What Factors Influence Economic Policy?

What are some of the factors influencing the determination and pursuit of economic goals? That is one of the central questions to the study of political economics. Major efforts have been made to answer this question, however, as Sirowy and Inkeles (1990) argue, most empirical studies examining democracy and economic performance suffers from a variety of weaknesses including – narrow samples of countries or narrow time periods, simultaneous bias, and poorly specified regression models (Gasiorowski 323). The difficulties in determining the important factors influencing economic policies are great but this week’s readings pinpoint a variety of factors influencing the complex process of formulation and implementation of economic policy.

Cameron (1978) investigates the causes of the expansion of the extractive role of government in 18 developed capitalist economies from 1960 to 1975 and he finds that politics is important in influencing the scope of the public economy (1251) and that a high degree of trade dependence is favorable to a relatively large growth of the public economy (1252). Cameron’s findings suggest that partisanship of government is related to the rate of expansion, and that control by left or right parties dictate the relative degree of change in the scope of public economy. In countries where leftist parties held a majority of government’s electorate, increases in public revenue was much higher than in countries where the Left was just a majority or did not participate of the government. Also, countries with open economies have sought to counter the effects of openness by expanding their control over public economy through nationalization. Even though Cameron finds supportive evidence to claim that politics is important in influencing the scope of public economy, he suggests that the dominance in government of leftist parties was a sufficient condition, not necessary, for a relatively large increase in the scope of public economy and that degree of trade openness is the best predictor.

The work of Geoffrey (1991) confirms, in part, Cameron’s argument that partisanship in government is an important factor influencing economic policy. Geoffrey and Cameron look at a similar time period (1960s-late 1970s) which makes the partisanship argument even stronger. Geoffrey argues that due to the openness of economy, governments will be unable to pursue independent macroeconomic strategies effectively. Therefore, in the long run, the monetary and fiscal policies of the right and left will converge, but that does not impede parties to further their partisan goals; there are distinct supply-side paths leading to the attainment of these goals.
Other than partisanship in government and degree of openness in economy, another factor influencing economic policy is political participation. Gasiorowski’s findings (2000) suggest that unrestrained political participation will ultimately undermine democratic performance. The poor macroeconomic performance of democracies, new and matures ones, seems to be a consequence of larger fiscal deficits and wage growth. In democracies there is a high demand for higher net public spending and wage increases, which in turn are the most common economic outcome of increased political participation. One may conclude for Gasiorowski’s work that the spread of democracy ultimately undermines the effectiveness of macroeconomic policy.

Remmer’s “The Political and Economic Impact of Economic Crisis in Latin America in the 1980s" (1991) also mentions popular participation as a factor influencing economic policy. Remmer looks at the impact of economic crisis on electoral outcomes in Latin America from1982 to 1990. Remmer’s evidence supports the claim that when people do not support retrenchment, major cutbacks are unlikely to take place. Governments will most likely negotiate packages with the public rather than take unilateral action. From this we may also assume that interest groups also play a role in the process.

We may conclude that there at least three important variables relevant to the study of the what influences economic policy: partisanship in government, level of openness, and political participation by the public. None of these variables appear as a surprise to the examination of the link between democracy and economic performance.

Overall, the results from the week’s reading seem to be pessimistic in nature. Democracy appears to harm economic performance. Counter to the overall findings and presenting a more positive perspective, it would be intuitive to some to argue that democracy guarantees transparency which in turn reduces the probability of rent-seeking or self-serving policies.

In conclusion, there have been major efforts to answer the question of what influences economic policy. This is one of the central questions to the study of political economic and the answer remains unclear. One of the major difficulties regards the shortcomings in our research design. This week’s readings do shed a light in the debate enabling the reader to recognize some of the important variables in the investigation of the link between democracy and economic performance.