Introduction

Previous chapters have examined the conditions under which World Bank lending can positively affect economic growth and poverty alleviation. A key conclusion that emerges from these chapters, supported by macroeconomic evidence and country case studies, is that the policy and institutional frameworks are critical determinants of aggregate performance.

This chapter addresses the same set of issues at the microeconomic level: how do economic policies and national institutions affect investment productivity? We use data from a set of public and private investment projects financed by the World Bank to present evidence that both complements and extends the macroeconomic evidence from chapter 8. With a microeconomic unit of observation as the dependent variable – either a dichotomous investment project performance indicator or an economic rate of return (ERR) – these results on the determinants of project performance provide additional insights on how the policies and institutions that produce poor aggregate performance affect returns to investment at the microeconomic level.

Drawing from the in-depth empirical analysis of the productivity of investment projects financed by the World Bank, this chapter also sheds light on factors other than macroeconomic policies, including civil liberties. Assessing the importance of a participatory process and civil liberties for economic outcomes is important in the context of the debate about conditionality and aid, as it introduces an important dimension that can improve aid leverage without resorting solely to standard (‘imposed’) conditionality.

The timing of the eventual transformation in 1844 can be explained by a number of factors. First, the awareness that developed after the middle of the eighteenth century on the part of entrepreneurs in the transportation and insurance sectors that joint stock is a beneficial feature of finance at least for some sorts of enterprises. Second, the recognition, in the late eighteenth and early nineteenth century, and particularly after the court decisions of 1807–1812, that the only efficient, not to mention legal, way to employ joint stock is by combining it with the conception of the corporation to form the joint-stock business corporation. Third, the realization, after 1825, that Parliament could not deal with each incorporation individually, and in the 1830s, that the Law Officers of the Crown would not be able to take Parliament's place in that respect. Fourth, the split of the link between incorporation and monopoly between 1813 and 1833, when the East India, Bank of England, and Marine Insurance monopolies were abolished. Fifth, the legitimization of investment in shares and in the share market in general, due to the spread of share ownership during the canal era, in other utilities after 1800, and particularly in the railway era, gathering momentum in the 1830s and 1840s. Sixth, the concept of registration as a method for facilitating and regulating associations, which had developed by the 1830s outside of the pure business context.

In the previous chapter I asked the models to explain many patterns they were not designed to explain. These repeated confrontations with data provided tough tests of the models. However, the patterns analyzed in Chapter 5 were all drawn from the statistical portrait of vetoes in Chapter 2. In this chapter I reverse the procedure: I use the models to generate predictions that lie outside the initial data. Then I test the predictions using new data. The predictions deal with three distinctively different phenomena: concessions, deadlines, and the legislative productivity of Congress.

In Chapter 2, I reported information gleaned from a content analysis of legislative histories. The legislative histories often reveal concessions in successors to vetoed bills, though sometimes the record is ambiguous and hard to interpret. The prevalence of concessions supplied the starting place for the model of sequential veto bargaining. Is there additional support for the fundamental “stylized fact” targeted by the model? Beyond this, do patterns in concessions conform to the predictions of the models? In this chapter I combine data on roll call votes on initial and successor bills with estimates of legislators’ preferences, derived from all roll call votes, to derive estimates of the direction and magnitude of policy concessions between successive bills in veto chains. These new data on concessions confirm the importance of concessions in veto bargaining and provide several tests of the game theoretic models.

A strong test for a model comes from predictions about a hitherto unstudied phenomenon. The bargaining models make several striking predictions about a phenomenon that political scientists have not previously studied: changes in the probability of vetoes immediately before presidential elections, a “deadline effect.”

In the second half of the sixteenth century and during the seventeenth century, the corporation, a familiar legal conception, increasingly began to be used for a new purpose. Employed since medieval times for ecclesiastical, municipal, educational, and other public or semipublic purposes, the corporation or, as it was often called at that time, the body corporate or body politic, was increasingly used for profit-oriented organization of business. There had been other, earlier, business associations such as guilds, but these had considerable social elements, and served as fellowships or brotherhoods which controlled and ritualized whole aspects of their members' lives. Prior to the sixteenth century, a number of groups of merchants such as the Merchants of the Staple and the early Merchant Adventurers traded with nearby continental ports, but these were associations of individuals usually with no formal legal basis, neither incorporation nor even a royal franchising charter. The novelty of the sixteenth-century corporation lay in the combination of specific business purposes with a formal corporate form of organization, and the fact that many of these new corporations reached beyond Western Europe. This new utilization, in kind and in degree, of the corporation for profit maximizing resulted in no immediate change in its legal conception nor in the features which characterized it. To what degree did the conception and features adapt to the new use by 1720, the starting point of this book? Did the pre-1720 history of the business corporation have any relevance to its post-1720 development?

Merchant Adventurers. Scott, Constitution and Finance of Joint-Stock Companies, vol. 1, pp. 1–10, 236–237; vol. 3, pp. 462–463. Cawston and Keane, Early Chartered Companies, 20–32. Hill, Century of Revolution, 27–29, 179–185, 224–227.

Russia Company. Willan, Early History of the Russia Company, 273. Scott claims that the company became regulated only in the year 1669. See Scott, Constitution and Finance of Joint-Stock Companies, vol. 2, pp. 15–46; vol. 3, pp. 462–463.

VETO BARGAINING AND THE FIRST CLINTON ADMINISTRATION

To observers in 1992, the election of Bill Clinton seemed to mark an end to the era of divided government. After twelve long years a Democrat was back in the White House. The House of Representatives remained the rock-solid bastion of the Democratic Party, as it had since 1955 and apparently always would. The Democrats held the chamber by a 258 to 176 advantage, with one Independent. The Democrats also held the sometimes volatile Senate with the solid margin of 57–43, unchanged from the 102nd Congress.

The ideological distribution of senators in the 103rd Congress is shown in the top panel of Figure 9.1. Strikingly clear is the polarization of the Senate. On the left was a large block of very liberal Democrats, on the right a substantial group of conservative Republicans, and on the far right an isolated group of extreme conservatives. The middle was thinly populated. Given this configuration, the Democratic leadership in the Senate favored a “start left” rather than a “start center” strategy. In other words, whenever possible, legislative initiatives were shaped to appeal to liberal Democrats and then include concessions to pick up a few moderates, rather than appeal to larger bipartisan supermajority. Given the nearly empty center, the policy costs of gaining the extra Republican votes were often prohibitively steep, at least for a very liberal Democratic caucus.

The 103rd Congress moved briskly to pass an impressive array of legislation, ultimately totaling nine important and ten landmark enactments, a very respectable record (Cameron et al. 1996; Mayhew 1995).

Following Holmes's advice means plunging into a sea of data: more than 17,000 enactments and over 400 vetoes. Each veto is unique. Many have fascinating stories. How can one deal with this overwhelming complexity?

It is possible to approach a data set in the spirit of a natural historian. Exploratory data analysis becomes the social scientist's equivalent of a collecting jar, magnifying lens, and scalpel. These tools, along with some simple pretheoretical notions, allow us to search for structure in the data, to reduce the enormous complexity in hundreds of events to a few memorable, reliable patterns that capture much of the variation in the data. The goal of this chapter, in short, is to transform bewildering complexity into bewildering simplicity.

THE DATA

Veto bargaining is a dynamic process. You can no more study veto bargaining by counting the aggregate vetoes per time period, than you can study price bargaining by counting the customers who leave a shop without purchases. What is needed is a different kind of data, event histories, longitudinal data in which discrete events (vetoes, override attempts, and repassages) may occur repeatedly. Such data identify episodes of veto bargaining and track what happens in each episode. Constructing a set of event histories of veto bargaining means, in practice, identifying each bill in a bargaining episode and detailing its fate.

Identifying the Bills

I start with the 434 vetoes of public bills cast between the beginning of the Truman administration in 1945 and the end of the Bush administration in 1992.

The Founders erected the new American state upon two pillars: federalism and the separation of powers. The Civil War and the Roosevelt revolution knocked the first aside – not entirely, but largely so. The breathtaking expansion of the executive apparatus during the twentieth century shook but failed to topple the second pillar. The separation-of powers system remains the foundation of that amazingly complex and ever changing construction, the American federal government.

In a system of “separated institutions sharing powers,” bargaining between the executive, legislative, and judicial branches becomes the modus operandi of governance. Of course, building legislative coalitions and managing bureaucratic hierarchies are also key features of American government, as they are in parliamentary governments. But in no system but the American is bargaining across the distinct branches of the government so formal and so important.

This book is about one type of interbranch bargaining, veto bargaining between president and Congress. When the policy preferences of the president and Congress differ dramatically, as they often do during periods of divided government, veto bargaining is instrumental in shaping important legislation. The process works through anticipation, through threats, and through vetoes, including vetoes of repassed legislation. This book examines all these mechanisms. Because we are living in the most concentrated period of divided government in our nation's history, a theory of veto bargaining is essential for understanding the recent operation of American government. It is also necessary for understanding American political history.

Having studied the attitude toward the joint-stock company in the business community and in the judiciary, we are now in a position to turn to an examination of the range of opinions in Parliament and in the government itself toward this form of business organization. While the company had become more popular with entrepreneurs and investors alike beginning in the late eighteenth century, it was not well received by the dominantly conservative judiciary, and the split between the economic reality and the legal framework reached a critical point. As a result, in 1824–1825, Parliament was forced to put the issue on its agenda for the first time since 1720, and to try to deal with the two conflicting outlooks.

The present chapter examines the debates in Parliament in 1824–1825 which led to the repeal of the Bubble Act. The Whig attempts at reform between 1830 and 1841 are studied next. The limited effectiveness of these attempts is examined in the context of the debate on the role of liberal ideology and the administrative competency of the Whig governments of this period. Finally, this chapter turns to Gladstone's Select Committee and the Joint-Stock Companies Act of 1844, which was based on the committee's recommendations. Gladstone's role in this reform is examined in the context of his early career. The act itself and accompanying legislation are analyzed in terms of laissez-faire and State intervention.

In previous chapters, I surveyed the emergence of two models of business organization during the eighteenth century, the joint-stock business corporation and the unincorporated company. I demonstrated the entrepreneurs' preference for the corporation over the unincorporated company and showed the growing advantages of the corporation toward the end of the century, due to its personality, transferability, and liability features. In addition, I claimed that the unincorporated company could not, due to legal deficiencies, serve as a surrogate form of organization. But these three assertions taken together do not say much about the position of these forms of joint-stock organization in the economy as a whole. Was joint stock a marginal or a central phenomenon in eighteenth-century England? Did eighteenth-century joint-stock organizations have any significant impact on the contemporary economy, or is their study worthwhile only because they were precursors to the late nineteenth-century corporate economy? These questions were initially touched on in Chapter 4, which dealt with transportation and insurance, two significant sectors. The present chapter aims to broaden the perspective by dealing with the following questions: Was the development of the joint-stock undertaking during the eighteenth century confined to these two major sectors? Did other sectors pursue the paths of either transport or insurance, or did they follow other models of organization? What, if any, were the effects of the Bubble Act on the spread of the joint-stock form of association after 1720?

As children, most of us delighted in Rudyard Kipling's “just-so” stories. Kipling began with a simple fact, for example, elephants have long noses. Then he made up a fanciful story to explain it: perhaps a crocodile stretched an elephant's nose and the trait was passed down to other elephants. Just so!

In the previous chapter, I began with some simple facts, and then made up a causal mechanism to explain them. The three facts were: vetoes actually occur, veto chains are relatively common, and concessions often occur over the course of a chain. The first model failed to generate any of these patterns, but it supplied a useful framework for additional thought. The override model can generate the first and second patterns, but not the third. The sequential veto bargaining (SVB) model can generate all three.

Are the override and SVB models merely just-so stories? Or do they capture something real about the dynamics of interbranch bargaining? How can we tell? To answer this question I rely on the criteria outlined toward the end of Chapter 3. As indicated there, a sine qua non for a good model is an ability to explain empirical puzzles it was not designed to explain. Table 2.12, which I reproduce in separate tables throughout this chapter, is filled with empirical puzzles that go well beyond the three “stylized facts.” For example, why does the probability of a veto increase with legislative significance during divided government, but not during unified government? Why are veto chains short? Why don't any of the covariates predict the success of an override attempt, once the decision to attempt an override is made? Can the models explain these facts?