# Research Library

1998

Neoliberal economic reforms, rather than unleashing market forces, can result in new institutions for market governance. By vacating institutionalized policy domains, neoliberal reforms can trigger two–step "reregulation" processes: first, political entrepreneurs launch projects to build support coalitions by reregulating markets; second, societal groups respond to these projects by mobilizing to influence the terms of reregulation. Depending on the strengths and strategies of politicians and societal groups, reregulation processes result in varied institutions for market governance. The paper develops this argument by analyzing how neoliberal reforms in Mexico led to the construction of distinct institution for market governance across four states (Chiapas, Guerrero, Oaxaca, and Puebla). The findings from Mexico highlight the importance of moving beyond the questions of why developing countries choose neoliberal policies and how they implement them. Students of the poltical economy of development should shift their attention instead to understanding the kinds of new institutions that replace those destroyed by neoliberal policy shocks.

Available in print format only.

Working Paper 98–13, Weatherhead Center for International Affairs, Harvard University, 1998.

Sachs, Jeffrey, John Luke Gallup, and Andrew D Miller. 1998. “Geography and Economic Development”. Abstract

This paper addresses the complex relationship between geography and macroeconomic growth. We investigate the ways in which geography may matter directly for growth, controlling for economic policies and institutions, as well as the effects of geography on policy choices and institutions. We find that location and climate have large effects on income levels and income growth, through their effects on transport costs, disease burdens, and agricultural productivity, among other channels. Furthermore, geography seems to be a factor in the choice of economic policy itself. When we identify geographical regions that are not conducive to modern economic growth, we find that many of these regions have high population density and rapid population increase. This is especially true of populations that are located far from the coast, and thus that face large transport costs for international trade, as well as populations in tropical regions of high disease burden. Furthermore, much of the population increase in the next thirty years is likely to take place in these geographically disadvantaged regions.

Sachs, Jeffrey, and Steven Radelet. 1998. “The Onset of the East Asian Financial Crisis”. Abstract

This paper provides an early diagnosis of the financial crisis in Asia, focusing on the empirical record in the lead–up to the crisis. The main goal is to emphasize the role of financial panic as an essential element of the Asian crisis. At the core of the crisis were large–scale foreign capital inflows into financial systems that became vulnerable to panic. The paper finds that while there were significant underlying problems and weak fundamentals besetting the Asian economies at both a macroeconomic and a microeconomic level, the imbalances were not severe enough to warrant a financial crisis of the magnitude that took place in the latter half of 1997. A combination of panic on the part of the international investment community, policy mistakes at the onset of the crisis by Asian governments, and poorly designed international rescue programs turned the withdrawal of foreign capital into a full–fledged financial panic, and deepened the crisis more than was either necessary or inevitable.

The eventual establishment of Europe's new currency, the euro, as a potential rival international currency to the U.S. dollar recently has elicited interest among a small but growing number of experts in the United States. Whereas official U.S. pronouncements tend to be couched in generally supportive terms, the views and opinions of American scholars tend to reflect considerable scepticism.

This paper examines the principal arguments put forward by those whoquestion the suitability of the European economy for monetary union. It argues, in particular, that such criticism tends not only to overestimate the importance of country–specific shocks and the need for fiscal federalism, in the European context, but also to underestimate the degree to which monetary union is seen in Europe as a means for addressing the very structural rigidities which, according to U.S. experts, cast doubt on the prospects for EMU.

In attempting to interpret the reasons for the pessimism of U.S. experts, importance is attributed to the overall uncertainties attaching to the EMU project, as well as, and more importantly, to the ambiguous nature of its repercussions on the American economy itself, including the dollar's international role. Failure is obviously undesirable from a U.S. strategic and economic point of view, while success will produce both benefits—more U.S. trade and investment—and costs, viz. a relative shift—however small—of economic activity and power from the U.S. to Europe.

Papadopoulos, Constantine A. "EMU: The Rising Challenge to the DollarA European Perspective on American Scepticism about Monetary Union." Working Paper 98–09, Weatherhead Center for International Affairs, Harvard University, June 1998.

Studies of international regimes, law, and negotiation, as well as regional integration, near universally conclude that political entrepreneurship by high officials of international organizations—"supranational entrepreneurship"— decisively influences the outcomes of multilateral negotiations. Studies of the European Community (EC) have long stressed their informal agenda-setting, mediation, and mobilization. Yet the studies underlying this interdisciplinary consensus tend to be anecdotal, atheoretical, and uncontrolled. The study reported here derives and tests explicit hypotheses from general theories of political entrepreneurship and tests them across multiple cases (the five most important EC negotiations) while controlling for the actions of national governments. Two findings emerge: First, supranational entrepreneurship is generally redundant or futile; governments can almost always efficiently act as their own entrepreneurs. Second, rare cases of entrepreneurial success arise not when officials intervene to help overcome interstate collective action problems, as current theories presume, but when they help overcome domestic(or transnational) collective action problems. This suggests fundamental refinements in the core assumptions about transaction costs underlying general theories of international regimes, law, and negotiation.

The purpose of this paper is to investigate the factors that can explain the general lack of success of Russia's policy toward Europe and, in particular, Western European institutions after the Cold War. In fact, despite the end of the East–West confrontation, the role of Russia in Europe remains uncomfortable. Expectations that post–Soviet Russia could be integrated into the new European space failed to materialize. Unlike the former communist countries,which have already joined or are in the process of joining NATO and the European Union, Russia's status in Europe remains undetermined. Russia is a full member of only two European institutions (the Council of Europe and the Organization for Security and Cooperation in Europe or OSCE) and has difficult relations with all the others.

Working Paper 98–16, Weatherhead Center for International Affairs, Harvard University, 1998.

Moravcsik, Andrew. 1998. “Is Anybody Still a Realist?”. Abstract

Realism, the oldest and most prominent theoretical approach in international relations, is in trouble. Its theoretical core is being undermined by its own defenders, who have addressed anomalies by recasting realism in less determinate and distinctive forms. Realists now advance the very assumptions and causal claims in opposition to which they traditionally—and still—have claimed to define themselves. This expansion would be unproblematic if it occurred through the further elaboration of an unchanging set of core realist premises. Yet contemporary realists increasingly defend propositions that manifestly and fundamentally contradict core realist assumptions by permitting other exogenous causes of state behavior—specifically, varying domestic interests, collective beliefs, and international institutions and norms—to trump the effects of material power. Contemporary realism has thus become little more than a generic commitment of rational state behavior in anarchy—a view shared by all major strands of liberal and institutionalist theory, as well as some strands of constructivism. It has thereby compromised its distinctiveness and thereby its analytical utility as a guide to theoretical debate and empirical research. Unlike many other critics, we propose not a rejection but a reformulation of realism in the form of three assumptions: (1) unitary, rational actors in anarchy; (2) underlying conflict of preferences; and (3) resolution of conflict on the basis of relative control over material resources. This formulation, we argue, is the broadest possible one that maintains a clear distinction between realism and other rationalist IR theories. It also promises to clarify the empirical domain of realism, to generate more powerful empirical explanations, and to permit realism to take its rightful part in rigorous multicausal syntheses with other rationalist theories.

Moravcsik, Andrew. "Is Anybody Still a Realist?" Working Paper 98–14, Weatherhead Center for International Affairs, Harvard University, October 1998.

LaPorta, Rafael. 1998. “Capital Markets and Legal Institutions”. Abstract

In this paper, we focus on the institutions required to support large capital markets and survey the empirical evidence on the link between legal institutions and financial markets. Specifically, we are interested in providing an answer to why we observe such large differences in the size, breadth and valuation of capital markets? Why, for example, are equity markets so much larger in South Africa than in Mexico or Peru? Why did many companies go public in India and Hong Kong in 1995, while no company went public in Brazil or Uruguay or Venezuela in the same year? Why do countries like New Zealand have large credit markets while Argentina and Colombia do not have them?

LaPorta, Rafael, Florencio Lopez-de-Silanes, and Andrei Shleifer. 1998. “Corporate Ownership Around the World”. Abstract

We present data on ownership structures of large corporations in 27 wealthy economies, making an effort to identify the ultimate controlling shareholders of these firms. We find that, except in economies with very good shareholder protection, relatively few of these firms are widely held, in contrast to the Berle and Means image of ownership of the modern corporation. Rather, these firms are typically controlled by families or the State. Equity control by financial institutions or other widely held corporations is far less common. The controlling shareholders typically have power over firms significantly in excess of their cash flow rights, primarily through the use of pyramids and participation in management.

LaPorta, Rafael, Florencio Lopez-de-Silanes, Andrei Shleifer, and Robert W Vishny. 1998. “The Quality of Government”. Abstract
We investigate empirically the determinants of the quality of governments in a large cross-section of countries. We assess government performance using measures of government intervention, public sector efficiency, public good provision, size of government, and political freedom. We find that countries that are poor, close to the equator, ethnolinguistically heterogeneous, use French or socialist laws, or have high proportions of Catholics or Muslims exhibit inferior government performance. We also find that the larger governments tend to be the better performing ones. The importance of historical factors in explaining the variation in government performance across countries sheds light on the economic, political, and cultural theories of institutions.
Kliouev, Vladimir. 1998. “Does Russia Need a Currency Board?”. Abstract

This paper analyzes the recently revived idea of introducing a currency board in Russia. It takes a negative view of that idea. The characteristics of the country make a currency board a poor arrangement for Russia on purely economic grounds. The considerations of political economy suggest that an independent and rule–bound monetary authority might provide benefits that outweigh the disadvantages of rigid monetary arrangements in certain circumstances, but it is exactly in those circumstances that the independence of a monetary authority and its ability to follow the rules will be very much in question.

Kliouev, Vladimir. "Does Russia Need a Currency Board?" Working Paper 98–15, Weatherhead Center for International Affairs, Harvard University, December 1998.

In this paper we study how aggregate output responds to the arrival of a new General Purpose Technology (GPT) by looking at adjustment mechanisms that operate through labor markets. We show that under a wide set of circumstances the arrival of a new GPT that raises long–run output can trigger a recession in the short–run. Furthermore, we characterize features of the GPT that produce a cyclical adjustment path. An initial recession occurs whenever a higher education level is required to operate the new GPT. But a recession can also occur when the new GPT has lower educational requirements. A cyclical adjustment path is more likely when inexperienced workers are less productive with the new technology and the faster productivity rises with experience in the new sector.

Helpman, Elhanan. 1998. “Lobbying and Legislative Bargaining”. Abstract

We examine the effects of the interaction between lobbying and legislative bargaining on policy formation. Two systems are considered: a US–style congressional system and a European–style parliamentary system. First, we show that the policies generated are not intermediate between policies that would result from pure lobbying or from pure legislative bargaining. Second, we show that in congressional systems the resulting policies are strongly skewed in favor of the agenda–setter. In parliamentary systems they are skewed in favor of the coalition, but within the coalition there are many possible outcomes (there are multiple equilibria) with the agenda–setter having no particular advantage. Third, we show that equilibrium contributions are very small, despite the fact that lobbying has a marked effect on policies.

After the passage of two decades, the situation in Southeast Asia is quite different from what is written here. For one thing, ASEAN membership has increased from five in 1978 to nine, including Vietnam, the country the original members dreaded for so long. Many countries in the region have achieved remarkable economic development, well beyond their expectations in the 1970s, although they are presently beset by currency crises. Notwithstanding, I have decided to reprint the paper in a bound edition for limited distribution with a hope that it may serve as a reference, despite its outdatedness, to students of Southeast Asia, an analysis that an Asian journalist made of the region?s complex circumstances in the late 1970s. As I see it, many of the problems discussed in the paper, especially those involving the sociopolitical setting and leadership performance by power elites in a number of countries, still persist in various forms to hinder the further progress of each nation and the region as a whole. The paper?s text, including facts and figures, is same as the original, except for minor copyreading corrections.

Since economic reforms began in 1978, China has undergone radical structural change from a command to a market–oriented system, and with it, dramatic economic results. The country?s gross domestic product (GDP) has enjoyed an average annual growth rate of about 10% for the past two decades, and its foreign trade 15%. Among the various facets of its impressive economic achievements is a massive influx of foreign direct investment (FDI). Starting from a moderate level, averaging about US$1 billion in the initial years of reforms, FDI inflows into China steadily picked up speed in the latter part of the 1980s, averaging about US$3 billion. They began to skyrocket in the 1990s, averaging more than US\$30 billion. Recent inflows account for close to 40% of all FDI inflows to all developing countries, making China the largest FDI recipient among all developing countries and second only to the United States.

The aim of this article is to go beyond mere economic factors such as market size labor cost, and infrastructure provision to arrive at a more nuanced understanding of the underlying forces that shape the patterns of FDI in China. My intent is theoretical; my method is empirical. The point of departure is the assumption that private investments, where current costs are incurred for future benefits, are not shaped by market forces alone. As Robert Bates points out, investments, being inherently intertemporal, are vulnerable to opportunistic behavior, and therefore require the presence of non–market institutions for the protection of property rights and reduction of transaction costs.

Working Paper 99–08, Weatherhead Center for International Affairs, Harvard University, 1999.

How do governments struggling to consolidate new democracies enact effective stabilization and adjustment policies, reform the public sector, and deregulate markets? And what has been the impact of economic liberalization on political institutions and systems of political representation? Treating economic and political transitions as mutually interdependent, this paper couples these questions to suggest a reformulation of the conventional wisdom about how economic liberalization proceeds and how political interests are determined. It challenges the assumption that neoliberal reform is most readily achieved in liberalizing polities when visionary political leaders surrounded by coherent economic teams with comprehensive programs in place act with a wide margin of autonomy from society. It also questions the contention that structures of political representation are the outgrowth of either economic organization or the product of state engineering. The paper makes two arguments. Its central argument is that economic reform is accomplished most readily when government reformers, acting through available clientelistic, corporatist, and party–based networks of mediation, negotiate the compliance of public and private sector representatives of social actors for the introduction of market–oriented reforms. They trade public resources or legislation favoring the representational status of political or social actors in the present for the agreement of those actors to accept diminished state resources for their organizations or constituents in the future. The use of specific networks of negotiation, moreover, influences the design of liberalization policies and helps to account for national differences in the pace and sequence of economic reform measures. The paper's second argument is that those systems of political representation that are strengthened as a result of the temporary advantages that accrue to them during the process of state retreat will endure even when they are incompatible with economic liberalism. This is so because the politicians and group leaders who manage these networks have the opportunity to design institutions that will allow them to accommodate themselves and adapt their power bases to economies in which the market plays a larger role.

Hagopian, Frances. "Negotiating Economic Transitions in Liberalizing Politics: Political Represetation and Economic Reform in Latin America." Working Paper 98–05, Weatherhead Center for International Affairs, Harvard University, May 1998.

A familiar question raised by the Federal Reserve System's evolving use of money growth targets over the past twenty years is whether monetary policymakers had sound economics reasons for changing their procedures as they did — either in adopting money growth targets in the first place, or in subsequently abandoning them, or in both instances. This paper addresses that question by comparing two kinds of evidence base on U.S. time–series data. The main conclusion from this comparison is that whatever economic conditions might have warranted reliance on money growth targets in the 1970s and early 1980s had long disappeared by the 1990s, so that abandoning these targets was an appropriate response to changing circumstances. Whether adopting money growth targets earlier on was likewise appropriate is less clear.

In reviewing the last 15 years of political science literature on this subject, I argue that scholars have correctly identified the central theoretical debate, for the contest between the institutional and normative approaches is of great practical and theoretical importance. Nevertheless, notwithstanding the intensity of debate, I argue that the proponents of the institutional approach have failed to make a strong case for it. First, their efforts to show that democracies fight fewer wars in general have largely failed. Despite many years of intense scrutiny, the initial empirical puzzle remains valid; the evidence still indicates that democracies frequently fight wars, but rarely against each other. Second, supporters of the institutional approach have too quickly abandoned theoretical development and innovation.

Working Paper 98–12, Weatherhead Center for International Affairs, Harvard University, 1998.