The role of state


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  • See Section 9-6 in the main text.
  • The role of state

    1. 1. How to define effective government or the role of the state in the long run?
    2. 2. <ul><li>Using data on the initial design attributes of 141 federal administrative agencies created legislatively between 1879 and 1988. </li></ul><ul><li>Enacting coalition attempts to strategically manipulate administrative design attributes and therefore political transaction costs for future coalitions seeking to affect agency policy . </li></ul><ul><li>Administrative design reflects the efforts of enacting coalitions to maximize future political benefits. </li></ul>
    3. 4. <ul><li>The competitiveness of the process through which a country's chief executive is selected </li></ul><ul><li>The openness of that process </li></ul><ul><li>The extent to which there are institutional constraints on a chief executive's decision-making authority </li></ul><ul><li>The competitiveness of political participation within a country. </li></ul><ul><li>The degree to which binding rules govern political participation within it. </li></ul>
    4. 6. <ul><li>Market failure is a concept within economic theory wherein the allocation of goods and services by a free market is not efficient. That is, there exists another conceivable outcome where a market participant may be made better-off without making someone else worse-off. </li></ul><ul><li>Market failures can be viewed as scenarios where individuals' pursuit of pure self-interest leads to results that are not efficient – that can be improved upon from the societal point-of-view. </li></ul>
    5. 7. <ul><li>Market failures are often associated with </li></ul><ul><li>non-competitive markets </li></ul><ul><li>principal-agent problems </li></ul><ul><li>Externalities </li></ul><ul><li>public goods </li></ul><ul><li>information asymmetries </li></ul>
    6. 8. <ul><li>Profit Maximization : Maximizes profit. </li></ul><ul><li>Price Maker : Decides the price of the good or product to be sold. </li></ul><ul><li>High Barriers to Entry : Other sellers are unable to enter the market of the monopoly. </li></ul><ul><li>Single seller: In a monopoly there is one seller of the good which produces all the output. Therefore, the whole market is being served by a single company, and for practical purposes, the company is the same as the industry. </li></ul><ul><li>Price Discrimination : A monopolist can change the price and quality of the product. He sells more quantities charging less price for the product in a very elastic market and sells less quantities charging high price in a less elastic market </li></ul>9.
    7. 11. <ul><li>Infinite buyers and sellers – Infinite consumers with the willingness and ability to buy the product at a certain price, and infinite producers with the willingness and ability to supply the product at a certain price. </li></ul><ul><li>Zero entry and exit barriers – It is relatively easy for a business to enter or exit in a perfectly competitive market. </li></ul><ul><li>Perfect factor mobility - In the long run factors of production are perfectly mobile allowing free long term adjustments to changing market conditions. </li></ul><ul><li>Perfect information - Prices and quality of products are assumed to be known to all consumers and producers. </li></ul><ul><li>Zero transaction costs - Buyers and sellers incur no costs in making an exchange (perfect mobility). </li></ul><ul><li>Profit maximization - Firms aim to sell where marginal costs meet marginal revenue, where they generate the most profit. </li></ul><ul><li>Homogeneous products – The characteristics of any given market good or service do not vary across suppliers. </li></ul><ul><li>Non-increasing returns to scale - Non-increasing returns to scale ensure that there are sufficient firms in the industry. </li></ul>
    8. 12. Lieberman & Hall; Introduction to Economics , 2005 D $400 S Market Demand Curve Facing the Firm $400 Firm Ounces of Gold per Day Price per Ounce 1. The intersection of the market supply and the market demand curve… 3. The typical firm can sell all it wants at the market price… Ounces of Gold per Day Price per Ounce 2. determine the equilibrium market price 4. so it faces a horizontal demand curve
    9. 13. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.
    10. 14. <ul><li>For a competitive firm, marginal revenue at each quantity is the same as the market price </li></ul><ul><li>For this reason, marginal revenue curve and demand curve facing firm are the same </li></ul><ul><ul><li>A horizontal line at the market price </li></ul></ul>Lieberman & Hall; Introduction to Economics , 2005
    11. 15. <ul><li>The primary source of the superiority of bureaucratic administration lies in the role of technical knowledge which, through the development of modern technology and business methods in the production of goods, has become completely indispensable.( Weber) </li></ul><ul><li>Skocpol and Finegold emphasize the institutional building of the state by various social groups as a basis for the indication of state capacity. </li></ul><ul><li>Olson and Weede view state capacity as a result of decision-making autonomy characterized by private groups trying to influence the central government to advance their own interests </li></ul>
    12. 16. <ul><li>Political development means capacity </li></ul><ul><li>Capacity is dependent on political performance in two areas : </li></ul><ul><li>1) penetration of the national society by central governmental elites to control as many subjects/citizens as possible within the political jurisdiction of the state </li></ul><ul><li>2) the capability of the government to extract resources from its society. </li></ul><ul><li>Measure of Relative Political Capacity </li></ul><ul><li>  </li></ul><ul><li>Tax/GDP =  0+  1 (time)+  2 (Mining/GDP)-  3 (Agriculture/GDP)+  4 (Export/GDP)+  t </li></ul><ul><li>  </li></ul>
    13. 17. <ul><li>Political elite are autonomous actors who can implement their goals. </li></ul><ul><li>Governmental elites are goal motivated. </li></ul><ul><li>Primary concern of government is to stay in power for as long as possible while maintaining stability and the secondary goal is to sustain long-term economic growth. </li></ul>
    14. 18. <ul><li>Relative political capacity measures extraction of material resources and population reach </li></ul><ul><li>Relative Political Extraction = Actual government revenue/Predicted Government Revenue </li></ul><ul><li>RPE >1–strong government (more collect taxes than otherwise predicted by economic factor) </li></ul><ul><li>RPE <1- less capable –fails to collect taxes it is expected to obtain. </li></ul><ul><li>RPE is related to the government capacity and domestic conflicts and the study of political institution and economic development </li></ul>
    15. 19. <ul><li>Relative political extraction (RPE) centers on material resources and measures the flexibility of the government in gathering revenues required to implement a desired policy. </li></ul><ul><li>Organski and Kugler explained why the fiscal system is representative of government capacity. </li></ul><ul><li>Factors determining RPE </li></ul><ul><li>(1) the ability to export goods </li></ul><ul><li>(2) level of agricultural productivity, distinguishing between subsistence and market-oriented production </li></ul><ul><li>(3) the availability of minerals that could be produced for export; </li></ul><ul><li>(4) the overall economic output of a society. </li></ul>
    16. 20. <ul><li>Relative Political Reach = Actual Activity Rate / Average Activity Rate   </li></ul><ul><li>Activity Rate= the crude activity participation rate reflected by the active population above the specific minimum legal age, including all officially recorded sectors of the economy adjusted for levels of unemployment. </li></ul><ul><li>Results : When the index is less than one an excess labor supply exists and concealed labor is expected </li></ul>
    17. 21. Relative Political Extraction Relative Political Reach <ul><li>Problems in Using RPE : Endogenous factors </li></ul><ul><li>(Vietnam) </li></ul><ul><li>Revolution (French Revolution) </li></ul><ul><li>National movement (China) </li></ul><ul><li>External threat (South Korea) </li></ul><ul><li>War (Israel) </li></ul>Relative Political Capacity
    18. 22. <ul><li>The level of economic development </li></ul><ul><li>The potential increasing political capacity. </li></ul><ul><li>Effects on RPC </li></ul><ul><li>Political Costs, Crowding Out Effects, mandating of the selectorates and key interest groups </li></ul>
    19. 23. <ul><li>• A budget is a quantitative expression of a plan of action prepared in advance of the period to which of relates. </li></ul><ul><li>• A budget expresses what is to be undertaken next year and authorizes the financial recourses that are needed </li></ul>Source: www. /.../Budgeting-in-a-​ Public - Sector - Power - Point
    20. 24. <ul><li>It must be noted that in the public sector come from taxes, charges and fees that are levied by the government. Budget income is arrived at by examining the current levels of income and the level of expenditure for the coming year. </li></ul><ul><li>Planning Service expenditure levels. </li></ul><ul><li>Money must be spent on what has been </li></ul><ul><li>authorized in the annual budget </li></ul>Source: www. /.../Budgeting-in-a-​ Public - Sector - Power - Point
    21. 25. <ul><li>It must be understood that most compelling reasons for revenue budget is to determine the income level and the expenditure levels. </li></ul><ul><li>For services that are funded through taxation and charges, the central government need to fix the level of taxes and charges to be levied </li></ul>Source: www. /.../Budgeting-in-a-​ Public - Sector - Power - Point
    22. 26. <ul><li>This type of budgeting places its emphasis on the purpose of expenditure e.g. crime prevention, mental health care etc. </li></ul><ul><li>This approach is believed to lead to better planning and control because recourses could be allocated more precisely to specific activities and actual achievements could be monitored more effectively </li></ul>Source: www. /.../Budgeting-in-a-​ Public - Sector - Power - Point
    23. 27. <ul><li>If a public sector organization is be successful in achieving its objectives it is to give consideration to planning of capital expenditure. </li></ul><ul><li>A Useful approach to the problem of planning and controlling expenditure is to develop capital programs which express the overall plan of start , medium and long term capital schemes, and reveal the allocation of priorities between different parts of the organization </li></ul>Source: www. /.../Budgeting-in-a-​ Public - Sector - Power - Point
    24. 30. <ul><li>Original income is income received from employment, savings and investment before government intervention of any kind such as through payment of social security benefits and the imposition of taxation. </li></ul><ul><li>Gross income =  Original income + social security (cash benefits). </li></ul><ul><li>Disposable income= Gross income - direct taxes and National Insurance contributions. </li></ul><ul><li>Post-tax income = Disposable income- indirect taxes. </li></ul><ul><li>Final income = Post-tax income + benefits in kind such as health and education . </li></ul>
    25. 33. <ul><li>The diagonal illustrates the line of perfect income equality because it implies that every single member of the population receives an identical income such that the lowest 10% of income recipients receive 10% of national income as do the next lowest 10% of income recipients and so on. </li></ul><ul><li>If f national income is distributed along the horizontal and then the vertical axis this would imply that national income  distributed perfectly unequally since every member of the population would receive zero income apart from the single highest income recipient who would receive the entire national income for him/herself. </li></ul>
    26. 34. <ul><li>The actual degree of income inequality in a society is shown by the area between the diagonal and the Lorenz curve measuring the actual distribution of national income in the society. </li></ul><ul><li>In the above diagram the lowest 20% of income recipients receive approximately 5% of the national income. If you imagine another Lorenz curve which is further from the diagonal, the distribution of national income shown on this second Lorenz curve would be more unequal than the Lorenz curve actually shown in the diagram </li></ul>
    27. 35. <ul><li>In general  the closer the actual Lorenz Curve is to the diagonal the greater the degree of equality in the distribution of national income and vice versa. </li></ul><ul><li>In terms of the above diagram  the Gini Coefficient= Area A  / Area A+B: that is Area A  divided by Area  A+B. </li></ul><ul><li>If there is total equality there is no area between the diagonal and the Lorenz curve because the Lorenz curve would be the diagonal.. Therefore A=0 and using the formula A/A+B=0, the value of the Gini coefficient is 0. If there is total inequality , B=0 and A/A+B=1 and the value of the Gini coefficient is 1. Thus the value of the Gini Coefficient can vary between 0 and 1 and the smaller the Gini Coefficient, the more equal the distribution of income. </li></ul><ul><li>Some more technical details are involved in the further analysis of Lorenz curves and Gini coefficients but at least this note gives you a basic explanation of Lorenz Curves and Gini Coefficients which will enable you to follow the ONS data to which we now turn. </li></ul>
    28. 36. <ul><li>Key contextual factors that a contingent approach would consider in appraising government include economic challenges, demographic realities, and socio and political structures. The paper draws these factors out of an inductive analysis of differences in a set of OECD countries considered examples of ‘good government’. </li></ul><ul><ul><ul><li>budgeting system formality </li></ul></ul></ul><ul><ul><ul><li>bureaucratic quality </li></ul></ul></ul><ul><ul><ul><li>degree of decentralization </li></ul></ul></ul><ul><ul><ul><li>level of service provision in areas like health, education and infrastructure </li></ul></ul></ul><ul><ul><ul><li>fiscal stability </li></ul></ul></ul>
    29. 38. <ul><li>Political Business Cycle is non-ideological politicians and myopic voters. Recession in the beginning if a new term and expansion immediately.- no partisan, and no rationality. </li></ul><ul><li>  </li></ul><ul><li>Rational Political Business Cycle is non-ideological politicians and rational voters. Immediately before elections, incumbents provide new public goods, services or transfers. By hiding or delaying the budgetary consequences, the incumbents may succeed in creating a temporary illusion of prosperity. This theory has no clear implications for a several year cycle of output and unemployment as in PBC. – yes rational, no partisan. </li></ul>
    30. 39. <ul><li>Partisan Theory – Parties’ decisions are influenced by their redistribution philosophy. Low unemployment/high inflation outcome is favorable to the lower middle class, while upper middle class prefer high unemployment rate and low inflation. Left wing party chooses points on the Phillip curve with higher inflation and lower unemployment. </li></ul><ul><li>  </li></ul><ul><li>Rational Partisan Theory - An expansion at the beginning of a left-wing government and a recession at the beginning of the right-wing government. In the latter part of the term, output and unemployment should be indistinguishable between government, while inflation may remain higher during left-wing administration. </li></ul>