Pampered Bureaucracy, Political Stability and Trade Integration

• Published date: 01 August 2017
• Author: Ben Zissimos,Caleb Stroup
• DOI: http://doi.org/10.1111/rode.12315
• Date: 01 August 2017

Pampered Bureaucracy, Political Stability and Trade

Integration

Caleb Stroup and Ben Zissimos*

Abstract

This paper examines the effect of trade integration and comparative advantage on one of a country’s

institutions, which in turn influences its economic efficiency. The environment we explore is one in which

a country’s lower classes may revolt and appropriate wealth owned by a ruling elite. The elite can avert

revolution by incentivizing a potentially productive middle class to sink their human capital into a

relatively unproductive bureaucracy. Thus the bureaucracy serves as an institution through which the

elite can credibly commit to make transfers to the rest of society, but in the process this reduces

economic efficiency. Trade integration alters the relative value of the elite’s wealth. This alters the lower

classes’ incentive to revolt on the one hand and the elite’s incentive to subsidize participation in the

inefficient bureaucracy on the other. Therefore, the interaction between a country’s comparative

advantage and an inefficient economic institution determines whether trade integration increases or

reduces economic efficiency. The econometric findings support the model’s main prediction.

1. Introduction

It is well known that effective economic institutions—the rules and norms that

govern economic interactions—facilitate economic development. Through the

development of this idea, many scholars have explored how security of property

rights, the prevalence of corruption and financial institutions, among others affect

economic growth. Yet in many developing countries powerful groups within a

society seek to manipulate institutions in order to enhance or maintain their power

and wealth if they are not bound by appropriate constraints. This manipulation of

institutions potentially undermines economic performance as captured by economic

efficiency and equity (e.g. North, 1988; Coatsworth, 1993, 1998; Engerman and

Sokoloff, 1997; Hall and Jones, 1999; Acemoglu et al., 2001, 2002; Efendic et al.,

2011).

1

*Zissimos (Corresponding author): Department of Economics, University of Exeter Business School,

Streatham Court, Streatham Campus, Exeter, EX4 4ST, UK. E-mail: b.zissimos@exeter.ac.uk. Stroup:

Economics Department, Davidson College, NC 28035-7123, USA. This paper was previously circulated

under the title “Pampered Bureaucracy and Trade Liberalization.” We are grateful to three anonymous

referees and an editor, Andy McKay, whose detailed comments helped us to significantly improve the

paper. We are also grateful for comments and/or advice from Daron Acemoglu, Constantine Angyridis,

Klenio Barbosa, Tibor Besedes, Rick Bond, Maggie Chen, Bill Collins, Kerem Cosar, Arnaud Costinot,

Mario Crucini, Amrita Dhillon, Bob Driskill, Chris Ellis, James Foster, Bernardo Guimaraes, Arye

Hillman, Oleg Itskhoki, Rod Ludema, Anna Maria Mayda, Ajit Mishra, Dilip Mookherjee, Michael O.

Moore, German Pupato, Joel Rodrigue, Rubens Segura-Cayuela, Vladimir Teles, Tony Venables, Ping

Wang, Quan Wen, Isleide Zissimos, and seminar participants at Essex, FGV (Rio de Janeiro and Sao

Paulo), George Washington, Georgetown, Georgia Tech, Ryerson, University of Cyprus, Vanderbilt, a

Southeastern International Development Conference, Atlanta, the Midwest Meetings, Wisconsin, the

Southern Economic Association Meetings, Atlanta, and the CESifo Venice Summer Institute on the

Economics of Conflict. For excellent research assistance, thanks are due to Sarah Brand and Mike Slade.

Financial support by the Center for the Americas at Vanderbilt University is also gratefully

acknowledged.

Review of Development Economics, 21(3), 425–450, 2017

DOI:10.1111/rode.12315

©2017 John Wiley & Sons Ltd

Although the literature has explored how elites manipulate economic institutions,

less is known about how the process of globalization, i.e. trade integration, affects

the institutions that in turn facilitate economic development. The international

trade literature has a long history of explaining variations across countries in their

economic outcomes based on heterogeneity in underlying factor endowments. Yet

the connection to this way of understanding economic outcomes has largely been

overlooked in the literature on the endogenous development of institutions. A

surprising conclusion that will emerge from our analysis is that the interaction of

factor endowments and the elite’s determination of the institution on which we

focus can cause globalization to either increase or decrease a country’s economic

performance.

The framework we explore features heterogeneity in endowments across

socioeconomic groups (elite, middle class and workers), comprises two goods

(primary products and manufacturers) that are produced using three factors (land,

labor and human capital). The elite’s wealth derives from their ownership of

“latifundia,” which can be envisioned as large estates suitable for the production of

primary products (e.g. mining or agriculture). More generally, the elite’s

endowment could be thought of as any rent-producing asset. Unlike workers who

labor on the latifundia, the middle class possess human capital that can be deployed

toward the creation of firms that produce manufactures. Alternately, the middle

class can seek employment in the government, which as we will see can be

subsidized by the elite in their attempts to stave off revolution. In this setting, if the

country has an abundance of human capital relative to land and labor then it has a

comparative advantage in manufactures. Otherwise it has a comparative advantage

in primary products.

Together, the workers and middle class, referred to collectively as the lower

classes, can mount a revolution against the elite that, if successful, would strip the

elite of their wealth and political power, but initiating a revolution comes at a cost.

Revolution is attractive to the lower classes only if its cost is small relative to the

potential gain from appropriating the elite’s wealth. To address the threat of

revolution, in our model, the elite can facilitate government employment contracts

for the middle class that are insensitive to their job performance in order to

guarantee beyond reasonable doubt that the transfers will be made.

2

In the interest

of clarity, government employment plays no other role in our model. We refer to

this aspect of government employment as “pampered bureaucracy” to highlight the

role of credible commitment device that it plays for making transfers to the rest of

society. It is because the pampered bureaucracy represents a form of commitment

device that we can think of it as an institution rather than simply as a

representation of government policy. The transfers made to the middle class

through the pampered bureaucracy reduce the payoff to revolution to the point

where it is no longer worthwhile.

Our modeling approach is based on various accounts of how government

employment has been used to maintain political stability. Jones (2012) explains how

government employment was used to maintain political stability during the wave of

uprisings in the Middle East known as the Arab Spring. The Economist (2011)

provides anecdotal evidence of the use by various elites of government employment

to quell social conflict. This type of influence by the elite over public sector

employment decisions is documented for Africa by Acemoglu et al. (2003), and for

Latin America by Sokoloff and Engerman (2000), while Baldacci et al. (2004) show

that larger governments are associated with lower growth in low-income countries.

426 Caleb Stroup and Ben Zissimos

©2017 John Wiley & Sons Ltd