Pathfinding Paper Research Theme 5: Political Economy and Public Investment

Political Economy and Structural Transformation: Democracy, Regulation and Public Investment

PP06 Martinez-BravoWantchekon PoliticalEconomyAndStructuralTransformation.pdf

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In this paper, we review the literature on the political distortions that can explain differences in productivity and the prospects for transformation. We identify the limitations of this literature and suggest avenues for future research. We first review the literature and discuss the state-of-the-art results on political distortions and their relation to economic outcomes, including various forms of state capture and firm-political connections. We study the prevalence of each type of political distortion and its observed effects on economic outcomes, such as prices, procurement and, consequently, on unobserved outcomes such as consumer surplus and welfare. The distortions we describe need to be evaluated using a plausible normative framework. We provide such a framework, using the basic results of a Schumpeterian growth model. The need for a framework stems from the necessity to connect theoretical claims with empirical evidence from many different structural and institutional backgrounds, from the US and Eastern Europe to South America and West Africa.

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