Introduction

On March 27,1994, after about forty years of proportional representation, national elections to both chambers of the Italian Parliament took place governed by an electoral system with a strong element of plurality. Since then Italy has held one more general election under the new rules (in April 1996). In the present study, we will be concerned with observing and explaining some of the effects of the new rules on the voting behavior of the Italian electorate. Our analysis will focus on the most recent election to the Chamber of Deputies (the lower house).

The rules for the Chamber of Deputies are as follows: approximately three-quarters are now elected on a plurality basis, while the remaining quarter is elected proportionally and essentially on a regional basis. This is operationalized by allowing voters to express two simultaneous votes: one for the single-member college candidate (a Plurality [PL] ballot) and the other for the party for the proportional allocation of seats (a Proportional Representation [PR] ballot). Since each voter has two simultaneous votes available, he or she can express a double preference for a party, by voting for it in the PR ballot and for that party's candidate in the PL ballot. Alternatively, the voter can express split preferences by voting for a party in the PR ballot, but not for that party's candidate in the PL ballot. This phenomenon, that can be described as a “switching-voter phenomenon” (Navarra, forthcoming), can significantly influence the overall results of the elections and, consequently, the formation of the government.

Introduction

We are currently observing the final steps in the process toward forming the European Monetary Union (EMU). Hence, the next step is to create not only an economic but also a monetary union, toward which major progress has been made with fixed agreements about the next stages in the Maastricht Treaty. In order to enable the functioning of such a dual union, some (minimal) European federal union will be required. In this chapter some basic elements of a federal European constitution, like subsidiarity, federalism, and direct democratic institution are elaborated with the help of the constitutional economics. This chapter builds on a large literature of positive economics and tries to provide some normative suggestions. The authors think that while the proposals made may be controversial, the evidence found in the literature is, on balance, in their favor. In any case this article is meant to be thought provoking and should be discussed thoroughly.

In Section 2 six propositions, which should be key elements of a European constitution, are introduced. In Sections 3–5 an attempt is made to scientifically justify these propositions. The design of European legislation is discussed in Section 3, the subsidiarity and federalism principle in Section 4, and direct democratic institutions in Section 5. Finally Section 6 provides a summary and gives some conclusions.

Six Basic Elements of a Future European Federal Constitution

The completion of the European Internal Market provides the opportunity to achieve a number of efficiency gains when creating such a big economic unit.

Introduction

Constraining rules are bound to give rise to opportunistic behaviors designed to elude them. In examining the Maastricht budgetary rules, therefore, one should expect opportunistic accounting behaviors. These may be called “creative accounting” in the sense that they do not reflect reality but rather are designed to demonstrate that constraints are met. Such behaviors may be considered kinds of intended or unintended fiscal illusion. The study of creative accounting is therefore at the core of the issue of budgetary transparency.

Because of the scope for opportunistic behaviors, some have expressed skepticism about the possibility of truly enforcing constitutional fiscal rules, consisting of parametric constraints (Von Hagen, 1991). However, it is argued here that in the context of the Maastricht rules, it is possible to limit substantially the scope of opportunistic behavior. The real problem is the willingness of the relevant authorities to accept inescapable constitutional fiscal constraints. Thus far, the authorities have tolerated or even fostered a climate in which the political considerations of a smooth launch of the European Monetary Union (EMU) have been held to be more important than the application of the constraints.

The Inadequacies in the Accounting Setting of the Maastricht Fiscal Constitution Rules

The Maastricht Fiscal Constitution

The Treaty of Maastricht of 1992 introduces a set of rules constraining the budget and the public debt for the countries expected to become members of the EMU.

Introduction

It is widely held that voting in the course of ordinary elections has no significant influence on the constitutional regime or order of a country. If voters have any influence at all on the constitutional set-up, which not everybody sees as evident, this is generally considered to occur only on the relatively rare occasions when constitutional questions are submitted to a referendum or to a specially elected convention or constitutional assembly. At least three arguments are provided to support that opinion. A logical consideration comes first. Ordinary elections are parts of the political game and thus logically take place within the rules of that game – that is, within the constitutional order or regime of the country. To assume that, at the same time as they play, players can change the rules is, to say the least, logically puzzling. The second argument refers to the motivations and possibilities of voters. Voters, this argument says, are not really interested in constitutional issues and, even if they were, are particularly ill equipped to understand their implications. The third argument rests on the observation of what obtains in practice. As a matter of fact, constitutional issues are generally absent from electoral platforms and campaigns.

In spite of its apparent strength, I will try to show that this threepronged denial is not compelling. To defend the opposite view – that voters do exercise a substantial influence on constitutional matters simply by the way they vote in ordinary elections – I will endeavor to neutralize each of the three arguments mentioned above.

Part I is made up of contributions that examine the theoretical underpinnings of constitutional political economy. Do constitutions matter? Mueller's answer to this fundamental question is that they can matter, although they do not necessarily do so. The many Brazilian constitutions have had limited impact. In the former USSR, the constitution had some admirable sounding sections but did not produce an admirable political system. In contrast, ancient Athens, the Weimar Republic, and Costa Rica are three cases where constitutions have had important effects. The main message of this chapter is that written constitutions can matter in how well the political institutions of a country function.

Vanberg focuses on economic systems and the framework of rules and institutions that constrain the actions and transactions of economic agents. He argues that this framework, which may be called an “economic constitution,” determines the ability of the system to adapt to a changing environment. This insight is used to analyze the current debates on globalization and the conflict between protectionist and competitive interests. The analysis of Buchanan and Yoon can be understood as a more abstract approach to the issue of a changing environment. In particular, dropping the “natural” distinction between rules (constraints) and outcomes within such rules, the argument is made for choosing constitutional variables (constraints) based on efficiency considerations.

The bipolar world during the Cold War pitted the free democracies of the West against socialist dictatorships. During this period, the socialist states offered the Hobbesian goal of order, while the democracies adopted the Lockeian perspective.

There are two sorts of students of politics: those who believe that constitutions have important consequences for a country's political history, and those who think they do not. I am one of those who believe that constitutions can matter, although they do not necessarily do so. After convincing you of this, I shall draw out some of the implications for constitutional design, and for the design of the process by which the constitution gets written.

It is uncontroversial that constitutions need not matter. Brazil has had more than eighty constitutions and most Brazilians probably would not be able to identify any one of them that had a significant effect on the country. The constitution of the former USSR had some admirable sounding sections but did not produce an admirable political system. If a constitution is ignored, it cannot have an impact.

But not all constitutions have been ignored. I begin by describing three cases where constitutions did matter. Two had good consequences, one not so good.

Three Cases Where Constitutions Mattered

A Ancient Athens

Democracy was invented during the sixth century B.C. in Attica through a series of reforms begun by Solon and largely completed by Cleisthenes. Prior to and during much of this century Attica was ruled by individuals (tyrants) and groups (oligarchies) drawn from the aristocracy.

Introduction

Electoral system choice, especially the distinction between proportional representation systems (PR) and plurality or majority forms of electoral rules, is widely regarded by political scientists as one of the three fundamental institutional decisions made by a democratic polity (the two other key elements of choice being presidentialism vs. parliamentarism, and unitary vs. federalized government). Choice of electoral systems and other electorally related decisions (e.g., about number of districts, timing of elections, basis for apportioning seats, the nature of the redistricting process, etc.) can be directly linked to a variety of other aspects of the political system such as the number of parties; the degree to which minor parties or minority points of view come to be represented; the degree of descriptive representation by gender, race, religion, and so forth; bias in the way in which some parties have their vote shares translated into set shares relative to other parties with the same vote share; the likelihood of single-party governments; cabinet durability; incentives for localistic or parochialistic attitudes on the part of legislators; electoral responsiveness of the legislature to changes in voter preferences; conflicts between president and legislature; and so on. In sum, electoral systems matter.

Electoral systems are currently a hot topic in political science, with the “third wave” of democratization having produced a large number of new (or “renewed”) democracies. Electoral and other results from these new democracies provide a fertile avenue for new research, especially since the number of electoral system variants available for study has increased at the same time as there has been the increase in the number of practicing democracies from which data can be obtained.

The Possibility of New Moral Insights That Necessitate Redistribution

The main point of this chapter is simple: Unless the process that generates a constitution is perfect, there should be provision for the possibility of changing the constitution. It is true that the stability provided by constitutions is valuable. By limiting the opportunities for transient majorities to redistribute, constitutions protect property rights. The resulting stability promotes efficiency by reducing rent seeking. But as valuable as stability is, it is not lexically more valuable than the chance to incorporate new moral understandings into a constitution. And when a society perceives the need to incorporate a new moral understanding into its constitution, a disappointment of pre-existing expectations is likely to be necessary.

Perhaps the point seems so simple that it does not even need to be stated. How could anyone doubt that it will sometimes be appropriate to change a constitution and that some will lose in the process? However, associated issues are complex enough that some elaboration is warranted.

The first point to be made is that disagreement about what constitutes an improved understanding of a moral imperative is nearly inevitable at the time when the new understanding is emerging. History reveals that such improvements in our understanding do occur and that they are controversial when they occur.

Three hundred years ago virtually no one questioned the propriety of slavery. Even John Locke, that most articulate advocate of human freedom, invested in slaves.

Federalism is often seen as a partial solution to an array of problems that confound stability and economic growth in democratic states. For continental powers like the United States, Russia, and Australia, the goal is to encourage a rational treatment of public goods and externalities that vary in geographic scope. Federalism in Germany was identified as a way to decentralize power in accord with earlier traditions and to minimize the likelihood that a dictatorship could again subvert its constitutional order. Federalism in India seems the only way to govern a heterogeneous state that will soon be the most populous on the planet. Federal institutions in Russia are essential not only because of geographic diversity and the desire to break with the previous regime's practices of over-centralization, but also to make coherent a situation in which regional authorities cannot be precluded from asserting their autonomy against a weakened central government. And federalism in one form or another is regarded as the only structure that might contend successfully with the ethnic, religious, and linguistic cleavages that bedevil countries like Spain, Ukraine, Nigeria, Belgium, South Africa, and Canada. In fact, it is now commonly agreed that there should be some federal-like decentralization of governmental authority and responsibility even for states that are not explicitly or implicitly federal.

Federalism, though, is not a notably successful governmental form. The ultimate character of American federalism, especially the legitimacy of the supremacy of federal over state law, was determined only through a civil war.

Constitutional design for a federal state generally focuses on things like the policy jurisdictions of federal subjects, representation in and the authority of the national legislature, the nature of federal and regional courts, and procedures for amending the national constitution. Once these matters are settled, attempts at ensuring stability typically focus on economic matters like tax policy, revenue sharing, trade policy, and regional investment. At both stages, there is an inherent conflict between federal subjects and the national government. One question therefore dominates all others: How do we achieve stable and enforceable rules that guarantee the rights of subjects and allow for the evolution of these rights, and at the same time ensure the authority of the national government?

Filippov and his colleagues argue that the key requirement for stability is the establishment of a set of incentives whereby political elites at one level find it in their self-interest to cooperate and coordinate with elites at all levels. Frey and Eichenberger extend the notion of federalism further by integrating it with genuine political competition. They define and develop the concept of Federally Overlapping and Competing Jurisdictions (FOCJ) and relate it to current developments within Europe.

In Part I, Mueller pointed the importance of institutions as the foundation upon which constitutions, as sets of rules, can function or fail to do so. Here, Forte provides a practical illustration of this insight in the context of the Maastricht excessive deficit rules of the European Union.

In the short space of less than a decade the political landscape of the world has changed dramatically. The fall of the Berlin Wall has brought into being many states with strong desires but little experience with democracy. In addition, the political climate in many of the world's democracies has been far from still. Italy, New Zealand, and Japan have all undertaken major changes in their electoral systems. Many experts describe the political landscape in the United States as being the most polarized in living memory.

In the former Soviet Empire and in many former authoritarian states, there is the widespread desire to roll back the power of the state and implement the popular will. Simultaneously there is the wish to utilize the second-mover advantages of starting with a clean slate to pick and choose the best system, learning from the experiences of the democratic world. The collapse of the centrally planned economies has also undermined the authority of governments in the democracies of the world. This has led to calls for a re-definition of the core functions of the state. Furthermore, electorates in the democracies are becoming increasingly critical of their political establishments as globalization makes life more and more uncertain. These critiques have fueled demands for changes to limit the powers of political agents and to make them more accountable to their constituents.

Perhaps no issue is as central to the functioning of modern democratic institutions and guarantees of representation as the rules by which representatives are elected. In this respect, despite the variety of alternative election mechanisms, plurality is the predominant rule in modern democracies. “One of the consequences of using plurality rule is that it leads the outcome to a two-party system. This empirical result is known as Duverger's Law” (Levin and Nalebuff, 1995, p. 7). Consequently, elections in modern democracies usually involve a two-candidate campaign. This study develops a model of the strategic decisions faced by candidates in these campaigns. While building on previous models that address the effect of the rent magnitude, opponent spending, and third-party contributions, this model incorporates the effect of variations in candidate attributes. Specific attributes modeled are an election bias, seat bias, the political price of contributions, and the ability to convert campaign funds to personal use. The primary strategic variable is the candidate's campaign spending; however, the related issues of optimal contributions and converting contributions to personal use are also treated. A change in U.S. election law created a natural experiment that allows the theoretical implications of the model to be tested with data from U.S. congressional elections. However, the results are generally applicable to other plurality systems.

Buchanan (1980) identifies the expenditure of resources to capture political office in order to receive payments from others as a form of rent seeking.

Leadership in the Hungarian Economic Transformation

Between 1990 and 1998 Hungary became a market society where the freedom of internal markets, foreign trade, and private-sector entry matched the standards of the Organization for Economic Cooperation and Development (OECD). In 1998 three-quarters of productive capacity was operated by private owners. New institutional and legal infrastructure compatible with the market economy replaced the direct and indirect bureaucratic coordination of the socialist system (Kornai 1992: 97). However, the implementation of the market-oriented strategy was difficult.The reform process seemed to be fragile and indeterminate.

On the one hand, harsh initial conditions, the collapse of the Soviet markets, and policy failures meant ever-present macroeconomic challenges for politicians and policy makers. Between 1990 and 1993 Hungary suffered from the transformational recession (Kornai 1994) followed by a short-lived recovery at the high cost of macroeconomic imbalances in 1994. Mounting current-account and fiscal deficits in 1995 were corrected by a draconian stabilization and adjustment package, which brought about falling investment and living standards, stagnation, social dislocation, and political protest. By 1997 Hungary returned to growth.

On the other hand, the rules, institutions, and conflicts characteristic to democratic politics had an immense impact on the economy throughout the whole period, underlining the idea that creating capitalism after Communism is an eminently political project. This fact generated a number of political economy interpretations of economic policy making and institution building in Hungary.

During the central-planning period much of the economy was public and the private sector played a very marginal role. The role of the state was all-pervasive. To a large extent the government determined the wages and other incomes (including pensions) of individuals; the allocation of resources to various functions and activities; the investmentconsumption breakdown; the allocation of jobs; and the relative prices and availability of products. The plan was the essential tool that the government used to carry out its economic decisions. Through planning decisions, the government could directly appropriate resources and use them in the ways it deemed desirable. It was difficult and unnecessary to separate an area that could properly be called public finance from private finance.

The transition to a market economy aims at replacing much public ownership with private ownership and many public decisions with private decisions. It thus aims at reducing the role of the state in the economy and at changing the way that role is played. In the new environment, the state must get the resources that it needs by taxing individuals and private-sector activities and, to a much lesser extent, by borrowing; and it must play its role by spending those resources in the most efficient way.

To operate efficiently in market economies, governments need the support of various institutions as well as the implicit support of the taxpayers. Some of these institutions did not exist in centrally planned economies because they were not needed.

Collegium Budapest, the first institute for advanced study in Eastern Europe, plays host to one or several “focus groups” every academic year. These special collaborative research formations offer the chance for a group of researchers in various disciplines to concentrate their attention on a common subject of their choice.The result is lively interdisciplinary collaboration. Members of the group spend shorter or longer periods at the Collegium. While there, they discuss their ideas at seminars with each other and interested members of the Hungarian academic community. The results of their research are made public at conferences organized by the Collegium for a wider professional public.

The research topic of the focus group for the 1997–98 academic year concerned the interaction between politics and economic policy in the period of the post-socialist transition. I had proposed that this subject be placed on the agenda and then acted, on behalf of Collegium Budapest, as the convenor for the focus group. So I think it is appropriate for me to give a brief and, to some extent, personal account of the events leading up to the group's formation.

I am not just an observer and analyst of the post-socialist transformation in Eastern Europe but an active participant in it. On several occasions, in books, studies, and lectures, I have taken a position on issues of short- and long-term economic policy during the transition. On each occasion I contributed as a social scientist: I have not tied myself with any political party and remain unaffiliated.

Countries of the former Soviet Union and Eastern Europe are now entering the second decade of political transformation and economic reform. The first decade was marked by the dramatic disintegration of the Soviet empire, severe macroeconomic problems, and, in many countries, hyperinflation. At the same time, countries in the region undertook transitions to democratic rule. This combination of economic crisis and “extraordinary politics” by no means led to uniform outcomes, but it did create opportunities for reformers to initiate fundamental economic transformations.

The transition from command to market economies has unfolded through a series of overlapping policy and institutional reforms. Attempts to adjust fiscal, monetary, and exchange-rate policies constituted one feature of the initial phase of reform, as governments wrestled with severe fiscal and balance-of-payments disequilibria. At the same time, many governments also began a complex set of microeconomic reforms that have been at the center of the literature on the transition to the market. Some of these reforms, such as the adjustment of relative prices through decontrol and liberalization of trade, took place relatively quickly. The reform of property rights through privatization and the rehabilitation of state-owned enterprises has necessarily been more prolonged and is very far from complete.

These challenges are still relevant as we enter the next decade of transition; as the economic crisis of 1998 in Russia demonstrated clearly, some countries are still grappling with macroeconomic stabilization and dismantling of the state sector.