Why Nations Succeed The Institutional and Political Influence in Prosperity

Transcription

1 1/38 Why Nations Succeed The Institutional and Political Influence in Prosperity Yiqian Lu Jincheng Zhang November 2, 2016

2 2/38 What Induces Cross-country Long Term Economic Growth? Geographical influence (Gunnar Myrdal 1968, Sachs 2001) tropical underdevelopment Leaders (Jones and Olen, 2005): Leaders are important Intellectual difference Lynn and Vanhanen (2006) shows IQ could explain most of income discrepancies, which is controversial. Culture Institution (Acemoglu, Robinson 2001, 2006, 2012 etc.)

3 3/38 How to Explain within-country Economic Growth Human capital accumulation - Gary Becker, Kevin Murphy 1994, Barro 1989, Romer 1989 Political capital - corruption s negative influence (Pellegrini and Gerlagh 2004) -government s influence non-negligible (Stigler 1975, Posner 1974, Becker 1983) Both human capital and political capital - Ehrlich and Lui 1999

4 4/38 Our Question Acemoglu and Robinson argue intrinsic political and economic institution is the only condition for economic success. The theory could be challenging in explaining Singapore, Mideast countries economic prosperity Our question: how to conglomerate Becker, Murphy and Ehrlich s approach with Acemoglu and Robinson s?

5 5/38 Some Related Literature Przeworski and Limongi (1993) summarize literatures (about 20 papers) have different views on democracy s influence on economic progress. Ansolabehere, Figueiredo, Snyder (2003): Political capital should not be viewed as investment but consumption. Cooper, Gulen, Ovtchinnikov (2009) Political contribution and future positive abnormal returns one kind of anomalies. Gary Becker (1994) More efficient laws takes effect on coordination cost and reduce redundant human capital investment.

6 6/38 Setup Discounted profit maximization assumption Agent wants to maximize max t=0 1 (1 + r t ) t Pi t, i (1) where r t is the t-year yield rate and P i t represents profit level for agent i in period t.

7 7/38 Setup Human capital and Political Capital Investment Following Becker, Ehrlich s approach, in each period agent needs to invest in human capital h t and political capital p t to reach the state H t and P t H i t+1 = A( H i + H i t)h i t (2) and Q i t+1 = B(λ H i + Q i t)q i t (3)

8 8/38 Setup - Agent level Production contribution and the raw profit is set by The realized profit is as follows. e i t = 1 h i t q i t (4) Y i t = C( H i + H i t)e t t (5) Pt i = Yt i [1 + θ ln( Qi t Qt )] (6) Agents with stronger political power Q i t > Q t are accompanied by positive subsidies or transferring income. On the contrary, Q i t < Q t denotes a net loss.

9 9/38 Setup - Redistribution equation i Y i t = i P i t = i Yt i [1 + θ ln Qi t Qt ], t (7) And the median political capital level Qt is also determined by the above equation. For instance, if all agents have the same raw profit level Yt i and the distribution of political capital follows log-normal distribution ln N(µ, σ 2 ), Qt will be exactly e µ since ln Qi t Qt remains symmetric.

10 10/38 Pros Using consumption in the utility function could result in negative consumption level in the utility function, which is less convincing than including a negative profit. Linear tax-consumption relationship is not consistent with permanent income hypothesis while in our approach the linear tax-profit relationship is more appropriate.

11 11/38 Equilibrium Euler Equation and e i t+1 = (1 + r t+1)(1 + θ ln Qi t Q t ) H i + H i t H i + H i t+1 A(1 + θ ln Qi t+1 Q t+1 ) = θq t+1 B(λ H i + Q i t) A(1 + θ ln Qi t+1 Q t+1 ) (8) (9)

12 12/38 Equilibrium I No human capital accumulation without political capital Condition: A < 1 + r. V ( H i ) = t=0 C H i (1 + r) t = C H i (1 + r) r (10) quite similar to the traditional discount cash flow pricing model

13 13/38 Equilibrium II Decreasing human capital growth without political capital Condition: 1 + r < A < 2r. Human capital in period t: Ht i = H i ((2A 2r 3)(A r 1) t A + r + 1), t (11) A r 2 Value of the agent: 1 V ( H) = (1 + r) t P t = t=0 t=0 ( C(r + 1) 1 t H((2A 2r 3)(A r 1) t A+r+1) A r 2 A = C H(r + 1) 2 (2r + 1) Ar(2(r + 1) A) ) + H (12)

14 14/38 Equilibrium III Increasing human capital growth with finite share value without political capital Condition: 2 + r < A < 2(1 + r). Most of the properties in Equilibrium III is the same as Equilibrium II The human capital accumulation growth rate is positive for each period, which is still lower than the growth of interest discount rate (1 + r) t, resulting in a finite company share price.

15 15/38 Equilibrium IV Increasing human capital growth with unbounded share price without political capital Condition: A 2(1 + r) This is equivalent to the case g > r in the discounted cash flow (with growth) model. In this case, the approximate growth rate for human capital and profit level is A 1 r, which even exceeds the interest rate (1 + r) t, yielding an infinite share price.

16 16/38 Equilibrium I to IV

17 17/38 Equilibrium I to IV

18 18/38 Equilibrium with political intervention and H i + H i t h i e + q i e = H i + A( H i + H i t)h i e A (1 + r) A = θq t+1 B(λ H i + Q t S i e) A(1 + θ ln S i e) where h i e, q i e, e i e, S i e are the steady states of h i t, q i t, e i t, S i t, respectively (13) (14)

19 19/38 Equilibrium with political intervention and H i t = (H i τ + A H i h i e Ah i e 1 )(Ahi e) t τ A H i h i e Ah i e 1 Q i t = (Q i τ + Bλ H i q i e Bq i e 1 )(Bqi e) t τ Bλ H i q i e Bq i e 1 with the natural constraint: A 1 + r (15) (16)

20 20/38 Equilibrium I Stagnant human capital accumulation where H t cannot grow where under the condition i.e. θq e B(λ H + Q e ) A Q e = θbλ H + (θbλ H) 2 + 4AθB 2θB Q e qe = Bλ H + BQe 1 q e A 1 r A A > 1 + r 1 q i e = 1 (17) (18) (19) (20) (21)

21 21/38 Equilibrium I Stagnant human capital accumulation where H t cannot grow with Q i 0 = λ H i and S i 0 = S i 1 =... = S i e =... = H i Qt+1 i = B(λ H i + Qt)q i e i = B(λ H i + Qt)q i e i = Bλ H i qe i Bqe 1 i Result: dq e dθ < 0 The after-redistribution profit is H (22) for t τ. P i t = C H i (1 q i e)(1 + θ ln H i H ) (23)

22 22/38 Equilibrium I Stagnant human capital accumulation where H t cannot grow the share value for the median company under stagnant equilibrium is V θ = C H i (1 qe)(1 i + θ ln Hi )(1 + r) H r (24) The share value of the firm with relative class level S i is V Si θ = t=0 C H i (1 qe)(1 i + θ ln S i ) (1 + r) t = C H i (1 qe)(1 i + θ ln S i )(1 + r) r Result: V θ Si > 0 if and only if B > 1 ds i (25)

23 23/38 Equilibrium II Increasing human capital accumulation ( A r 1 A q i e) Bλ H i q i e 1 Bq i e B(λ H i + Bλ H i qe i 1 Bqe i ) = S e i θ + S e i ln Se i (26) with 0 qe i < 1 B, if 1 B A r 1 A A A r 1, if 1 B > A r 1 A (27)

24 24/38 Equilibrium II Democratic equilibrium Equilibrium II (Democratic Equilibrium): When 1 B A r 1 A, i.e. B A A r 1, for higher class agents with S dem i 1, no matter what θ is, there exists one unique equilibrium state {qdem i, hi dem, ei dem }. For lower class agents S dem i < 1 is true, if and only if θ 1, there exists one unique equilibrium state ln Sdem i {qdem i, hi dem, ei dem }.

25 25/38 Equilibrium II Democratic equilibrium For all 0 < Sdem i <, we have 1 (w.r.t social status) qi dem S i dem > 0, hi dem S i dem 2 (w.r.t. political influence coefficient) qi dem e i dem θ = 0 < 0, ei dem S i dem θ = 0 < 0, hi dem θ > 0, 3 (w.r.t. to democracy level) qi dem B < 0, hi dem B > 0, ei dem B = 0 4 (w.r.t how raw human capital impacts initial political endowments) qi dem λ < 0, hi dem λ > 0, ei dem λ = 0 5 (w.r.t. human capital accumulation coefficient) qi dem A < 0, hdem i A > 0, ei dem A < 0 6 (w.r.t. interest rate) qi dem r > 0, hi dem r < 0, ei dem r > 0

26 26/38 Equilibrium II Democratic equilibrium

27 27/38 Equilibrium III Good authoritarian equilibrium Equilibrium III (Authoritarian Equilibrium) When 1 B > A r 1 A, i.e. B < A A r 1, there are two equilibrium states. (i) Equilibrium IIIG (Good Authoritarian Equilibrium) {qautg i, hautg i, eautg i } when (a) Saut i 1, θ θ(s aut ) or (b) Saut i < 1, θ(s aut ) θ 1, where θ(s ln S aut) i is a threshold depending on aut i Saut. i The property of good authoritarian equilibrium is the same as Equilibrium II (Democratic Equilibrium) {qdem i, hi dem, ei dem }

28 28/38 Equilibrium III Bad authoritarian equilibrium Equilibrium IIIB (Bad Authoritarian Equilibrium) {qautb i, hi autb, ei autb } when (a) S aut i 1, θ θ(s aut ) or (b) Saut i < 1, θ(s aut ) θ 1, where the threshold function θ(s ln S aut) i is aut i the same as good equilibrium case.

29 29/38 Equilibrium III Bad authoritarian equilibrium 1 (w.r.t social status) qi autb S i aut < 0, hi autb S i aut 2 (w.r.t. political influence coefficient) qi autb e i autb θ = 0 > 0, ei autb S i aut θ = 0 > 0, hi autb θ < 0, 3 (w.r.t. to democracy level) qi autb B > 0, hi autb B < 0, ei autb B = 0 4 (w.r.t how raw human capital impacts initial political endowments) qi autb λ > 0, hi autb λ < 0, ei autb λ = 0 5 (w.r.t. human capital accumulation coefficient) qi autb A > 0, hautb i A indetermined, ei autb A < 0 6 (w.r.t. interest rate) qi autb e i autb r > 0 r < 0, hi autb r indertermined,

30 30/38 Equilibrium III Authoritarian equilibrium

31 31/38 Good or bad authoritarian equilibrium Peer choice The choices among various classes are intertwined with each other, making the choice within one class highly depend on others. The level of political capital threshold could have deterministic impact on the choice between good and bad authoritarian equilibrium In the country like United Arab Emirates, millions of immigrants who could never achieve permanent residency work diligently in Dubai and Abu Dhabi, lowering local political beneficial threshold Q

32 32/38 Equilibrium I No human capital accumulation Least developed countries Political instability, prevalence of human rights invasion and ongoing warfare drive up the discount rate to a level so high that any substantial human capital accumulation becomes not worthwhile. Such as North Korea, Syria and many Sub-Saharan countries. In North Korea, although there exists a centralized government, the inflation rate has remained at high level varying between 30% to triple digits. At the same time, North Korean citizens lack most of basic human rights such as basic education, which yields a relatively small A

33 33/38 Equilibrium II United States, United Kingdom, etc. Political capital high: military service, advocacy work and community service Enjoy a high level of both B and θ Invest intensively in human capital

34 34/38 Equilibrium IIIG Singapore and Qatar People s Action Party has been in control since Singapore s independence; Qatar is known as an absolute monarchy Singapore and Qatar are among the richest countries: Singapore has GDP per capita of more than 50,000 US dollars and Qatar more than 70,000 US dollars. Both Singapore and Qatar have large population of foreign workers. Singapore has 1.4 million foreign workers equivalent to 25% of total population. Qatar is notorious of its exploitation of migrant workers which construct more than 90% of its population. High percentage of migrant workers lowers countries Q level

35 35/38 Equilibrium IIIG The size of their economies is small. Their economies depend heavily on migrant workers.

36 36/38 Equilibrium IIIB In South Asia such as Cambodia and Bangladesh, in Middle Asia such as Tajikistan and Kyrgyzstan, and in Africa such as Uganda and Kenya. In this status, citizens put more efforts in acquiring political power than human capital, although their human capital still grows very slowly compared to countries in Equilibrium I stagnant economy where human capital deteriorates over time. When it is easier to gain and execute political capital (B and θ is larger), countries invest less human capital.

37 37/38 Transitional Status China China, being identified as an authoritarian regime, has witnessed fast economic growth during past decades of reform and opening up economic policy Size is large and almost no foreign migrant workers. China needs to switch to a regime more politically inclusive just like the democracy reform.

38 38/38 Conclusion For politically inclusive countries, there exists only one equilibrium and the share of resource allocation to human capital depends on how effective political capital can influence production redistribution and the politically beneficial threshold. For authoritarian countries,it is possible for those countries to enjoy long-lasting economic development as well if they happens to stay with the good equilibrium given proper political and policy nudges.