This chapter uses qualitative case studies to analyze the argument from the Electoral Politics Model. The case studies focus on the budget debates that occurred in 1988 and 1989, the first two years of Michel Rocard's Socialist minority government. As described in the Introduction, during the 1988 budget debate, Prime Minister Rocard's government made significant policy concessions to the opposition parties, and the budget was adopted without recourse to Article 49.3. Observers and politicians alike proclaimed the renaissance of parliament. One year later, however, Rocard's government made virtually no policy concessions to deputies in the National Assembly, and, following a rancorous parliamentary debate, the budget was adopted under the confidence vote procedure. The central focus of this chapter is to analyze the cause of these changes across the two years, and the usefulness of the Electoral Politics Model in explaining them.

The chapter has six sections. The first contains an argument about methodology and focuses on the role that qualitative case studies can play in the attempt to understand how the confidence vote procedure shapes political behavior in France. The second section describes in detail the legislative behavior and policy choices during the 1988 and 1989 budget debates. The third section draws on interviews with key participants in the budget debates to evaluate the circumstances leading to the adoption of Rocard's budget in 1988 without use of the confidence vote procedure.

This chapter steps back from the idea that France's restrictive procedures are used to structure bargaining processes between the legislature and executive. Instead, it examines how the two procedures can facilitate bargaining processes among the members of the governmental majority. The theoretical underpinning for the analysis is two themes that emerge from models developed by scholars who study the use of closed amendment rules in the U.S. Congress. The first theme is that institutional arrangements in general, and restrictive legislative procedures in particular, play a central role in preserving gains from trade between parties and party factions when policies are chosen on more than one policy dimension at a time. The second theme is that restrictive procedures are important tools for hastening the legislative process when the government faces important time constraints and policies are chosen on more than one dimension.

The chapter has three parts. The first part discusses how one can apply insights from the ‘gains from trade’ models to the French context. It then tests these insights empirically. The second part discusses how one can apply the ‘time constraints’ models to the French context. It then tests these insights empirically. The third part undertakes multivariate tests of the hypotheses developed in this chapter and Chapter 3.

DIMENSIONAL COMPLEXITY AND RESTRICTIVE PROCEDURES

When applied to the case of France, three hypotheses emerge from the ‘American’ models that link the use of closed rules in the House to the problems inherent to choosing policies by majority rules in multidimensional policy spaces:

This volume is the outcome of a research project initiated by the World Bank. In recent years, the Bank has been actively supporting efforts at privatization in developing countries. For utilities in particular, it has become clear that the regulatory framework was an important determinant of the success or failure of these efforts. Yet there were important gaps in knowledge as to appropriate regulatory design across different institutional settings. Consequently, a first objective of the research project was to learn from experience as to what worked in the regulation of telecommunications – and, by extension, in utility regulation more broadly.

A second objective of the research was to probe what might be the practical relevance for World Bank work of the “new institutional economics” (NIE). Many World Bank staff were intrigued by the conceptual advances and the empirical findings emerging from the NIE research agenda – but were unclear as to the concrete implications of the intellectual advances for policy design. Some key characteristics of utilities – important economies of scale and scope, assets which can be specific and nonredeployable in other uses, and the frequent politicization of utility pricing – are presently those which have received detailed attention in the NIE literature. Consequently, there was much background work on which an applied study of regulation of telecommunications could build.

Argentina is a very recent entrant to the small group of countries with privately owned telecommunications firms – and, given its history, an unexpected one. Argentina entered this group in November 1990 when the government sold the Empresa Nacional de Telecomunicaciones (ENTeL) to private investors. Although it is too early to definitively assess the impact of this sale, the sequencing of the privatization and the development of a regulatory regime present some interesting issues.

The political situation during the transition from the administration of President Raúl Alfonsín to that of President Carlos Saul Menem in 1989 presented the Menem government with a brief opportunity to introduce radical economic reform. Privatization was a central component of this reform program, and ENTeL was the first company put on the block. The sale became a test of the Menem government's ability and resolve to reform the economy. Rapid completion of the sale was the overriding concern, and development of a regulatory regime initially was neglected.

Regulation plays an important role in the private provision of telecommunications. Portions of the sector are characterized by economies of scale, making an argument for limiting entry in the interests of efficiency. However, inadequate competition can lead to abuses of monopoly power and to demands from customers and suppliers for regulatory protection from these abuses. Standards and interconnection rules affect the efficiency of the sector. High sunk costs and asset specificity make telecommunications firms especially vulnerable to the risks of expropriation.

INTRODUCTION

Most social scientists agree that an understanding of institutions is critical for understanding economic development and the economic performance of economies. Yet, despite this recognition, the research on institutions by many social scientists is either highly descriptive or so abstract as to render it useless for policy. The reason for the absence of the “happy medium” is that few scholars know how to do empirical work in institutional economics. It is seldom taught in graduate school and the practitioners have learned by doing. It is our goal in collecting the essays in this volume to further the development of work in institutional analysis by drawing out some lessons on how to perform research.

HISTORY MATTERS

Institutions are historically specific, and for this reason it is necessary to be sensitive to historical context. This is particularly true for the dynamics of institutional change. Much of the developmental path of societies is conditioned by their past. Even after revolutions, institution builders do not start off in a historical vacuum. At any moment in time, actions are constrained by customs, norms, religious beliefs, and many other inherited institutions. This is as true for the leaders in Eastern Europe today as it was for Augustus Caesar.

An understanding of history is also important because the dynamics of institutional change frequently include unintended consequences that take on a life of their own.

History must be replete with instances where the stated intentions of legislative actions have diverged from the actual effects. However, for two reasons it is difficult to demonstrate such variance empirically in actual case studies. For one thing, legislators often tend to express their intentions in such vague terms as “to improve welfare.” How can one measure by any commonly accepted criteria how well the observable effects attributable to a given piece of legislation fulfill such an intention? Second, before observed effects can even be attributed to a given enactment, it is imperative that implications be derived which can be confirmed or falsified by facts; and this, in turn, demands sufficient information on the relevant constraints.

The rent control in Hong Kong enacted under the Rents Ordinance of 1921 presents an exceptionally useful case. The legislative intents could not have been stated more clearly: rent control was imposed to keep a roof over the heads of the sitting tenants and to encourage the construction of new buildings on vacant lands. And although most of the records were destroyed by the Japanese occupation of the colony during World War II, adequate information is still available to allow derivation of some crucial implications of the control.

THE ARGUMENTS FOR THE RENTS ORDINANCE

“The object of the Bill is to protect the tenants, not landlords,” declared the Hon. J. H. Kemp, Attorney-General of Hong Kong, on July 18, 1921, in the second reading of the Rents Ordinance Bill which passed the same day.

This article focuses on the political factors underpinning economic growth and the development of markets – not simply the rules governing economic exchange, but also the institutions governing how these rules are enforced and how they may be changed. A critical political factor is the degree to which the regime or sovereign is committed to or bound by these rules. Rules the sovereign can readily revise differ significantly in their implications for performance from exactly the same rules when not subject to revision. The more likely it is that the sovereign will alter property rights for his or her own benefit, the lower the expected returns from investment and the lower in turn the incentive to invest. For economic growth to occur the sovereign or government must not merely establish the relevant set of rights, but must make a credible commitment to them.

A ruler can establish such commitment in two ways. One is by setting a precedent of “responsible behavior,” appearing to be committed to a set of rules that he or she will consistently enforce. The second is by being constrained to obey a set of rules that do not permit leeway for violating commitments. We have very seldom observed the former, in good part because the pressures and continual strain of fiscal necessity eventually led rulers to “irresponsible behavior” and the violation of agreements. The latter story is, however, the one we tell.

THE ECONOMIC SPHERE AND THE RULE-MAKING SPHERE

The following essay by William Riker and Itai Sened analyzes a fascinating case of institutional change: the evolution of property rights in time slots (the rights to land and to take off) at four heavily used U.S. airports. In these airports, the structure of rights in slots changed in 1969 from open access and queuing on a first-come, first-served basis to communal property governed by the established carriers. In 1985 the structure changed again, to exclusive salable property rights.

Riker and Sened take their analysis beyond the naive model of property rights, which examines the behavior of only economic actors and organizations (the demand side of institutional change), and strongly emphasize the role of political actors and organizations (the supply side). In other words, the study analyzes the behavior of actors in both the economic sphere and the rule-making or public-choice sphere, but not in the constitutional sphere, since the institutional change in question did not involve new procedures for public choice.

In society, the design of formal rules for granting property rights is ultimately the domain of the actors who control the state, because they (usually) have the resources and the will to determine the basic structure of property rights in their territory. Riker and Sened assume that these political actors act rationally and grant property rights in order to promote their own welfare, broadly defined to include individual wealth, power, and social ideals.

In most societies individual private ownership of natural resources such as minerals, forests, and fisheries is rare. Unless regulated, open-access conditions will result in overuse of a resource relative to what would prevail under private ownership. Regulation of the commons faces two challenges: (1) the prevention of overuse and (2) exploitation of the resource in the least costly manner. The following essay by Robert Higgs analyzes the causes and consequences of the regulations restricting the catch of salmon in the Pacific Northwest. For the most part the focus is on the costs of regulation rather than on the issue of preventing overuse. Higgs argues that because of the anadromous nature of salmon, the least costly means of catch is the use of upstream techniques or traps at the mouths of rivers, yet legislators have generally outlawed the highly successful catch techniques. The result of the regulations, according to Higgs, is technical regress; we now harvest fewer salmon with more inputs than we did before the regulations were instituted.

Higgs's essay is rich in historical detail. As in the essay by Krueger (Chapter 5), without such historical knowledge the dynamics of regulation would be difficult to understand. For example, sport fishermen today are among the important players in the policy arena and were not a potent force when the original legislation was put in place. It is not reasonable to assume that the original designers could have foreseen the future role of sport fishermen.

RESTRICTING THE PRICE MECHANISM

Price control changes the structure of property rights and has complex economic consequences that often are unforeseen by economic actors. In a free market, before controls are instituted, prices allocate scarce resources among competing individuals according to the willingness and ability to pay. The question of who gets what is settled on the basis of individual preferences and purchasing power. However, the use of prices to ration the rights to scarce resources frequently conflicts with the selfinterest or ideologies of economic and political actors, who may seek to restrict or even abolish the price mechanism, at least in specific areas. The suspension of the price mechanism calls for some alternative method of rationing, such as direct assignment by the state, rationing by waiting, lottery, fistfights, or warfare. The alternative system of rationing can also be based on social norms and custom – which usually is the case, for example, within the family.

It is important to realize that the system used to ration economic resources affects not only the distribution of wealth in a community but also the overall level of wealth. The behavior of investors and producers is influenced by the methods used to reward them and their degree of control over inputs and outputs in production and so is also the supply of goods and services.

The authorities may interfere with the price mechanism either by subsidizing or restricting the demand and/or the supply of commodities or by directly controlling prices.

In economic theory, it is relatively straightforward to analyse the impact of government controls over economic activity. Whether the control is over feed-grain prices in Egypt, the quantities of imports of individual items in India, price controls on ‘old’ oil, or the ‘voluntary’ reduction in the number of automobiles exported from Japan to the United States, several conclusions follow straightforwardly. First and foremost, those controls (and most others) at best achieve their objectives in a more costly manner than would alternative mechanisms. Second, the presumed beneficiaries of controls are often quite different from those (if any) actually benefiting. Third, the costs of controls seem to be largely ignored or misunderstood in political decision-making, at least in the first instance.

Despite these well-established results, controls seem to persist. A major challenge confronting those concerned with their costs is to attempt to understand the reasons why the political process often generates and perpetuates high-cost solutions to stated objectives. To establish an understanding of the political economy of controls would appear to be a formidable, but important, challenge, if means are to be sought to lower the costs of attaining political objectives.

The purpose of this chapter is to attempt to further our understanding of the political economy of controls. Section i provides a survey of existing models of regulation. The remainder of the chapter is then devoted to an examination of how well those models perform in light of the history of one particular set of controls – the American sugar programme.