420 Inflation and Stabilization
income countries. Their reduction or elimination has been a central component of
most stabilization plans and is one of the most difficult to carry through because
of the vulnerability of most governments to urban consumer groups. Yet not all
governments have fallen into the subsidy trap, and some have managed to reduce
subsidies.
A related example is provided by the growing literature on state-owned enterprises
(SOEs). SOEs played a major role in contributing to fiscal deficits and external
borrowing in a number of developing countries over the 1970s and 1980s. Some
of this expenditure was no doubt for legitimate purposes; viewed politically, however,
SOEs represent powerful constituencies within the government because of the
resources under their control and their importance in generating employment. In
many cases, SOEs are more powerful than the ministries that presumably oversee
their activities; state-owned oil enterprises, such as Mexico’s PEMEX, are important
examples. Governments have also been politically vulnerable to pressures from
customers, contractors, and suppliers to maintain purchases of goods and services,
limit price increases, raise wages, and retain employees. Again, the puzzle for the
new political economy is in explaining variance. In some countries, SOEs have
mushroomed and been a major drain on national treasuries, while in others their
role has been limited or subject to effective control.
One way of bridging the gap between the micro- and macrolevels of political
analysis is through the political business cycle. This literature argues that regardless
of the party in power, economic policy will change over the electoral cycle as
politicians seek to manipulate the short-run Phillips curve (showing the trade-off
between unemployment and inflation) to electoral advantage. The evidence for a
political business cycle remains weak for the advanced industrial states. The model
assumes short voter memory concerning past performance and myopia concerning
future inflation, or, as Brian Barry has put it, “a collection of rogues competing
for the favors of a larger collection of dupes.”
Many of the political and institutional characteristics that mitigate political
business cycles in the advanced industrial states are absent, however, in the
developing countries. These include, among other things, informed publics;
independent media coverage of economic policy; institutionalized forms of
consultation between business, government, and labor; and welfare systems that
cushion the costs of unemployment. Given lower levels of income, extensive poverty,
and the insecurity of political tenure in a number of polities, it is plausible that
politicians’ time horizons in the developing world are oriented toward the delivery
of short-term benefits for electoral gain.
A second way of joining the micro- and macrolevels is through models
emphasizing partisan conflict. In one such model, the economy is divided into
two groups, “workers” and “capitalists,” each with its own political party. The
party in power seeks to redistribute income in favor of its constituency: right-
wing governments pursue policies that favor profits; left-wing governments, those
that favor wages. In designing fiscal policy, each party will seek to tax its opponents
to the maximum feasible extent, while redistributing to its own constituency.
Governments in power have a strong incentive to borrow, knowing that the full
cost of servicing current obligations will be borne by political successors.