Pathfinding Paper 6

Political Economy and Public Investment – Monica Martinez-Bravo and Leonard Wantchekon

On the one hand, the political configuration of societies is a key determinant of the types of industrial policies that are adopted. The existence of policies that promote structural transformation or lack thereof is likely to be largely influenced by political connections of key economic actors. On the other hand, the process of structural transformation could profoundly shape political institutions as well as preferences and cultural and social norms, which in turn affect the political configuration of societies.

The paper will be centred on these two main areas of work. Firstly, the political determinants of policies that promote growth. The existing literature on structural transformation has suggested that a number of policies and public investments are key to promote economic growth. In this path-finding paper, we inquire on the politics behind the adoption or failures of adoption of these policies, including interest groups as a determinant of industrial policies; regulatory capture and technological innovation; and political distortions and market structure.

Secondly, the political consequences of the process of structural transformation. A defining characteristic of structural transformation is the changes to sectoral composition, technologies, and structure of the economy. These processes are likely to affect the distribution of resources and the political influence of different groups – in turn shaping institutions – as well as preferences and cultural traits. We will examine topics including the effects of technical change and new economic groups on the power of traditional elites; the effects of changes in the economic structure on social inequality and appeal for populist candidates; and the effects of structural transformation on preferences and cultural norms, such as female labour force participation or social norms.