Political economy.

• Author: Alesina, Alberto
• Position: Program Report - Report

The NBER's Political Economy Program was created in 2006 and has flourished and expanded in a variety of directions since then, reflecting the rapidly growing interest of the profession in this area. Early on, this field was focused on issues that could be strictly defined at the connection of politics and economics. For instance, widely studied issues included the effect of elections on the economy and vice versa (political business cycles); the effect of corruption and inefficient bureaucracies; the role of the quality of institutions for long-term development; and the effects of lobbying pressures. Of course, these topics are still at the core of the field, but the most remarkable development in this area is the extension of political economics, broadly defined, to new areas. For example, many authors have studied the role of culture in determining economic choices, and the relationship between culture and institutional development. This topic has been so active that the program now has a group specifically focusing on it, directed by Alberto Bisin of New York University and Paola Giuliano of University of California, Los Angeles. Other "new" or especially active topics include: the role of the press and the determinants of its (lack of) freedom; the effects of ethnic and religious fragmentation with both new measurements and new implications for economic choices; exploration of "behavioral" (that is psychologically driven rather than rationally driven) effects applied to political action; the study of the determinants of wars; and the analysis of potential gender and race discrimination.

Political economy has even expanded methodologically. In addition to "standard" theory and regression analysis, we have seen the use of randomized trials which are common in development economics, as well as experiments in labs; new survey data have been collected; and historical research on original sources has been quite common. The coverage in terms of countries also has been very broad: from Afghanistan to Russia, China, Africa, Europe, and of course the United States. One common theme links this literature together, however: that in order to understand the world around us, we need to go beyond the assumption of "homo economicus" maximizing his welfare in isolation in an institution-free world.

Given the size and diversity of the work produced by this group, it is impossible to review every paper or even every topic touched upon. I therefore select a few of the main themes, with an apology to all the authors whose work I have not mentioned in this report.

Diversity

Diversity (measured by ethnicity, language, religion, genetic makeup, and birthplace) can have positive or negative effects. On the one hand, diversity may increase productivity because of the complementarity of different skills. On the other hand, it may bring about lack of communication, difficulty in running a polity, conflict, or even civil wars. One may think of a sort of inverted U-curve: too little or too much diversity may be "bad" while an intermediate level may be productive. Research by Quamrul Ashraf and Oded Galor (1), and Johann Harnoss, Hillel Rapoport, and me (2), implies this point. The former authors measure diversity in terms of genetic makeup and argue that more successful countries historically have been those with an intermediate level of diversity. The latter work measures diversity by birthplace and shows that some diversity is positively correlated with development and productivity in a cross-section of countries.

The negative effects of diversity are especially obvious in the case of Africa. In that continent, former colonizers left behind illogical borders, which split or merge various ethnicities in ways that have nothing to do with the aspiration of local populations. The result has been failed states, slow development, civil wars, and more. Many papers have documented various aspects of this phenomenon (Stelios Michalopoulos and Elias Papaioannou (3), and William Easterly, Janina Matuszeski, and me (4)). As Nathan Nunn and Leonard Wantchekon (5) point out, slave trade in Africa has increased mistrust among competing ethnic groups. Raphael Franck and Ilia Rainer (6) have also studied favoritism and mistrust among African ethnic groups. Patrick Francois, Rainer, and Francesco Trebbi (7) study the allocation of political power among ethnic groups, providing a carefully constructed new dataset, while Robin Burgess et al. (8) document ethnic-based politics in Kenya.

Ethnic and religious diversity is not unique to Africa. Abhijit Banerjee and Rohini Pande (9), and Kaivan Munshi and Mark Rosenzweig (10) document the negative effect of politics based upon ethnic identity in India. Christian Dippel (11) discusses the effects of forced cohabitation of different tribes in Native American reservations.

Diversity may have different effects in different scenarios. One additional critical variable is the level of segregation. Ekaterina Zhuravskaya and I (12) present a new dataset on segregation in all countries in the world, and show that the latter is negatively related to trust and the quality of institutions. Elizabeth Ananat and Ebonya Washington (13) show that in the United States, racial segregation has a negative effect on the efficacy of black representatives.

Another dimension that interacts with ethnic fragmentation is income inequality. Michalopoulos, Papaioannou, and I (14) provide a new measure of income differences across ethnicities in all countries and find a strong negative correlation between this variable and development. That is, the negative effects of ethnic diversity are exacerbated when they are correlated with income differences. A case in point is of course the United States, where racial tensions are exacerbated because poverty is higher among minorities.

An important and policy relevant question is what happens when individuals of different ethnic groups are forced to interact more closely than they would normally do. Yann Algan et al. (15) use random allocations in Parisian housing complexes to show that more diverse condominiums are more poorly run and show more decay and less concern for public goods. David Clingingsmith, Asim Ijaz Khwaja, and Michael Kremer (16) study the Muslim pilgrimage to Mecca, using the...