Aymo Brunetti

A free press is bad news for corruption

Abstract This paper tests the proposition that a free press may be a powerful control on corruption. We find evidence of a significant relationship between more press freedom and less corruption in a large cross-section of countries. This result is robust to specification and sample and the relationship is not sensitive to the choice of a particular measure of corruption or of press freedom. Furthermore we present evidence which suggests that the direction of causation runs from higher press freedom to lower corruption.

Investment and institutional uncertainty - a comparative study of different uncertainty measures

Investment and Institutional Uncertainty: A Comparative Study of Different Uncertainty Measures. — There is ample empirical evidence of a negative relationship between aspects of institutional uncertainty and investment. Most studies, however, do not allow a comparison between different dimensions of such uncertainty because they focus on specific indicators, particular regions or different periods. The paper concludes with an evaluation of the quantitative effects of the significant uncertainty indicators on investment finding that a lack of rule of law, high corruption, and volatility in real exchange rate distortions are the most detrimental for investment.ZusammenfassungInvestitionen und institutionelle Unsicherheit: Eine vergleichende Studie verschiedener Unsicherheitsma\e. — Es gibt reichlich empirische Belege für eine negative Beziehung zwischen der Unsicherheit über Institutionen und den Investitionen. Die meisten Untersuchungen gestatten aber keinen Vergleich zwischen unterschiedlichen Dimensionen solcher Unsicherheit, weil sie sich auf spezifische Indikatoren, bestimmte Regionen oder verschiedene Perioden konzentrieren. Die Verfasser schlie\en mit einer Bewertung der quantitativen Wirkungen der signifikanten Unsicherheitsindikatoren und finden, da\ Rechtsunsicherheit, ein hohes Ma\ an Korruption und UnbestÄndigkeit der realen Wechselkursverzerrungen besonders hinderlich für Investitionen sind.

Institutions in Transition: Reliability of Rules and Economic Performance in Former Socialist Countries

Building reliable institutions that support a market system is widely believed to be critical to a successful economic transition. The authors present indicators on the predictability of the institutional framework across twenty transition economies -including indicators of the predictability of rules, political stability, the security of property rights, the reliability of the judiciary, and the lack of corruption. They then investigate whether those indicators can explain differences in economic performance. The results suggest that the predictability of the framework may indeed explain a large part of differences in foreign direct investment and in economic growth among transition economies. Political stability and secure property rights are particularly important to entrepreneurial confidence in the economy.

Catching Up or Falling Behind

This chapter analyses the cross-country growth experience of LDCs and compares it with the predictions of growth theory. The main message will be that the puzzle of why many LDCs fail to keep pace with economic development can be resolved by analysing their political systems.

Political credibility and economic growth in less developed countries

While the mainstream of economic development theory focuses on the efficiency of policy measures, the role of the credibility of these measures is rarely analyzed. In this paper we argue that in less developed countries the problem of establishing the credibility of policy measures is at least as important as the problem of choosing the efficient policy solution. We claim that many of the difficulties less developed countries face can be understood in terms of lack of effective control on the discretionary power of governments, which ultimately leads to policies that are not credible. The private sector anticipates large swings in policies and reacts by withholding its resources. Symptoms of these credibility problems in less developed countries include the size of the informal sector, capital flight, and the reluctance of investors to commit capital. All of these reactions contribute to the slow economic growth in these countries. This paper concludes that establishing strategies for the control of state discretionary power is a crucial precondition for overcoming these problems and generating long term economic growth.

Measuring Political Credibility

The theoretical discussion in the previous chapter revealed the importance that political credibility has for private economic activity and economic growth. The remaining two chapters of Part I will test this hypothesis. In order to do this it is necessary to find an empirically workable measure of the political credibility of a country. We will therefore review the literature to see whether there are any existing measures that could be used for this purpose. This chapter also discusses different ways of improving measurements and concludes that the best way to grasp the effects of politics on the private sector is to ask entrepreneurs directly. The last section of this chapter therefore describes how a measure of the political credibility of 28 LDCs was developed by asking private firms about their experiences with the institutional framework.

Political Credibility: A Crucial Factor for Growth

Thus far we have argued that differing political systems might provide the crucial link in understanding differences in growth performance between countries. The term ‘political system’ is very broad and is interpreted differently by different scholars. Some concentrate mainly on democracies and their idiosyncrasies: direct and indirect democracy, the paradoxes of voting and so on. The image of a benevolent dictator underlies many economists’ political framework. Others take the malevolent or self-serving dictator as their point of reference.

Sources of Political Credibility in Ten Countries

This chapter will try to operationalize the mechanisms of control identified in the previous chapter. Case studies of ten LDCs will be conducted in order to evaluate the relevance of the three control mechanisms assumed to create political credibility: (1) control through reputation, (2) control through openness, and (3) control through participation. The style of this empirical chapter will clearly be more informal than in the analysis of political credibility. As it is not possible to consistently quantify the mechanisms of control, the chapter will not provide any econometric analysis. Rather it will try to come up with qualitative categorisations of the different mechanisms for ten LDCs. Table 6.1 summarises these categorizations.

Explaining Political Credibility: Conceptual Foundations

This chapter will start the analysis of the sources of political credibility by discussing mechanisms that reduce the discretionary powers of governments. The most primitive of the three basic mechanisms is reputation, which forms the basis of monarchical systems. This is enhanced by the second mechanism — openness, that is, an element of competition between countries. The most refined mechanism is institutionalised control through participation, which is at the heart of credibility in well-functioning democracies. This is not to imply, however, that there is some kind of natural order in these mechanisms, we are merely setting the stage for the following case studies by stating that different mechanisms exist to reduce discretionary power.

Political Credibility and Economic Growth: The Empirical Evidence

This chapter will provide empirical evidence for the growth effects of political credibility. Our indicator of political credibility will be used to test two central and interrelated propostions.