May the 4th be with you: Economics of Star Wars


By Marco Albori (Economics ’18)


Cartoon by Marco Albori '18

Economics students, as all those students specializing in a particular field, love to share memes about their favorite subject, like jokes about strange convergence theorems, weird topological spaces, or absurd economic policy statements. However, it turns out that at least one day a year our nerdy preferences align, like planets would do, with those of the people outside the world of supply and demand, in name of the movie series that makes all nerd hearts beat: Star Wars! (If you thought it was Star Trek please leave this page!)

May the 4th, which is pronounced as “May the Force” if you studied English with Jar Jar Binks or if you are drunk enough after a night out in a disreputable bar of Tatooine with Han Solo, is the day chosen by Star Wars fans to celebrate the saga. Actually, it seems that this word pun was used for the first time not by a geeky guy brandishing a Made-in-Taiwan lightsaber but by the Conservative Party to wish good luck to the new elected Prime Minister Margaret Thatcher in 1979, “May the Fourth Be with You, Maggie. Congratulations.” [1] Too much culture already, let’s go back to the point.

Fun apart, we like the plot of Star Wars because it could be used to explain many of the real world past and current issues in political economy and international trade. Consider for instance the beginning of the story: Qui-Gon Jinn and his apprentice Obi-Wan Kenobi have to negotiate with the Trade Federation, which blockaded the planet Naboo as a protest against the Galactic Republic taxation of commercial routes. Sound realistic, doesn’t it?

The storyline continues with political conspiracies, taking us across the galaxy from highly developed planets where the production process is made mainly by droids to poor constellations where aliens harvest or starve, from growing free trade zones to stagnating stars. This also reminds us the issues our fellows from the Barcelona GSE International Trade, Finance, and Development (ITFD) Program are studying day after day. Investopedia [2] tells you all need to know about the “economics” of Star Wars galaxy, while Mark Thorton wrote a couple of interesting blog posts [3] for the Mises Institute discussing it from a political economy point of view, which, drawing from the Austrian tradition, is a liberal one. Indeed he defines The Phantom Menace as “one of the finest allegories on classical liberal political economy to ever appear on screen.”

Sometimes we just want to quote the saga to paint a little our mathematically intensive works: it is the case of Brodeur et al. (2016) who titled their paper on econometrics and the worry of every researcher (getting as many stars as possible on his regression coefficients) “Star Wars: The Empirics Strike Back.

Some other times we definitely go wild with creativity, as Zachary Feinstein, a financial engineer who estimated the cost of building the two Death Stars and the loss caused by their destruction due to the Rebels. His paper “It’s a Trap: Emperor Palpatine’s Poison Pill” [4] not only does an accurate accounting of the aforementioned costs in terms of Gross Galactic Product, but also analyses the systemic risk implication of such a disruption on the galactic banking and financial system. According to the author: “this would have been worse than the Great Depression. It would have been beyond anything that we’ve ever seen on Earth.” [5]

At this point it seems legit to ask ourselves: among the famous people named Lucas, are economists more like Robert or George?

No matter whether you are a galactic empiricist or a interstellar growth theorist, as an economist you have a lot of reasons to love Star Wars and watch the whole saga again or do it for the first time if you haven’t done it yet (shame!). And, let’s confess it, we would all like Yoda’s wisdom helping us during our homework nights at the library, of course keeping him away from Latex (imagine the mess caused by convoluted his talking way). Or even better, Chewbacca as a partner in crime when we have to go to an exam revision at the professor’s office.

Lego Chewbacca and economics paper
Photo by Marco Albori ’18

May the 4th be with you!


[1] Wikipedia

[2] Investopedia

[3] Mises Institute

[4] Feinstein

[5] CBC

The True Cost of Polarization

“There’s No Such Thing as a Free Lunch” – Milton Friedman

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Source: Gary Markstein/Creators Syndicate

In their first lesson of economics, students are introduced to the concept of scarcity – an inherent condition in a world of limited resources – and, as a result, the existence of opportunity costs; Milton Friedman’s famous quote “There’s No Such Thing as a Free Lunch” echoes this idea that everything has a cost, even when it is not obvious. When it comes to government decisions, costs are often scrutinized: the cost of an investment, of giving (or not giving) a public service in concession or implementing a policy; however, the costs of political polarization are rarely analyzed.

What is the cost of political polarization?

Or, rather, which is the most valued asset lost for having political polarization? Certainty. In this essay, the author will provide arguments in favor of the hypothesis that the opportunity cost of the increasing gap between political attitudes of politicians towards major policy dimensions (trade, migration, gender, racial integration, public expenditure) is uncertainty and will discuss its negative effects on economic performance.

A first approach to studying the economic effects of uncertainty resulting from political activities is observing economic markets’ performance during electoral cycles. Brandon and Youngsuk (2012) estimated the effect of elections over corporate investment. Results indicate that, after setting control variables for investment opportunities and economic environment variables, corporate investment rates dropped, on average, by 4.8 percentage points the year prior to elections. In countries with polarization, the effect is expected to increase due to the risk of abrupt changes in policy. The changes may be moderate, for example: contract regulations, taxation, trade policy, or more drastic actions like expropriation of possessions and hostility towards non-supporters. Empirical evidence reveals that political polarization affects investment not only during electoral cycles, but also discourages long-term investments, with investors instead opting  to minimize their risk and making short-term opportunistic solutions such as  asset stripping, and intensive lobbying with state officials (Frye. 2002).

Other negative effects of polarization

Especially in countries with parties that exhibit diverging ideologies such as ex-communists and anticommunists, other negative effects of polarization are the imposed barriers to create consensus. There is a constant conflict over the economic reforms to be implemented, given the conflicting principles, and it does not allow politicians to reach agreements to effectively address economic crisis with coherent policies (Frye. 2002).

The struggle between opposing factions also has a detrimental effect on  the quality of institutions by increasing the state officials’ incentives to make opportunistic decisions, for example populism, clientelistic relationships, bribing and interference of power groups in government policies, just to name a few

According to a growing mass of literature on the subject, when a country lacks strong institutions and has a polarized government, it will be more likely to default on sovereign debt. It is important to bear in mind that sovereign debt crises   do not occur only when governments choose to default, as recent events have shown that crises can arise from investor’s uncertainty about a country’s ability or intentions to honor its responsibilities. Qian (2012) uses an economic model to show the dynamics between the quality of institutions, the level of government polarization and the sovereign default risk, for a sample of 90 countries. Her findings support the premise that the lack of strong institutions and a clear set of rules allows powerful groups to capture government and influence policies to their benefit, without considering their impact on other groups.

Additional evidence of the negative effects of polarization and weak institutions is found when combined with a globalized financial market. In particular, countries with low income and weak institutions are perceived as unreliable by investors and experience a threshold effect that will hinder their access to all the benefits of globalization, as presented by Alfaro, Kalemli-Ozcan and Volosovych (2008), as well as by Kose, Prasad and Taylor (2011).

Moreover, Broner and Ventura (2006) discuss the conditions under which globalization lead to higher financial market volatility. According to their model, the instability of domestic financial markets can be explained by: 1) uncertainty of governments’ behavior (incentives to default on foreign liabilities increased with globalization) and 2) the probability of a financial crisis (i.e., it depends largely on the nature of regulations and strength of judicial systems to enforce contracts). As a result of financial liberalization and the existence of the previously mentioned sources of uncertainty, the economy will alternate between two possible outcomes: an optimistic equilibrium (in which institutions are strong in enforcing contracts) or a pessimistic equilibrium (one with weak, opportunistic institutions). In a polarized government, the effect of the uncertainty sources would be amplified, potentially destroying the possibility of an optimistic equilibrium.

After analyzing polarized countries using these arguments, it is not a surprise to find that some countries have low levels of investment, slow economic growth, high volatility and recurring economic and institutional crises.

 “There’s No Such Thing as a Free Lunch”… especially when it comes from a politician.

References

Layman, G. C., Carsey, T. M., & Horowitz, J. M. (2006). Party polarization in American politics: Characteristics, causes, and consequences. Annu. Rev. Polit. Sci., 9, 83-110.

Baldassarri, D., & Bearman, P. (2007). Dynamics of political polarization. American sociological review, 72(5), 784-811.

 Qian, Rong. 2012. Why Do Some Countries Default More Often Than Others? The Role of Institutions. Policy Research working paper; no. WPS 5993. World Bank. © World Bank.

Frye, Timothy. 2002. The Perils of Polarization: Economic Performance in the Postcommunist World. World Politics, Volume 54, Number 3, April 2002, pp. 308-337

Brandon. J, Youngsuk, Y. 2012. Political Uncertainty and Corporate Investment Cycles. Journal of Finance, 67 (2012), 45-83.

Broner, F. and Ventura, J., 2006. Rethinking the effects of financial globalization. The Quarterly Journal of Economics, p.qjw010.

Corporación Latinbarómetro, Socio- demographic variables (2015). Retrieved from http://www.latinobarometro.org/latOnline.jsp

 

The rise of Voting Advice Applications – aquienvoto.org and the Spanish case

With over 700,000 users, data from the app aquienvoto.org suggests how VAAs could represent a whole new way of surveying the general public before an election and collecting data on the political position of the population.

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With over 700,000 users, data from the app aquienvoto.org suggests how VAAs could represent a whole new way of surveying the general public before an election and collecting data on the political position of the population.

The creator of the app is BGSE alum Hugo Ferradáns ’15, graduate from the Economics of Public Policy Program. Follow him on Twitter @Hferradans.


The rise of the internet era opened a door for innovative ways to help voters be informed about their political choices prior to casting their ballot. During the past 2015 Spanish General Election, new tools such as aquienvoto.org (whodoivote.org in English), an app that matches users’ policy preferences with parties’ proposed policies, became an easy and straightforward alternative for users to explore their political position and compare it to that of the biggest parties. Its success, with over 800,000 users and more than 30 million responses, suggests how technology and the social sciences can work successfully together to create a more informed and accountable electorate, especially in a multiparty political system such as the Spanish one.

But encouraging are more informed electorate is not the only benefit of Voting Advice Applications. In fact, the large amount of data that is generated from online applications such as aquienvoto.org can be a source of analysis and study regarding why people make their choices1, as well as a way to estimate what users care most about in a real-time basis before an election. This article, thus, will try to shed light on the usefulness of Voting Advice Applications to gather data on the political positioning of users. I will show some of the results that were acquired from aquienvoto.org, both on the policy preferences of users and on their most politically-aligned parties.

But first things first- What is exactly aquienvoto.org?

Aquienvoto.org is what is called in the field of political economy research a “Voting Advice Application” (VAA). VAAs are essentially an online test that matches users to parties depending on individual responses to policy-related statements. The user can either disagree or agree with the statements, as well as indicate whether that specific policy is important to him or her. After replying to several questions, the VAA gives the user a summary of what parties the user disagrees and agrees most with, mainly in the form of a ranking or a political map.

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Even though there some VAAs more sophisticated than others2, all VAAs acquire essentially the same data:

  1. the position of the user regarding a specific question (in a scale of completely agree to completely disagree with the statement in question),
  2. whether that user gives importance to that question and
  3. after answering all questions, the ranking of most preferred parties for each user.

Aquienvoto.org was able to gather information on 756,908 people, after dropping all users that did not complete at least level 1 (that is, replied to 31 questions).

What did users get as an advice from aquienvoto.org?

If we look at what party was the most first-ranked among users, we see that the centre-right Ciudadanos was the most preferred party throughout the whole period for roughly 33% of users. However, interestingly enough, the overall amount of people that voted for parties that are more leaned towards the left (Podemos,PSOE, United Left and Nós, representing 62.8% of votes)  is much higher than those in line with liberal and conservative policies (Ciudadanos, PP, PNV and DiL, being 37.2% of users’ first choices), indicating that users from aquienvoto.org are consistently left-wing.

ferradans_results

It is particularly noticeable the different layout that the results present when compared to the results from General Elections. For example, the conservative Partido Popular, which was ranked first in the elections with roughly 25% of votes, appeared last almost throughout the whole period for aquienvoto.org. It is clear that this might certainly come from the fact that VAA users are consistently younger and more left-wing than the average citizen, but it also poses a question that would be interesting to explore: do people vote in line with their policy preferences or are there other factors that are influencing voters’ decisions in the field of electoral politics?

How do people position themselves about certain issues and what they think are most important?

Unsurprisingly, the topics related to corruption were the ones users gave most importance to, with almost 10.67% of respondents (that is, 80,410 individuals) giving importance to the question “Politicians accused of corruption should resign and be illegitimated to run for office”, of which almost 93% of people responded that they agree or completely agree with the statement.

The second and third place of most-given-importance questions are related to the presence of religion in the political sphere (second place) and the presence of religion in the education curriculum (third place), for which both find a strong rejection towards religion.  Furthermore, social policy is an area of much importance to individuals as well, surely very much related to Spain’s current economic woes. Indeed, Spanish law related to mass evictions over the past years3 takes fourth place in most-given importance question (8.06% of total questions replied), followed by a statement on the education budget (7,46%), for which most people agree that increasing the budget is a top priority within government policy. These results are roughly constant throughout time, although the amount of users that gave importance to questions declined (graph 2).

ferradans_important

In terms of the most controversial topics out of all questions, where there are large amounts of people agreeing and disagreeing with the statement, we find the prohibition of bullfighting, the abolition of escuelas concertadas4 and the law regarding underage abortion5, having all of them a rather high rate of importance-responses as well.

Regarding what users are not interested on, that is, the questions that were least given importance to, it is seen that the four topics that are least important to users (starting from the least important) are the deficit and the ceiling of government expenditure, the legalization of prostitution, the regulation the financial sector, and the financing of the Autonomous Communities (the different regions of Spain).

What is the political position of the average user?

In order to give users the most interactive experience when analyzing their results, we created a map of their political position using eight different axis, as the Swiss VAA smartvote6 did. Using an algorithm, each response that a user gives contributes to create its “political map”, which can be later compared to the political map of the parties. Thus, using the responses from each user, we computed the political map for the average user, creating the image below.

ferradans_averageuser

As it can be seen, the average user is very much in favor of strong democratic institutions that condemn corruption at all levels, as it presents a rather high value for the axis related to democratic regeneration. Furthermore, it also presents a high value for welfare state and liberal society, and quite a low value for those questions supporting a liberal economy and a restrictive fiscal policy, which goes in line with the results mentioned above that users are more prone to identify themselves with left-wing policies.

Also, it can be seen that the average user rejects all statements related to regional nationalism, and favors those regarding state centralization. This changes, however, when comparing the average users from different regions, as people from Autonomous Communities such as Catalonia and the Basque Country strongly reject state centralization and favor regional nationalist policies.

What is left to be done from VAAs like aquienvoto.org?

Although VAAs can give academics a rich database, there are a number of methodological challenges that need to be overcome7, mainly regarding the representativeness of the sample. Indeed, if we want to make inferences on the positioning of the whole Spanish population, it is crucial that we acquire good quality data on the characteristics of users; something that has been proved difficult for online surveys. From aquienvoto.org, we are working to improve the process of data collection, providing users with the option to sign into an account where they can store their information and reply to surveys at any time. Nevertheless, we believe that more attention from Universities and governments should be given to these tools so that institutions and VAA organizations collectively work to make VAAs a better tool both for users and for the academia. Hopefully, that is what will happen in the next years to come.

For more information on the effect of VAAs on voting behavior, please check my article on Politikon

For inquiries on aquienvoto.org, please send an email to contacto@aquienvoto.org


  1. El auge de las aplicaciones de orientación del voto y su efecto en el comportamiento electoral, Politikon, June 2016.
  2. A review of the top Voter Advice Applications for the 2015 General Election, LSE British Politics and Policy Blog, April 2015.
  3. “If a citizen cannot pay his/her mortgage, giving the house to the bank should cancel his/her debt”
  4. An “escuela concertada” is a semi-private school that receives money from the government and at the same time charges fees to each student. It is unique to Spain.
  5. Whether underage girls should have permission from their parents by law to be able to have an abortion.
  6. https://www.smartvote.ch/
  7. Pianzola (2014), Selection biases in Voting Advice Application research.

Local Agency Costs of Political Centralization – A lecture by Roger Myerson

photoby Genevieve Jeffrey ’15, current student in the Economics of Public Policy program.


Nobel Laureate Roger Myerson presented his latest paper, ‘Local Agency Costs of Political Centralization’ to the Barcelona GSE community on the 3rd of June.

The central focus of the paper is to examine how efficient the widely accepted notion of Political Centralisation is.

Some existing literature already argues that political decentralization and community empowerment may be the key to successful development. They show how autonomous local governments can reduce entry barriers in national politics. Creating the space for success on a smaller scale can lead to them becoming strong candidates for higher office. The decentralization of power also gives local leaders a stake in nation building.

Others argue that one centralized government could also have the same effects by applying differentiated policies accounting for regional differences.

myerson

The need for targeted policies for differing dynamics in different regions is clear but the way to achieve this is still being explored. Myerson comes in with this paper is to show that in order to achieve efficient local public investment there needs to be accountability which is best achieved with decentralization of power.

The mechanism he uses to analyze this issue is a model of moral hazard in local public services in which an efficient solution is only feasible when officials are held accountable to local voters.

Political Decentralization can lead to Accountability

If the quality of the local public services can only be observed by the local residents, then unless the residents have power over the officials’ career, they will not be accountable.

If the local residents do not have the power to dismiss the officials, their careers would depend more on political relationships than on effectively managing local public services. This would have a roundabout effect on development as without good public services, private investments would be scarce since the success of these investments would depend on the quality of these public services.

In his talk he expounded on the following example to illustrate his findings. In a remote town, if we imagine each resident invests to start an enterprise whose probability of success would depend on the amount spent on public services in the town. The only observable evidence that the official spent the money on public services would be the number of successes among the residents’ enterprises.

This budget is managed by the local official, who could divert any part to his personal consumption. What Myerson shows is that there is a premium that can be paid to the official in addition to his salary that would incentivize the official to stay. This would make up the moral hazard rents and allow the efficient amount of investment to be spent.

Equilibria

Myerson shows that for a given budget if the official is paid ‘p’ if a specified fraction of residents report success then the renewal thresholds and official salaries can be set as functions of the local population ‘n’ that would result in the efficient budget and induced public investment levels.

Distrust and Instability

However if there were distrust, the voters would rather replace the incumbent if they expect the funds to be stolen in the future. In this case, public investment and residents’ benefits would be a decreasing function of the political instability parameter ‘q’. However as long as the utility from the induced public investment for the given level of instability is positive, residents can still benefit.

Autocracy – Rulers Incentive

In an autocracy the national ruler can commit to allow the town to elect an autonomous local government in exchange for a tax the residents would pay until their utility is maximized.

Moral hazard rents would be paid by candidates in terms of cash or political support. The autocracy could offer these offices as rewards for support and help them ward off challengers in this way.

If the national ruler could credibly commit to allow an autonomous local government after picking the first incumbent local official, the ruler could gain fiscal and political benefits per resident. But for this to happen, the ruler must make a credible commitment to the division of power constitutionally which would be against his interests ex-post.

With local accountability then the ruler would not be able to use the offices as rewards as this would make him vulnerable to voters distrust.

If successful they could be serious contenders for national office competing against him. This may be politically too costly for the incumbent national leader.

Separation of Information from Influence in an Autocracy

Key supporters are important for the success of any leader. A leader can get more support when key supporters monitor how he treats others so not rewarding one would cause distrust in all. If successful, competitors cannot recruit supporters without constraints.

Since an autocratic ruler is only accountable to these courtiers, they must deter wrongful dismissals as he can resell the vacant offices with moral hazard rents.

Courtiers can impose political costs on the ruler but these costs cannot depend on information that the ruler would be able to manipulate.

Courtiers could impose a penalty on the ruler depending on the set of dismissed officials. They should choose this penalty such that the dismissal set is a small fraction of all offices. If the net service value the ruler would get from replacing the official would equal his penalty for dismissal, the ruler would pick the dismissal set based on information on public services. However on the other hand, he might choose to dismiss those with the best services as they may prove to be strong contenders and rivals.

Under democracies also, political leaders need the reputation of rewarding patronage to motivate supporters. Under democracy, local autonomy threatens to increase competitive entry into national politics against the interest of national officials. One example of this given was Pakistan. National democratic competition also raises the political risk for the retention of appointees.

However if Local Accountability leads to better Public Services could Democracy induce leaders to promise it?

An analysis shows that with sequential bids the challenger can win by offering marginally more in most districts and zero where the incumbent spends the most. Contrary to the optimal socially, this will lead to small offers everywhere.

Endogenous Decentralization in a Unitary Democracy

However if public budgets are fixed as in most cases, then candidates can compete based on promises of accountability of the local officials. An alternative for this would be for the candidate to sell the office for a political contribution and then spend this money obtained on the campaign. This would win over the uninformed voters while the informed would vote for the best promise. This result thus depends on the proportion of the population that is informed.

Inefficient Centralization in a Unitary Democracy

Citing the example of Ukraine, Myerson also warned of the possibility of politically neglected regions being dangerous for a nations territorial integrity if it facilitated the opportunity for disaffected regions to secede. In an equilibrium of a 2-candidate election for national leadership of a unitary state, each candidate would naturally maintain inefficient centralized management of local public services in a fraction of all districts.

In Sum

The key points were that moral hazard in local public investments can be efficiently managed with local accountability. When the public services can only be observed by local residents, officials can only be held accountable if their careers depend on the resident’s approval. Political decentralization would guarantee such local power.

However if the leader can resell offices then he would not a neutral judge of the local public services. In the specific case of a centralized autocracy, dismissal must be approved by the national elite and residents cannot communicate their complaints to them, so without a guarantee of local political rights there can be no credible commitment to sustain efficient local investments by the autocratic national government.

Full Barcelona GSE Lecture by Roger Myerson:

‘Why Nations Fail’ and Spain’s rent-seeking system

Spain’s political class and institutions have behaved in an extractive manner. This situation is largely due to a structural system of rent extraction, both at a institutional and cultural level, that drives the creation of wealth to the benefit of a few.

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By Hugo Ferradans, current student in the Barcelona GSE Master in Economics of Public Policy. Follow him on Twitter @Hferradans.

 


 

In 2012, MIT professors Daron Acemoglu and James Robinson published one of the most compelling and resourceful books I have read in the field of development economics: Why Nations Fail. Their work suggests that the existence of extractive institutions and an extractive political class constraints to a large extent the ability of a country to experience prosperity and economic success.

book coverAcemoglu and Robinson define extractive institutions as those institutions that create a system that moves resources from the many to a small powerful elite. In this sense, institutions that are extractive do not secure property rights to the population, nor provide an unbiased justice system that caters for the interests of the powerless. Many examples are given: North Korea vs. South Korea, Mexico vs. the United States, etc., drawing the conclusion that, if a society operates under the rule of a state that fails to create institutions that are democratic, a state will be bound to fail and not achieve a decent level of prosperity.

Although Acemoglu and Robinson’s work focuses on the relevance of extractive institutions in developing countries, this article will show how the argument could be easily expanded to developed countries like Spain.

Indeed, after many years of economic boom where money was flowing ferociously into the economy, Spain appears to have reached an economic and political cul-de-sac. Where did all the money go? How can it be that Spain is now leading the charts of extreme child poverty in the European Union, and at the same time is the country with the highest number of high-speed trains and empty houses in Europe?

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Placard says “people without a home, homes without people,” highlighting how Spain has a huge amount of empty houses and a growing number of homeless people. Photo: La Vanguardia

At this point is where Why Nations Fail becomes appealing to me. I put forward the idea that Spain’s political class and institutions have behaved in an extractive manner and that this situation is largely due to a structural system of rent extraction, both at a institutional and cultural level, that drives the creation of wealth to the benefit of a few.

It is important to clarify, though, that this article appreciates that the extent to which Spain’s institutions are extractive is not the same as the ones described in Why Nations Fail. Spanish institutions do secure property rights and provide certain mechanisms to achieve a satisfactory level of development and economic growth. However, the construction and housing bubbles, as well as today’s economic policies put forward by the conservative party Partido Popular, suggest how many institutions are fuelling a system that perpetuates a ruling elite without trickling wealth down to the rest of the population.

I would like to introduce, not only at a political-economy-theory level, but also looking at a number of historical qualitative and quantitative data, how Acemoglu and Robinson’s discourse is crucial to understand today’s political and economic situation in Spain, and how a move towards a greater democratic and prosperous country will only be achieved by a regeneration of Spain’s political class.

Some history: from the 17th century until today

Hidalgos
Meeting of hidalgos in Valladolid, Spain

The creation of a very dense and static political and economic elite in Spain can be traced back to the 16th and 17th centuries. The combination between an absolutist government and a system of privileges that encouraged the middle class to abandon productive work and constitute tax-free property entails, created an elite (the so-called hidalguía) that was characterized by a rejection to culture and class mobility. Indeed, this elite was very supportive of the emergence of rent-seeking structures, as seen in the massive increase of mayorazgos during the decline of the Spanish empire, which ensured that the hidalguía could not see their capital reduced but only increased. In this way, even though Spain was being hit hardly by an economic turmoil at the beginning of the 17th century, the elite managed to keep their wealth at the expense of the whole population.

Such mechanisms of extraction from the population endured continuously over history, protecting the power of the government, the aristocracy and the bourgeoisie 1. It was not until the Second Republic (1930-1936) that Spain’s political elite was questioned. The Second Republic was a period in Spanish history where the government started to impose a number of very progressive and democratic policies, and where the cultural elites started to have a say in politics. Nevertheless, this ‘insurrection’ ended up being highly suppressed by a coup d’état from the military, obviously led by the previous political elite. This caused a Civil War that ultimately drove Spain into 40 years of a dictatorial regime under the rule of Francisco Franco, who brought back the previous system of corruption and rent-extraction to the country.

After Franco’s death, the transition to democracy was the result of a compromise between the old dictatorship heirs and a new class of younger politicians that had been organized in underground movements. Under these circumstances, the new democracy inherited many of the ways of doing politics that were customary of the Francoist regime. It is certainly not surprising, thus, that such an extended and static elitist system continued until today. In fact, the development of rent-seeking institutions that provided systems of extraction is something so ingrained in the Spanish society that it endured after the transition to democracy.

The construction and housing bubbles

This article puts forward the idea that one of the major exponents of such a system were the construction and housing bubbles. A huge expenditure in public infrastructure, both at the local and state levels, as well as a facilitation of housing construction by the local and regional governments has been a distinctive feature of Spanish politics over the last decades. Although many politicians have tried to argue that such a level of investment in public infrastructure was a way to provide the population with a system of “common welfare”, this political discourse seemed to confuse allocating public resources for construction of essential public transport systems, like fast-train lines and airports, with the supplying of unnecessary infrastructures in order to get private gain, such as, for example, Castellon’s airport, which has been opened since 2011 but has not managed to attract any flights yet.

Where institutions create culture: Spain’s ‘culture of ownership’

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A Spanish family right before being evicted from their homes. Evictions have been a major problem in Spain recently, where banks kept evicting people from their homes and families still had to pay their debt to the bank after being evicted. Photo: The New York Times / Samuel Aranda

The Spanish housing market has been a case-study for many economists for showing some unusual features. One of the most prominent ones is the level of homeownerships when compared to the average European countries– 87% of Spanish population is living in owned rather than rented houses, in contrast with the 60% average of Europe. Many politicians have encouraged this market structure by stating that Spain has an innate ‘culture of ownership’ as opposed to other European countries, and thus Spaniards should follow this ‘Spanish way of life’. Nevertheless, this was not the case not that long ago. In fact, in 1950, 51% of the population lived under a rented property, and even in some cities such as Madrid and Barcelona this figure could increase up to 85%, indicating that this ‘Spanish way of life’ was more imposed by public institutions than ingrained in the DNA of the Spanish population, something that is consistent with Why Nations Fail’s argument that culture does not precede politics, but rather politics creates culture.

This change was fuelled by the minister of housing in 1957, José Luís Arrese, who, after stating the famous quote “Spain needs to be a country of owners, not of proletarians”, presented a political project to confront the increasing number of shacks in the metropolitan areas of cities. In this project, Arrese committed to undergo a series of reforms, such as a massive investment to build new houses and fiscal reforms to provide the majority of the population with their “right for adequate housing”. Although the number of social houses built during this period of time were almost nonexistent, many of the reforms that characterized the last decades of the Francoist regime marked a point of inflexion in the emergence of a ‘country of owners’ in Spain. In fact, housing started to be seen by the political elites as a mechanism of social control by which the revolutionary desires of the working classes could be brought down. Making the working classes subordinates not only to the state, but also to the national banks that provided them with credit, gave the regime a new sense in the ways they could control the population and undergo their political project. Expanding ownership and the housing sector would not only bring economic growth, but also political stability. This was clearly stated by Arrese, who mentioned in a speech in 1957:

“Man, when not given a proper shelter, tries to take over to the streets and, controlled by his bad mood, becomes subversive, bitter and violent.”

Nevertheless, the poor social housing provision and the systematic speculation that gave the elites notorious economic revenue produced an environment of total political disaffection and lack of credibility. In fact, many of the national companies that created this boom in housing during the 60s were extremely linked to the richest families in the country, some members of which were even part of the political and administrative elites as well.

Furthermore, this desire to build a culture of homeownership further continued after the implementation of democracy, indicating again how housing was a mechanism of the elites to satisfy their interests. In 1985 and 1988, new reforms undertaken by the socialist government gave homeownership fiscal preference over renting. Buying a house could decrease by 15 to 17 percent the amount of income tax paid to the government. Also, Spain is the country with the lowest expenditure in social housing in Europe, spending 48.5 Euros per capita in contrast with the 117.06 of the European average. In this way, social housing did not expand in the years of the housing bubble because it ended up not being profitable for building companies. Thus, although the demand for social housing was increasing massively due to the systematic rise of housing prices in the real-estate market, the supply of social housing remained static, making it difficult for low-income families to buy a decent house.

The systematic fiscal compensations and the creation of a general belief by politicians that a house was ‘the best investment because prices never went down’ produced a general propensity for buying instead of renting. However, although the policies regarding tax discount for house ownership were massively applauded by the public, the real effects of these policies were neutral for consumers. The deduction of the tax for homeownership was actually compensated by the overpriced houses in the market, ultimately making the sellers, being big building companies and private banks, the only ones who benefited from this system of rent extraction. Furthermore, the political class was so linked to this culture of ownership and speculation that they would intensely benefit from the increase in prices and the rise in construction. In fact, many of the MPs in the national parliament owned more than three houses in 2011.

A political framework: the laws of urban planning

Besides the fuelling of a culture of ownership, Spain’s political class also created a framework in which speculation could operate freely, mainly taking the form of laws of urban planning that favoured mass construction.

In 1956, the Spanish government put forward the first law of urban development, which gave local councils the competencies to define whether an area was urban (suitable for building) or rural (unsuitable for building), as well as to determine the density of the construction to be taken place, making local governments able to redefine the land value of a specific area within a municipality.

However, this law was rather restrictive in some of the requirements for determining whether a piece of land is fit for urban development. To regulate and fuel the massive construction of houses during the housing bubble, successive governments put forward new laws that eased these requirements, such as the Law 7/1997 of 14th of April 1997 applied by José María Aznar, which allowed urban development in virtually any land throughout the country. In this way, local governments were able to easily increase the land value of particular unused areas by giving them an urban title. This fed the emergence of corruption during the housing boom years, since local governments could easily benefit the economic elites by increasing land values through giving land areas an urban title.

Furthermore, this new law gave local authorities the ability to issue building permits according to their local urban plan. In possession of a building permit, landowners were entitled to start with the building or urbanization project, having, however, the legal duty to give 10 percent to 15 percent of the total construction costs of the new urban development to the local authority. Both the state and landowners, thus, had very strong incentives to expand urban land, since local authorities could benefit financially from expanding areas of urbanisation and landowners could retain much of the value of their already valuable lands. Many municipalities were intensely financed by these forms of revenue, as seen in Valencia.

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An unused street in Benidorm, which used to be a famous tourist destination in Spain. Some parts of the city have become ghost towns as many skyscrapers and constructions were stopped after the burst of the bubble. Photo: The New York Times / Samuel Aranda.

In addition, the decisions about the land title given to certain areas within a municipality tended to be signed by local authorities and private companies privately through the so-called convenios urbanísticos, which actually lacked any kind of transparency and regulation by the state. Politicians and private companies could negotiate many of the conditions for urban development in a city without a formal legal framework that regulated a possible case of interests in the negotiation of the convenio urbanístico.

It is important to differentiate how Spain’s legal framework is different from other similar developed countries in Europe. Indeed, many countries give councils the ability to decide the nature of lands in cities. Cities in France and Germany, for example, are also able to do so. In Spain, however, there is a system that gives private companies and local authorities incentives to expand urban land and build. Since local governments will get a big amount of revenue from giving building permits to private companies, they will deliberately do so to finance their debt. Also, since the negotiations between public and private actors were not regulated, local authorities and companies set urban policies to generate capital gains for the elites at the expense not only of creating a bubble in the economy, but also at the expense of environmental deterioration too.

The inefficient judicial system: a matter of resources?

Lastly, this article will briefly focus on Spain’s judicial system. On the basis of Acemoglu and Robinson’s (2013) theoretical framework, a state that is not providing a system that “prevents theft and fraud” would be “failing to secure property rights and justice” among the population, and thus becomes extractive. In this sense, if Spain is not promoting a system that is independent from other actors such as the political elites and that controls the evolution of extractive activities from any agent in the economy, especially from the ones in power, it will be contributing indirectly to the existence of this rent-seeking society.

The current judicial system in Spain is very inefficient. The average time that takes a trial to proceed with a resolution is one of the highest in Europe, sometimes taking 10 year to know the outcome. The media and many politicians have argued that this problem is due to the lack of resources given to the judicial institutions. However, Spain’s expenditure on justice is 50% higher than in France, and only 10% lower than Germany. Also, the number of judges per 100,000 inhabitants is similar to the one in France.

The problem, thus, must go beyond a simple analysis of the resources given to its institutions. One of the main problems, and it is indeed connected to the construction bubble, is the overlap of the political class and the judicial system. The two main parties, PSOE and PP, control the judges through the General Judicial Board (CGPJ), the major institution of Spain that promotes the independence of the judicial system from the parliament and the senate. In fact, although in 1980 a law that established that 12 of the members of the CGPJ were chosen by other judges was put forward, this law was derogated in 1985, giving the Parliament the power to choose all of the 20 members of the CGPJ. From this moment on, the CGPJ became a body used by the political class to rule for their own interests, where both political parties are constantly replacing the members of the chamber every time they come into power. It is not surprising, thus, that a study put forward by the World Economic Forum places Spain in the 60th position out of 133 in terms of the independence of the judicial system in front of the parliament, the senate and many private companies, being behind countries such as Namibia, Botswana and Gambia.

Regarding the cases of corruption that rose during the boom years, many of the trials about political scandals are still not resolved because of both the inefficiency of the judicial system and the poor dependence from the political parties that the system of justice has. One of the clearest examples is the Gürtel case, where the power of the political parties over the justice system was uncovered by the suspension of the judge Baltasar Garzón, the one that started its investigation. Indeed, when many front-line politicians from the government of Valencia and the Autonomous Community of Madrid started to be accused of bribery, money laundering and tax evasion in relation to the construction activities, a number of right-wing parties, of which some were involved with the politicians accused, put forward a lawsuit against him for causes unrelated to the Gürtel case.

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Judge Baltazar Garzón. Photo: El Mundo

After a long process of investigation, the CGPJ decided to move Baltasar Garzón aside the case and suspend him as a judge for 10 years. Currently the investigation is still ongoing. Most of the front-line politicians that were related in the case, such as Francisco Camps, were not found guilty.

The fact that the Spanish judicial system is failing to impose the rule of law to prevent theft and fraud is not a matter of opinion. Many studies have analysed the trust that the public has towards the judicial system, finding that it presents one of the lowest in Europe, being at the same level as Greece and Bulgaria. The effects that this can have on the evolution of further rent-seeking activities similar to the housing bubble are massive, since politicians know that being involve in corrupted activities will not be punished by law.

Challenging the establishment

This article has focused on the manifold ways in which Spain’s institutions have created a system of rent-extraction, with specific attention to the construction and housing bubbles. Although this issue calls for a more extensive and resourced analysis, I believe that Acemoglu and Robinson’s theoretical framework provides a good starting point.

This article has concluded that Spanish institutions are extractive for the following reasons. First, it was argued that Spain has been historically a country with a strong political elite that rules for the interest of the elites. Institutions constantly created a culture that perpetuated a system of rent extraction, as seen in the creation of the mayorazgos, as well as the ‘culture of ownership’ so acclaimed during the housing boom years. Second, institutions and major politicians not only promoted a certain culture that benefited them, but also a national administrative and political structure that fuelled the construction sector, and thus ultimately moving public resources into their hands. Finally, politicians also fuelled the creation of a non-independent judicial system that ensures that corruptive activities are generally not charged by law.

It is crucial that Spanish citizens challenge the establishment. Some moves from new political parties, such as Podemos, appear to be opening a door for this. Nevertheless, it is still not clear how the political scene will change in the following months. There is much to come, and hopefully Spain will realize about this vital challenges.

References

  1. Colau, Ada. Vidas Hipotecadas. Lectio, 2012.
  2. Drelichman, Mauricio. “All that glitters: Precious Metals, rent seeking and the decline of Spain.” European Review of Economic History 9(3), 313-336 (2005).
  3. Molinas, César. Qué Hacer Con España? Destino, 2013.
  4. Navarro, Vicenç. “El subdesarrollo social de España.” Público, October 22, 2009.

[1] For example, the mayorazgos were not abolished until the 19th centruy.

A real life “House of Cards” in class

Tweet and photo by Marlène Rump ’15 (current student, Master in International Trade, Finance and Development)

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Political Economy slide from ITFD course with Prof. Giacomo Ponzetto

Hate is in the air: The effect of Czech and German radio on elections in pre-war Czechoslovakia

Editor’s note: This post is part of a series showcasing Barcelona GSE master projects by students in the Class of 2014. The project is a required component of every master program.


Hate is in the air: The effect of Czech and German radio on elections in pre-war Czechoslovakia

Authors:

Bruno Baránek, Kryštof Krotil, and Samuel Škoda

Master Program:

Economics

Paper Abstract:

In this paper we assess the role of radio broadcasting in parliamentary elections of 1935 in Czechoslovakia. In our main specification, we regress the vote shares of multiple parties on the signal strengths of Czech and German radio while controlling for demographic and socio-economic characteristics. In particular, we focus on SdP – the ethnic German party with separatist tendencies, which was supported by Hitler’s NSDAP. We find that propaganda contained in the German broadcasts had a polarizing effect on the Czechoslovak political spectrum as it increased the number of votes for SdP and also for Czech communists and nationalists. This increase was compensated by the fall in votes for centrist democratic parties. On the other hand, the Czech radio, which was politically neutral, tended to neutralize the effect of the German radio.

Read the full paper or view slides below:

A Wave of Changes (of more or lesser importance)

Another one bites the dust. Could it be much more than a lost election for the Republicans?

Every lost election sets off a wave of debates, blaming and eventually new strategy-setting. This wave is now hitting the Republican Party – and hard. How much in its path will be wiped off and the extent of the ensuing change is still uncertain but potentially big.

If they are driven to change, it is, to most accounts, because the American electorate has a new face. The Latino and Afro-American communities who usually do not make use of their electoral rights have in bigger shares wielded their power and gone to the polls. The Republican’s inability to relate and appeal to these minorities is thus by now commonly identified as the reason for their loss.

As said, this could have far-reaching impacts; the first one being the opportunity for professors to update that Political Economy problem set they have been handing out for years. These elections mark indeed the era of a new Median Voter Theorem case study. If analysts are right, what we are observing in the United States is indeed nothing else than a shift of the electorate. Naturally, this accounts for a shift of the Median Voter.  Our theorem tells us to expect the political actors to accordingly change their ideology and adopt that of the new median voter. And this is what we see unraveling – and at an amazing pace.

Continue reading “A Wave of Changes (of more or lesser importance)”