Ruling Elites' Rotation and Asset Ownership

Ruling Elites' Rotation and Asset Ownership

- 8 mins

The paper is co-authored with Leonid Polishchuk and published in the Public Choice.

We provide a theory and empirical evidence indicating that the rotation of ruling elites in conjunction with elites’ asset ownership could improve property rights protection in non-democracies. The mechanism that upholds property rights is based on elites’ concern about the security of their own asset ownership in the event they lose power. Such incentives provide a solution to the credible commitment problem in maintaining secure property rights when institutional restrictions on expropriation are weak or absent.

Summary

Twenty years ago Mancur Olson (1993) proposed his famous “stationary bandit” metaphor to argue that an authoritarian ruler with a firm grip on power has a stake in private sector development and hence the incentives to invest in public goods, including secure property and contract rights. Indeed, such pubic goods expand the tax base, and if an increase in tax yield accrues over a sufficiently long period of time, it would recoup the investments into public goods (in the case of property rights–forgone short-term gains from expropriated property and repudiated contracts).1 Put differently, a long tenure moderates short-term greed and makes the commitment of a “stationary bandit” to secure property rights credible. This credibility is based on the ruler’s reputation with investors, which in the spirit of the Folk Theorem becomes a valuable asset worth preserving by exercising self-restraint (Besley and Ghatak 2010).

The above logic leads to a testable hypothesis that stable autocracies should offer better protection of property rights and hence more enabling conditions for economic development than unstable ones. This hypothesis finds a degree of support in the empirical evidence indicating that political instability, measured by the incidence of government change, adversely affects economic growth (Alesina et al. 1996; Aisen and Veiga 2013). Such evidence however is inconclusive–alternative estimations show that economically successful autocracies have higher leadership turnover than unsuccessful ones (Besley and Kudamatsu 2008).2 Furthermore a negative association between political instability and growth reflects inter alia losses and disruptions of violent government collapse brought about by coups and revolutions, as well as policy volatility and uncertainty (shown to adversely affect growth–see, e.g., Fatás and Mihov 2013), caused by nearly any government change. Hence, the adverse impact of instability on growth does not answer the question as to whether or not stable autocracies have stronger incentives to supply and maintain enabling institutions. A more straightforward empirical test should involve direct measures of institutional quality, including property rights protection. Such tests produce mixed results–on the one hand polities with lower rates of government turnover tend to have less secure property rights (Besley and Ghatak 2010); on the other, longer tenure of an autocrat could be associated with better institutions (Holcombe and Boudreaux 2013).

McGuire and Olson (1996) point to another factor that could potentially improve policies and institutions supplied by an autocratic regime, i.e., asset ownership by the ruling class. In such case the latter has two sources of income–from appropriation and from the owned assets (“rent income” and “market income”, respectively; see Bourguignon and Verdier 2012). As any other private owner, an autocrat turned businessman benefits from market-supporting institutions, including secure property rights. This shortcut to the private sector is a potential substitute for democratic accountability, aligning incentives of an asset-owning autocrat with the needs of the society at large. Such incentives could be quite powerful–sometimes even a relatively small share of the economy’s assets owned by an autocrat ensures full social optimality of his policies (McGuire and Olson 1996).

This optimistic view is, however, conditional on an important caveat–it implicitly assumes that the ruling class is subjected to the same rules and requirements as the rest of the private sector. In real-life autocracies this “equal treatment” assumption is routinely violated: rulers and their cronies enjoy various privileges, easily resolve in their favor economic disputes and otherwise benefit from the principle “For my friends–anything, for my enemies–the law”.3 Without the “equal treatment” condition the outlook of an asset-owning autocracy is much bleaker (Acemoglu 2006; Polishchuk 2012).

Under certain conditions the protection of property rights can be improved by rotating ruling elites. Less than fully stable autocracies are not destined to degenerate into “roving bandits” (Olson 1993)–they might still have the incentives to maintain secure property rights (e.g., by preserving an independent judiciary) that they would need themselves in the event of losing power, when the present rulers are subjected to the same treatment as everyone else outside of the new ruling circle. The value of such “institutional insurance” depends on the values of the assets that are owned by the political elites and would require protection once their owners are out of power. Hence we should expect that asset ownership is another factor that increases the propensity of ruling elites to maintain secure property rights in order to prevent expropriation after a power change. Without asset ownership by elites, political instability does not moderate a “roving bandit”. To the contrary, even massive asset ownership by a “stationary bandit” is unlikely to ensure universal protection of property rights. This leads to the conjecture that ruling elites’ rotation and asset ownership complement each other in improving property rights.

Our argument does not assume democratic accountability of government–in fact in mature democracies with firmly entrenched rule of law, the quality of institutions could be unrelated to the degree of political competition and elites’ wealth. The above effect should be expected to be more pronounced among imperfect democracies and autocracies where property rights are endogenous and more or less in the hands of the ruling class. The essence of our logic is the elites’ direct self-interest in secure property rights. Usually self-interest is a weak incentive for the provision of public goods (including property rights), given the small size (“measure zero”) of the elites in the society. Numerically small elite groups would be better-off by simply expropriating the resources required for public goods provision (Lizzeri and Persico 2004). This explains elites’ usual preference for rent-extracting, rather than inclusive, institutions (Acemoglu and Robinson 2012), and their aversion to curbing expropriation and corruption (Besley and Persson 2011). However, what matters in the case of property rights is not the relative size of the elites, but the values of their assets, which could create sufficiently powerful incentives for the provision of this particular kind of public good even in the absence of democratic accountability.

Our main contribution to the literature is in establishing, theoretically and empirically, a joint impact of elites’ rotation and asset ownership on institutional quality. We propose a theoretical model that demonstrates the complementarity of these two factors in improving property rights. In the empirical part of the paper we employ standard measures of institutional quality in countries around the world and make use of various databases of political institutions. Given the paucity of direct information on ruling elites’ asset ownership, we use instead two proxies–economic inequality (assuming that political elites are in the wealthiest segments of population) and regimes’ tenures (assuming that authoritarian rulers use time in power to amass personal wealth). In both cases our hypothesis finds solid empirical support.

References

  1. Olson, M. (1993). Dictatorship, democracy, and development. American Political Science Review, 87(3), 567–576.
  2. Besley, T., & Ghatak, M. (2010). Property rights and economic development. In D. Rodrik & M. Rosenzweig (Eds.), Handbook of development economics (Vol. 5, pp. 4525–4595). Amsterdam: Elsevier.
  3. Bourguignon, F., & Verdier, T. (2012). The simple analysis of elite behavior under limited state capacity. In A. Amsden, A. DiCaprio, & J. Robinson (Eds.), The role of elites in economic development (pp. 251–280). London: Oxford University Press.
  4. McGuire, M. C., & Olson, M. (1996). The economics of autocracy and majority rule: The invisible hand and the use of force. Journal of Economic Literature, 34(1), 72–96.
  5. Acemoglu, D., & Robinson, J. (2012). Why nations fail: The origins of power, prosperity, and poverty. New York: Random House LLC.
  6. Lizzeri, A., & Persico, N. (2004). Why did the elites extend the suffrage? Democracy and the scope of government, with an application to Britain’s “age of reform”. The Quarterly Journal of Economics, 119(2), 707–765.
  7. Polishchuk, L. (2012). Misuse of institutions: Patterns and causes. In G. Roland (Ed.), Economies in transition: The long run-view (pp. 172–193). Chippenham: Palgrave Macmillan.
  8. Acemoglu, D. (2006). A simple model of inefficient institutions. The Scandinavian Journal of Economics, 108(4), 515–546.
  9. Aisen, A., & Veiga, F. J. (2013). How does political instability affect economic growth? European Journal of Political Economy, 29, 151–167.
  10. Alesina, A., Özler, S., Roubini, N., & Swagel, P. (1996). Political instability and economic growth. Journal of Economic Growth, 1(2), 189–211.
  11. Besley, T., & Kudamatsu, M. (2008). Making autocracy work. In E. Helpman (Ed.), Institutions and economic performance (pp. 452–510). Cambridge, MA: Harvard University Press.
  12. Fatás, A., & Mihov, I. (2013). Policy volatility, institutions, and economic growth. Review of Economics and Statistics, 95(2), 362–376.
  13. Holcombe, R. G., & Boudreaux, C. J. (2013). Institutional quality and the tenure of autocrats. Public Choice, 156(3–4), 409–421.
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