, Alan Peacock, Charles K. Rowley, Robert D. Tollison, Gordon Tullock, Richard E. Wagner, Jack Wiseman, among many others.

The public choice paradigm has proven to be extremely powerful in analyzing institutions of collective choice. For countries undergoing major reform of their political and economic institutions, such as those in Eastern Europe that are emerging from communist rule, or those in many parts of the developing world that are attempting to establish democratic governance structures after many years of autocratic rule, the public choice paradigm can provide significant and useful insights. Most of the key questions confronting these countries have to do with establishing new institutional arrangements such as constitutional reforms, property rights, privatization, introduction and sustaining of party politics, bureaucratic reform, and so on. All these issues are best looked at from the public choice perspective. Thus, it is in fact in these countries that public choice analysis can have the most noticeable impact. Unfortunately, public choice analysis has largely been confined to the study of the institutions of the developed industrial countries. A primary reason for this is that most developing countries have been dominated by nondemocratic governments thus limiting the use of the public choice paradigm. However, as has been demonstrated by Gordon Tullock in his analysis of revolutions, coups and autocracy in general, the public choice paradigm can be extended to explain the behavior of individuals in societies with nondemocratic institutions. This includes the study of the behaviors of rulers, voters, and participants in revolts against despotic rulers. Some other studies have applied the public choice paradigm to the study of the growth of government. Although such studies are few, the results demonstrate the validity of the public choice approach even to the institutions of developing societies. By and large, the importance of this paradigm to developing societies remains largely unexplored, ignored, and most importantly, unknown to many in the developing world.

In this volume, we seek to consider some of the central public choice insights and attempt to investigate how these insights apply to developing countries. We look at both normative and positive theories of public choice and relate them to developing countries in general and to specific countries or issues, in particular. At this time when many developing countries are undergoing radical transformations in their institutions, it is our hope that this volume will provide useful lessons in the choice and evaluation of alternative institutional arrangements.

As discussed earlier, traditionally, economics and political science have investigated different areas of society, using significantly different approaches and methodologies. The discipline of political science sought ‘good government’ and believed its provision could be achieved by people of good moral character. Although economics also desired good government, it believed that its provision depended on appropriate laws and institutions and not on the moral character of leaders. The main model of man developed by economists argued that each individual was interested primarily in maximizing his selfinterest. Public choice theory adopted the economic approach and extended it to the analysis of politics. Thus, a new sub-discipline, which uses the tools of economics to study the political marketplace, emerged. In the study and evaluation of public policy, public choice theorists apply the voluntary exchange paradigm of economics in which the individual is assumed to maximize his own self-interest. The selection of rules to regulate socio-political interaction and the functioning of these rules is affected by the activities of several political actors including, legislators, politicians, voters, civil servants, and political coalitions (including special-interest groups). The new approach to the study of political markets emphasizes that once elected, politicians and legislators should not be expected to be obedient and passive servants of the people. Instead, elected officials are expected to seek to maximize their own objectives, and as a result, every effort should be made to constitutionally constrain them to the extent desired by society. In the second chapter, Gordon Tullock, a principal in the development of public choice theory, traces its development and provides important insights into its usefulness as a tool for understanding the functioning of political markets.

Throughout history, economics has been devoted to the study of scarcity and the development of ways to help societies allocate their scarce resources efficiently. Beginning with the work of Adam Smith, economists proposed the relatively unregulated market economy as the most efficient framework for resource allocation and the creation of wealth. However, in the 20th century, many prominent economists and political philosophers called to question the effectiveness of the market economy in wealth creation and economic growth. They argued that central planning was a more appropriate framework for economic growth than a market economy. After the collapse of socialism in Eastern Europe and the subsequent disintegration of the Soviet Union during the period 1989–1991, the weaknesses of central planning became evident. Today, as the 21st century approaches, a significant shift has taken place in the discipline, and once again, economic freedom is now being regarded as an important determinant of the ability of entrepreneurs to engage in wealth-creating activities, and consequently of economic growth. In Chapter 3, Gwartney and Holcombe make a strong and compelling case for the positive impact of economic freedom on growth. In addition, they emphasize the importance of constitutionally guaranteeing such economic freedom. As a consequence, Gwartney and Holcombe elaborate the constitutional provisions which they believe will establish and sustain economic freedom in a polity, minimize rent seeking, and significantly improve the ability of entrepreneurs to engage in productive activities.

Chapter 4, written by Brough and Elliott, is devoted to an examination of collective action in non-democratic societies. Specifically, the chapter examines those institutions that structure the government in the absence of democracy. In the majority of developing countries, institutional arrangements are fragile and collective choice is problematic. In many of these countries, weak and fragile institutional arrangements have produced revolutions, coups d’état and insurgencies. In Chapter 4, Brough and Elliott limit their discussion of ‘blow outs’ in developing societies to insurgency. Basically, they extend the public choice analysis to non-democratic societies and present a theory of insurgency based on standard assumptions of economic theory and public choice.

Meyer and Naka, in Chapter 5, examine the role of the Liberal Democratic Party (LDP) in Japan’s post-World War II economic growth and development. In this chapter, the authors develop a theory of a growth-inducing political party system through the extension of Olson’s (1993), and McGuire and Olson’s (1996) rulership framework. Basically, Meyer and Naka examine the role of the political party system in the economic growth of a nation using Japan as a case study. The Japanese example provides important policy lessons for developing countries.

Chapter 6 is devoted to an examination of political business cycles. Georgios E. Chortareas reviews the literature on political business cycles (PBCs) and shows the relevance of PBCs in developing countries. Despite the significant differences between developed and developing countries in such areas as macroeconomic structure, institutional arrangements, behavioral patterns of voters and political parties, and the fact that developing countries face additional external constraints, including surveillance from the IMF and the World Bank related to structural adjustment programs, there is evidence (albeit indirect) to indicate that institutions and legal arrangements can be vulnerable to political pressures. More research, however, is required to determine the relevance of PBCs for developing societies.

In Chapter 7, Ronald M. Nate provides a thorough review of the literature on the economics of bureaucracy. Specifically, he examines Niskanen’s model of bureaucratic behavior, subsequent extensions to it, and implications for developing societies. Emphasis in this chapter is placed on the extent of bureaucratic inefficiency and its effects on economic growth and development. Today, inefficient bureaucracies represent one of the most important constraints to sustainable growth and development in developing societies. Nate argues that public choice theory can help developing countries recognize the inefficiencies associated with bureaucratic provision and how to deal with them. Thus, this chapter presents materials that should prove very useful to developing countries currently attempting to reform their institutions and provide their societies with more efficient and effective bureaucratic structures.

Since the end of the Second World War, many countries have made remarkable economic progress. Unfortunately, these significant improvements in the quality of life have occurred primarily in the North, while living standards among peoples of the South (i.e., the Third World) have remained essentially the same since the end of the war. In fact, except for a few countries in the Asia Pacific region, which have made significant progress in human development, most people in the Third World are actually worse off now than they were more than forty years ago.

Much has been written about underdevelopment in the Third World. Recent evidence, however, appears to point to the importance of laws and institutions as the crucial determinants of growth and development. Unless a society’s institutions provide entrepreneurs with the appropriate incentives, they are unlikely to engage in those activities that create wealth, and provide the resources for society to eliminate mass poverty and improve national welfare. Such incentives, as William F. Shughart II, argues in Chapter 8, include ‘the freedom to respond to market price signals and the ability to profit personally from their own resource-allocation decisions.’

Although more empirically oriented, these new approaches believe, like the neoclassical theories of the early post-war period, that the government is a benevolent, exogenous factor in macroeconomic growth. These new approaches to public policy differ significantly from the public choice model. The latter argues that government is an endogenous variable and that outcomes to public policy are determined endogenously and affected by the activities of several political actors. Viewed from the public choice perspective, policy outcomes that may first appear to be mistakes, ‘are seen instead as the logical outcomes of a political process that provides policy makers with higher personal payoffs from supporting narrow special interests than from tending to the public’s interest.’ Thus, policy reform should be designed to incorporate the ‘right’ model of government into the economic development model chosen for the country. Shughart’s chapter provides a rigorous analysis of the interest-group theory of government and shows that in order to successfully develop their societies, the poor countries have to implement changes in institutions and incentive systems that minimize the scope and extent of rent-seeking activities and thus, provide opportunities for entrepreneurs to create new wealth.

The primary purpose of this book is to apply public choice theory to an examination of economic growth and development problems in the developing countries. In accordance with that theme, Kimenyi and Tollison devote Chapter 9 to a study of the concept of rent seeking as it applies to developing societies. The term rent seeking was coined in 1974 by economist Anne O. Krueger to describe a concept made explicit in a seminal article by Gordon Tullock in 1967. Rent seeking refers to the expending of resources to capture wealth transfers created by government regulatory activities in the economy. Since research has established that rent seeking involves wastage of resources, it is considered an important constraint to economic growth and development. In addition to examining the theory of rent seeking, Kimenyi and Tollison show the several ways in which rent seeking retards economic growth in the developing countries. In the process, they emphasize the fact that rent seeking is related to the scope and extent of government intervention in private exchange and thus is determined by the kinds of institutional arrangements in a given society. As a result, to minimize rent seeking and improve economic performance, requires institutional reforms which significantly constrain the ability of the government to engage in economic regulation. Such reforms should change economic incentives, significantly increase the cost of rent seeking, while at the same time improving the ability of entrepreneurs to engage in wealth-creating activities.

In Chapter 10, Charles K. Rowley re-emphasizes a theme that runs throughout this book: institutions matter. He examines the postindependence experienc...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• List of Tables
• List of Figures
• List of Contributors
• Acknowledgments
• 1. General Introduction
• 2. The Realm of Public Choice
• 3. Economic Freedom, Constitutional Structure, and Growth in Developing Countries
• 4. The Economics of Insurgency
• 5. The Political Party System and Economic Growth: The Case of Postwar Japan
• 6. Political Business Cycles: Theory, Evidence, and Extensions
• 7. The Economics of Bureaucracy
• 8. The Interest-Group Theory of Government in Developing Economy Perspective
• 9. Rent Seeking, Institutions, and Economic Growth
• 10. Rent Seeking and Rent Extraction from the Perspective of Africa
• 11. Governments and Monetary Policy
• 12. Government Ownership and Privatization
• 13. A New Proposal for Federalism and Democracy in Developing Countries
• 14. Democratization and the Crisis of Policy Reform in Developing Countries
• 15. Spatial Competition, Ethnicity, and the Optimal Size and Composition of Units of Collective Choice
• 16. Economic Sanctions and Developing Countries: A Public Choice Perspective
• 17. Conclusion and Recommendations for Further Investigation
• Index