Thursday, March 6, 2014

Institutions and inequality

I am attending the Forum on inequality organized by the Socialist Group in the European Parliament (the only group that could organize a conference of this calibre), where Joseph Stiglitz and Martin Schulz just made the key addresses. I presented a much more modest paper earlier. I paste here a few paragraphs from the introduction and the conclusions of my paper:
"The importance of institutions taking into account that they are endogenous (and therefore must be to some degree self-enforcing) has been acknowledged by numerous scholars. Institutional reforms have to be part of a political equilibrium: they must take into account efficiency and distribution, common interest and rivalry. In Europe, the need for reforms that make progress in the process of economic and political integration, and at the same time improve democratic accountability and commitment and reduce capture, should follow the same logic.
Economists such as Spolaore (2013) or Alesina and Giavazzi (2006) are of the view that integrated policies should be limited to “economic” policies where the costs of heterogeneity are low, and where distributive concerns are scarce. However, from the analysis of existing institutions, there is nothing that prevents lessons from being learned and applied to policies with distributive concerns.
In this paper, four EU institutions are evaluated in terms of democratic accountability, capture, commitment and European integration. These institutions are the telecomunications policy framework, competition policy, infrastructure subsidies and the UEFA Champions League in football. Lessons from these existing institutions are applied to other policy areas, such as fiscal policy and financial regulation. There is nothing in policies with distributive components that prevents positive lessons from being learned.(...)

Europe needs increasingly integrated institutions that encourage institutional and product innovation, and needs to empower those who facilitate integration to make institutional reform part of a political equilibrium. The UEFA Champions League in football suggests that reputational issues and saliency of the institution are key in constraining principals and agents to behaviours that are accountable and transparent. In football, the same referees, players and managers behave better in Champions League games than in national games, in a similar way that some politicians are better EU Commissioners than national cabinet ministers.
In a context of international markets that coexist with significant between and within countries inequality, shared prosperity can only be achieved through the development of institutions that at the same time promote regional integration, democratic accountability and commitment. Authors such as Spolaore (2013) and Alesina and Giavazzi (2006) are wrong in suggesting that European integration should not be applied to redistributive policies. There is nothing in these areas that prevents them from learning from existing institutions. Common fiscal policies and financial regulation that tackle distributive problems in a democratically accountable way are a prerequisite for better efficiency enhancing policies. A new democratic federalism must find a middle way between technocratic solutions and populism.
Future research must focus on the details of an institutional architecture that promotes the desired objectives (including distributive concerns) and that is self-enforcing and stable."

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