Political Institutions, Policymaking

Processes and Policy Outcomes:

A Political Transactions Framework

Pablo Spiller
Ernesto Stein
Mariano Tommasi

Motivation
Natural inclination of economists is to emphasize policy recipes as a way of
improving the well-being of people in developing countries.
In Latin America during the 1990s, this has led to the adoption of a wide
variety of reforms, grouped under the Washington Consensus
The outcome of these efforts has been disappointing.
This project is based on the belief that the potential of policy recipes
depends on the quality of the policymaking process through which those
recipes are discussed, approved, implemented and enforced.
Improvements in the policymaking processes and a better understanding
of these processes when policies are designed are key in order to improve
the quality of public policies, and achieve development objectives.

Motivation
Comparison across countries even within LAC reveals very substantial
differences in the quality of public policies.
While some countries can sustain policies long enough to create a stable and
predictable environment, others experience sudden changes in policies with every
change in government.
While some are able to adjust their policies in response to shocks, or when previous
policies fail, others seem unable to adjust, or get stuck in bad policies for long
periods of time.
While some are able to adequately implement and enforce policies once they have
been enacted, others seem unable to do so effectively.
What determines the capacity of countries to design, approve and implement
effective public policies?
In this project, we try to provide some answers to this question.

The project
This paper is part of an IDB research network project on Political
Institutions, Policymaking Processes and Policy Outcomes.
The project covers 9 countries in Latin America, in addition to the
original work on Argentina by Spiller and Tommasi.
The purpose of this paper (as well as a companion paper by
Scartascini and Olivera) was to provide a blueprint so that other
authors could (loosely) replicate the methodology developed by
Spiller and Tommasi for Argentina, and apply it to their respective
countries.
We are now in the process of writing an overview chapter, which
will complete the book.

The project
Argentina
Brazil
Chile
Colombia
Ecuador
Mexico
Paraguay
Peru
Uruguay
Venezuela

The objectives
To improve our understanding of the process by which policies get
enacted, approved and implemented (the PMP).
To improve policy recipes, by adapting them to (political) institutional
capabilities
Countries have different political institutions. Policies that may work under one
institutional context may not be adequate under another one.

To contribute to the debate about (possibly) reforming political

institutions, shedding some light on their effects on policy.
To foster institutional political analysis in Latin America
To foster interdisciplinary collaboration
All country chapters were written by interdisciplinary teams, including economists as
well as political scientists.

The framework
We draw extensively on pre-existing literature on Positive Political Theory
Most of the extant literature on effects of political institutions on policy outcomes tends to
focus on a single institutional dimension, and explores its impact on some policy outcome.
Example: impact of proportional representation on government size.

This literature is very useful but

it is mostly partial equilibrium
it is mostly forward looking
it is not (directly) useful for analyzing specific political reforms in specific countries at
specific points in time.
For this, one needs to take into account
Interactions
Country specificities
Historical dynamics

General equilibrium approach

We believe the workings of the PMP (and the impact on policy outcomes) do
not depend on single-factor explanations but rather on a multiplicity of factors,
and their interaction.
For this reason, we adopt a GE approach with a country focus.
We believe the GE approach is more appropriate to
understand why reforms that work under certain institutional environments may not work
under others
think about the design of political reform.

Our approach is very demanding in terms of the knowledge of the institutional

details of the countries under study.
Our approach is also backward looking or consequential
starting from dependent variable (common features of policy outcomes) and looking
backwards to find their institutional determinants.
Complex methodology, implementing it is as much an art as a science

Complements other approaches such as Tsebelis (2002) or Cox and Mc

Cubbins (2001). Ours is more intertemporal.

Outer features of public policies

The focus of the approach is in explaining not the content or
substance of policies (such as whether tariffs are high or low), but
rather certain common features or qualities of public policies,
characterized asouter features

Stability vs. volatility:

Adaptability vs. rigidity
Coordination / coherence
Quality of implementation and enforcement
Public vs. private regardedness

How can the authors characterize these outer features in each of the
countries?
By combining first hand knowledge of key policy areas with
secondary country sources, and with different indices that may help
place the countries in comparative perspective.

Policy volatility (based on Fraser index))

Belgium
Finland
Switzerland
Australia
Austria
Germany
Canada
Netherlands
Colombia
Denmark
Sweden
Uruguay
Italy
Jordan
Jamaica
Spain
United States
Japan
Hong Kong SAR
Panama
Honduras
Singapore
United Kingdom
Sri Lanka
France
Israel
Greece
Hungary
Trinidad and
Iceland
India
Mauritius
Egypt
Portugal
China
Thailand
Chile
Norway
Ireland
South Africa
Malaysia
Costa Rica
Mexico
Turkey
Paraguay
Ecuador
New Zealand
Dominican Republic
Nigeria
Guatemala
Philippines
Indonesia
Brazil
El Salvador
Bolivia
Venezuela
Argentina
Peru
Nicaragua
Zimbabwe

0.00

0.25

0.50

0.75

1.00

Cost of Institutional Change (GCR 2002)

Zimbabwe
Venezuela
Ecuador
Indonesia
Guatemala
P eru
P araguay
Colombia
Ukraine
P hilippines
P anama
Slovak Republic
Nigeria
Bolivia
A rgentina
Turkey
Sri Lanka
Latvia
Russia
Nicaragua
Lithuania
B angladesh
Dominican Republic
Korea
M exico
Honduras
Egypt
Bulgaria
New Zealand
Chile
Greece
Thailand
Taiwan
J ordan
Costa Rica
Uruguay
J amaica
Italy
China
Brazil
South A frica
P ortugal
France
Israel
El Salvador
Vietnam
P oland
Hungary
M alaysia
India
Slovenia
Romania
M auritius
Australia
United Kingdom
Spain
Norway
J apan
Czech Republic
A ustria
Sweden
Belgium
Switzerland
Germany
Canada
Ireland
Estonia
Denmark
Trinidad and Tobago
Iceland
United States
Hong Kong SA R
Singapore
Netherlands
Finland

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

Legal or political changes over the past few years have

(1=severely undermined your firm's planning capacity, 7=had no
effect)

Policy stability vs. Growth

GDP growth

10

CHL
DOM

ECU

COL PAN
PAR
GTM
PER
ARG

CRI
MEX

BRA
SLV
UGY JAM

VEN

-5
-2

-1

0
Policy stability

Controlling for GDP per capita. Significant at the 5% level

Minimum Wage Enforcement (GCR 2002)

Argentina
P araguay
Bangladesh
Guatemala
Nigeria
Nicaragua
M alaysia
Egypt
Iceland
P eru
India
China
Vietnam
Hong Kong SA R
Sri Lanka
Slovak Republic
Norway
Latvia
J ordan
Ecuador
Bolivia
Switzerland
Russia
Czech Republic
Uruguay
Korea
Turkey
South A frica
Singapore
El Salvador
Trinidad and Tobago
Sweden
P hilippines
P anama
Italy
P ortugal
Germany
Brazil
Zimbabwe
Venezuela
Thailand
J amaica
Indonesia
Honduras
Ukraine
Greece
Dominican Republic
A ustria
P oland
M exico
Estonia
B ulgaria
United Kingdom
J apan
Ireland
Colombia
Slovenia
Hungary
Finland
Spain
Netherlands
Chile
Taiwan
M auritius
Costa Rica
B elgium
Romania
Lithuania
Denmark
Israel
New Zealand
Canada
United States
France
Australia

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

The minimum wage set in your country is (1=never enforced,

7=strongly enforced)

Tax Evasion (GCR 2002)

P hilippines
Ukraine
Turkey
Nigeria
M exico
Argentina
Russia
Guatemala
B olivia
Bangladesh
Venezuela
Indonesia
Honduras
Zimbabwe
Sri Lanka
P araguay
Colombia
Brazil
B ulgaria
Slovak
P eru
J amaica
Czech Republic
India
Greece
Ecuador
P ortugal
Nicaragua
Italy
Dominican
B elgium
South A frica
P oland
P anama
Lithuania
Costa Rica
China
Thailand
Egypt
Romania
Latvia
Korea
El Salvador
Vietnam
Norway
Hungary
Uruguay
Trinidad and
J ordan
Estonia
Denmark
Sweden
Israel
Germany
Slovenia
Taiwan
France
Ireland
A ustria
Iceland
M auritius
M alaysia
Spain
J apan
Australia
Netherlands
F inland
Canada
Chile
United States
United Kingdom
Switzerland
New Zealand
Hong Kong
Singapore

0.0

1.0

2.0

3.0

4.0

5.0

6.0

Tax evasion in your country is (1=rampant, 7=minimal)

7.0

Consistency of Regulation Enforecement (GCR 2002)

Guatemala
Ecuador
Nicaragua
Honduras
El Salvador
Bolivia
Bangladesh
P araguay
Venezuela
Nigeria
Dominican Republic
Ukraine
P hilippines
A rgentina
P eru
Romania
Zimbabwe
Trinidad and
Sri Lanka
M auritius
P anama
Greece
Turkey
India
Bulgaria
M exico
Indonesia
Colombia
China
Vietnam
South A frica
Czech Republic
Costa Rica
Thailand
J amaica
Uruguay
Egypt
Russia
P ortugal
Chile
Brazil
Slovak Republic
Lithuania
J ordan
Estonia
Spain
Slovenia
P oland
Korea
Italy
M alaysia
Latvia
Israel
Hungary
Hong Kong SA R
Taiwan
Ireland
Belgium
Norway
New Zealand
J apan
France
Canada
United States
United Kingdom
Sweden
Denmark
A ustralia
Iceland
Germany
Austria
Netherlands
Switzerland
Singapore
Finland

0.0

1.0

2.0

3.0

4.0

5.0

6.0

Environmental regulation in your country is (1=not enforced or

enforced erratically, 7=enforced consistently and fairly)

7.0

Quality of Enforcement vs. Growth

GDP growth

10

CHL
DOM

PAR
GTM
ARG

CRI
PAN
COL
MEX
BRA
ECU
PER
SLV
UGY
JAM
VEN

-5
-1.5

-1

-.5
0
Quality of Enforcement

Controlling for GDP per capita. Significant at the 10% level

.5

The Policymaking Process (PMP)

Within our framework, the PMP takes center stage. A lot of effort is spent in
each of the papers characterizing the PMP:

Which are the key actors that participate in it?

What powers and roles do these actors have?
What preferences, incentives and capabilities do these actors bring to the table?
What are the characteristics of the arenas in which they interact?
How frequent are these interactions?
What is the nature of the transactions they engage in?

We believe that certain key characteristics of the PMP play an important role
in determining some important features of policy outcomes (link PMP PO)
In turn, the workings of the PMP can be traced back to political institutions
(link PI PMP)

The framework
(features of)
PUBLIC
POLICIES

POLICYMAKING
GAME
XxZY

FUNCTIONING
OF
POLITICAL
INSTITUTIONS
(rules of
policymaking
game)

X
General
Equilibrium
Interactions

features of
specific
policy issues

BASIC
INSTITUTIONS
&
HISTORY

The framework
(features of)
PUBLIC
POLICIES

POLICYMAKING
GAME
XxZY

FUNCTIONING
OF
POLITICAL
INSTITUTIONS
(rules of
policymaking
game)

X
General
Equilibrium
Interactions

features of
specific
policy issues

BASIC
INSTITUTIONS
&
HISTORY

PMP Policy Outcomes

We view public policies as the outcome of intertemporal political
transactions among political actors.
Key insight: important features of public policies depend crucially on
the ability of political actors to achieve cooperative outcomes that
is, their ability to strike and enforce intertemporal political
agreements.
In political environments that facilitate such deals, public policies
will tend to be of higher quality, less sensitive to the realization of
political shocks, and at the same time more adaptable to changing
economic conditions.
In environments that hinder cooperation, policies will be of lower
quality, either too unstable (subject to political swings) or too
inflexible (unable to adapt to socioeconomic shocks), poorly
coordinated, etc.
Key question: what determines cooperation?

What determines cooperation?

Number of actors with substantial impact on the policymaking game
(related to number of veto players).
Discount rate of actors (related to their tenure in office).
Frequency of their interactions.
Extent of convergence or divergence of preferences.
Availability of credible enforcement technologies (such as an
independent judiciary, or a strong bureaucracy to which certain public
policies can be delegated).
Link between PMP and characteristics of public policies modeled by
Spiller and Tommasi (2003)

ST Model: Games of political cooperation

Motivation for the link between PMP and outer features of PP
Imagine set of political actors making collective decisions
Players have a common interest in having policy respond to
economic shocks, but there is conflict due to different
preferences (or distributive nature of politics).
Random political shocks shift the relative power of the players.
The political game starts with period in which players can reach
some agreements regarding the way in which they will restrict
their actions in the future.
The set of feasible agreements that can be reached will depend
on the institutional environment (for example, on observability
of moves, verifiability of states of nature, availability of
enforcement technologies).

ST Model: Games of political cooperation

First best policies: those that would be agreed upon in a
complete contract before the world starts running -- or
equivalently, those that would be chosen by social planner.
Spiller and Tommasi show that optimal policies are invariant to
the realization of political shocks (i.e., do not depend on the
party in power) but contingent on economic shocks.
If political actors are patient enough, optimal policies can
emerge as a Nash equilibrium of the infinitely repeated game.
But if their discount rate is high enough, full cooperation will not
be achieved and policies will depend on the realization of the
political shock.
The existence of credible enforcement technologies (such as an
independent court) which bound the players to their agreements
may contribute to generate cooperative outcomes.

ST Model: Games of political cooperation

If there is third-party enforcement, but economic shocks are
not verifiable, it may not be possible to enforce statecontingent rules. Simple rules may be agreed upon, but these
will imply inflexible policies, where actors tie their opponents
and their own hands in order to prevent political opportunism.
When discount rates are high, and enforcement of
intertemporal political agreements is relatively weak, we may
observe highly volatile policies, or highly inflexible policies.

Games of political cooperation: summary

Y *( )
first best

Y ( , )

First best function of economic shock ()

but not political shock ()
Attained for low discount rate (large ).
Non-cooperative equilibrium policies
depend on (as well as ).
Actors might impose rigid rules to prevent
political opportunism.
Result: In bad transactions environments,
some policies are too volatile, others too
rigid.
Simple extensions: bad transaction
environments also lead to lack of
coordination, and to inability to pass
welfare improving reforms.

Why focus on outer features?

Common features of policies such as stability or volatility are
more naturally linked to the institutional environment than the
content of policies.
For example, in an institutional environment that makes
cooperation difficult, the content of policies may shift frequently
with the realization of the political shock, while the institutional
environment remains the same (for example, trade policy may
shift from closed to open, to closed again, depending on the
preferences of the party in power).
Features such as stability or adaptability, however, will remain
the same.
Focus on outer features also allows comparability across policy
issues, which would not be possible with the contents of policies.

The framework
(features of)
PUBLIC
POLICIES

POLICYMAKING
GAME
XxZY

FUNCTIONING
OF
POLITICAL
INSTITUTIONS
(rules of
policymaking
game)

X
General
Equilibrium
Interactions

features of
specific
policy issues

BASIC
INSTITUTIONS
&
HISTORY

Policy outcomes may differ across issues

Different policy issues may differ in their transaction
characteristics.
Some (such as social security) may be more demanding than others
in terms of the enforcement of intertemporal deals.
Some may have special outside enforcement mechanisms (such as
international trade agreements for the case of trade policy).
They may involve key specific actors (such as the Central Bank for
monetary policy, or the teachers union for education)
They may be played in different arenas.
They may differ on the degree of divergence of preferences.

These differences across issues is being exploited in several

of the country studies
Uruguay, Brazil, Chile, Colombia

Characterizing countries PMP

How did authors go about characterizing their PMPs?
By combining first hand knowledge of key policy actors and their
interactions with secondary sources and, in some cases, with new
empirical work. Examples:
In Brazil, the team discusses in detail several episodes in which the supreme court
ruled against the executive on issues of vital importance, and present evidence from
a previous study (Castro, 1997) examining more than 1200 judgments by the
Supreme Court in 1997, in order to back up their claim that the SC was independent.
In Colombia and Paraguay, the authors illustrate their claims about the changing role
of the legislature in the PMP by carrying out empirical analysis of legislative
activity in the different periods they consider.
In Brazil, authors present empirical evidence about the connection between votes for
the government in Congress and the appropriation of legislators budget
amendments on the part of the executive, providing support for their story that the
key exchange is one of pork for support.
In Ecuador, team provides detailed account of the mechanics with which the
government forms coalitions, the currencies used, etc.

The framework
(features of)
PUBLIC
POLICIES

POLICYMAKING
GAME
XxZY

FUNCTIONING
OF
POLITICAL
INSTITUTIONS
(rules of
policymaking
game)

X
General
Equilibrium
Interactions

features of
specific
policy issues

BASIC
INSTITUTIONS
&
HISTORY

PI PMP
In turn, key aspects of the PMP are determined (among other
things) by the nature of the political institutions.
For example, the number of actors, as well as their preferences,
may be shaped by the nature of the electoral rules, which affect
the configuration of the legislature.
Constitutional rules (such as agenda setting power of the
president) may affect the interaction between the relevant actors.
Once again, authors were encouraged to combine their own
knowledge with secondary sources, the extant literature (for
example, suggesting that certain electoral rules lead to certain
incentives for legislators) as well as international comparative
data on political institutions.

Tenure of Supreme Court Justices

Corte Suprema, 1960 - 1994; Duracin Promedio de sus miembros
Duracin Promedio de sus miembros en el cargo
Pas
USA
Chile
Norway
Australia
Netherlands
Canada
Guyana
Ireland
Singapore
Belgium
New Zealand
Israel
Malaysia
Trinidad&Tobago
Germany, FR
South Africa
J amaica
France
Total general
Brazil
Bangladesh
United Kingdom
Mauritius
Philippines
Italy

Aos
22.4
16.8
15.8
15.8
15.2
14.9
14.5
14.5
14.2
14.0
13.7
13.5
13.5
13.5
13.0
12.3
12.2
11.8
11.4
10.6
10.4
10.3
10.0
9.5
9.1

Pas
Nigeria
Colombia
Malawi
Nicaragua
Kenya
Zimbabwe
Ghana
Pakistan
Cameroon
Zambia
Dominican Rep.
Sri Lanka
Peru
India
Sudan
Lesotho
Argentina
Botswana
Rwanda
Mexico
Honduras
Guatemala
Ecuador
Paraguay

Aos
8.7
8.7
8.4
8.0
7.7
7.7
7.7
7.6
7.2
7.0
6.8
6.7
6.0
5.9
5.8
5.7
4.9
4.4
4.3
4.0
3.9
3.3
2.8
1.2

Legislative Powers of Latin American Presidents

Package
veto

Partial veto

Decree
powers

Exclusive
initiative

Convoke
referenda /
plebiscite

Budgetary powers
Power to Result of no
define
legislative
action

Total

Argentina
Bolivia
Brazil
Chile
Colombia
Costa Rica
Dominican Rep.
Ecuador
El Salvador
Guatemala
Honduras
Mexico
Nicaragua
Panama
Paraguay
Peru
Uruguay
Venezuela

2
2
1
2
1
1,5
2,5
3
2,5
2,5
1,5
2
1
2,5
1
1
1
0,5

2
0
1
2
1
0
2,5
2,5
0
0
0
0
1
2,5
1
1
1
0,5

1
0
4
1
2
0
0
1
0
1
1
0,5
0
0,5
0
2
0,5
1

0
1
2
2
2
0
0
1
0
0
0
0
0
1
0
1
1
0

1
0
0
0
0
0
0
2
0
2
0
0
2
0
0
3
0
2

0
0
2
3
3
1
2
3
3
0
0
0
2
2
0
3
2
2

1
2
1
2
2
0
1
2
1
1
0
0
2
2
1
2
1
1

7
5
11
12
11
2,5
8
14,5
6,5
6,5
2,5
2,5
8
10,5
3
13
6,5
7

Average

1,7

0,9

0,6

0,7

1,6

1,2

7,6

Variation across time

Several of the studies exploit variation across time in political
institutions
Colombia, before and after 1991 Constitution
Venezuela, before and after election of governors
Paraguay, during the Stroessner dictatorship, and thereafter
Mexico, during the PRI hegemony, and thereafter
Not all changes are alike. Some more fundamental than others.

Example: Colombia
Exploits variation across time, focusing on two periods:
Frente Nacional (1958-1974), with many features extending into the
late 1980s. Agreement between the two traditional parties (Liberal and
Conservador) to share power, with parties alternating in the presidency,
and strict parity in key policymaking arenas, such as Congress, the
cabinet, courts, governors and majors.
1991 Constitution and beyond

Exploits variation across policy areas

Fiscal policies
Monetary and exchange rate policies

Colombia: 1991 Constitution

In general, the Constitution reduced the power of the executive
through different channels
Constitutionalization of some policy issues, such as pensions,
transfers to local governments, etc.
Gave a more active role to Congress
Restricted decree powers of the president
Augmented capacity of Congress to override presidential veto
Lowered party discipline through ballot and campaign finance reform

Gave a more active role to the judiciary

Created Constitutional Court, much more active and independent

At the same time, introduced Central Bank independence

Changes in the key actors differ according to the policy domain,
and this is exploited by the authors in their research

Colombia: The PMP before 1991

Rules of political game constrained role of Congress in economic
policy and enhanced the decision-making capacity of the government.
Frente Nacional coalition (sustained through cabinet and governorship
appointments) ensured ample majorities.
Finance minister (typically a technocrat) had very large power.
Liberals and conservatives would rather have a technocrat occupy this
ministry than a potential rival.
Legislators got their pork (in the form of auxilios parlamentarios) and
got out of the way of economic policymaking
All in all, small number of players with long time horizons that
interacted repeatedly generated cooperative policymaking environment
that produced stable and adaptable policies

Colombia: The PMP after 1991

Significant aspect of economic policy get written into the constitution,
and thus become more difficult to change.
Congress increasingly involved in policy discussion, introducing
significant changes to legislation proposed by executive. Passing
legislation becomes more costly as a result of increased fragmentation
and reduction in party discipline.
By-passing Congressional discussion through the use of decree powers
is severely curtailed by the Constitution, under the review of the
Constitutional Court.
Even after enactment by Congress, the CC becomes a key player (on
occasions a veto player) in the economic policymaking game.
Through CBI, Central bank board becomes a prominent actor,
restricting the role of the executive in monetary and exchange rate
policy

Colombia: Fiscal Outlook

Consolidated Public Sector's Operations as % GDP
(1981-2003)

40

Total expenditure and net lending

Total revenue

30
25
20
15

Source: DNP

2003

2001

1999

1997

1995

1993

1991

1989

1987

1985

1983

10
1981

% GDP

35

Source: DNP

2003

2001

1999

1997

1995

1993

1991

1989

1987

1985

2
1
0
-1
-2
-3
-4
-5
-6
-7

1983

Consolidated Public Sector's Total Balance as % GDP

(1981-2003)

1981

% GDP

Colombia: Fiscal Outlook

Source: Banco de la Repblica

2001

1998

1995

1992

1989

1986

1983

1980

1977

1974

1971

1968

1965

1962

1959

1956

1953

1950

Percentage

Colombia: Annual inflation

35

30

25

20

15

10

Stage 2 of the agenda (IPES 2006)

The cast of characters

Political parties and party systems

The legislature (and the legislators)
The president
The cabinet
The bureaucracy
The judiciary
Regional authorities (their role in the national PMP)
Business interests
The media
In each case, we look at their role in the PMP across
countries, taking into account relevant interactions with
other actors

Stage 2 of the agenda (IPES 2006)

The PMP in action

Tax reform / tax policy

Budget Institutions
Privatization / Regulation
Social Protection
Health
Education
Decentralization

Need for GE approach: an example (Brazil)

Strong presidential powers, include capacity to impound budgetary
amendments. But
Congress highly fragmented. President needs to rely on coalitions to pass his
agenda.
Legislators elected with open lists system, need to deliver pork to seek
reelection. They add amendments to the budget bill, involving programs that
benefit their jurisdiction.
Since the president can discretionally impound budget allocations, he holds
key for the legislators to deliver the pork.
Thus, key exchange in Brazil is (little) pork for support
Reform is under discussion that would eliminate the discretion of the
president in cutting the budget.
Our approach suggests that this may seriously compromise the ability of the
president to pass legislation.
Ski boots and knees

Political Institutions, Policymaking

Processes and Policy Outcomes:
A Political Transactions Framework

Pablo Spiller
Ernesto Stein
Mariano Tommasi