Stephanie J. Rickard
London School of Economics
The goal of this book is to understand government economic policy. Specifically, it seeks to explain the variation in economic support governments provide to economic actors, such as industries and sectors. The central question is why government-funded subsidies vary across countries? The answer is simple: government subsidies depend on the way politicians are elected and on the distribution of economic activities in space. If politicians are elected by plurality in single member districts, they will tend subsidize economic actors that are geographically concentrated; if politicians are elected in large multi-member districts where seats are distributed in proportion to the number of votes parties receive, they will tend subsidize economic actors that are geographically dispersed. The argument accounts for the contradictory findings that collectively characterizes research that seeks to explain the types of policies governments adopt.
One of the most striking features of modern economies is the uneven distribution of economic activity. Activities, such as production and employment, are unevenly distributed across space. Measuring geographic patterns of economic activities is difficult because doing so requires large amounts of disaggregated data. Information is needed about where individuals work and what sector they are employed in and this information must be available for highly disaggregated geographic units, such as local labor markets. Given these data requirements, many previous measures of economic geography fall short of capturing the theoretical concept of interest and most are available for only a single country. To address these limitations, I generate a continuous empirical measure of the geographic dispersion of sector-specific employment in more than ten countries using entropy indices. Measuring geographic concentration is an important first step to investigate how economic geography influences politics and policy in countries with various political institutions. I leave until Chapter 4 the technical details about the construction of the measure of economic geography. In this chapter, I explore the concept of economic geography: what it is, why does it vary, and how might it matter for politics?
Institutions and geography together shape economic policies. Policy outcomes are decided by incumbent politicians whose decisions are influenced by a desire to win reelection. Particularistic economic policies, like subsidies, will sometimes be an efficient means by which to win reelection. Subsidizing geographically diffuse groups helps political parties win votes across the country. Such diffuse electoral support is valuable to parties competing in proportional electoral systems with multiple districts because it maximizes the number of seats they hold in parliament. While focusing exclusively on geographically concentrated groups may increase a party’s vote share in a given district, it limits the party’s national appeal. Leaders in proportional electoral systems are therefore less responsive to the demands of geographically concentrated groups, as compared to diffuse groups. In this chapter, I discuss the mechanisms through which economic geography and electoral institutions work to shape leaders’ policy incentives, notably effective vote maximization and the nature of electoral competition. I also discuss possible alternative mechanisms including government partisanship, factor mobility, party discipline, and electoral competitiveness.
Electoral institutions, which determine the manner in which citizens choose their representatives, and economic geography, which refers to the distribution of economic activities across space, together help to explain the variation in subsidy spending between democracies. Economic geography is measured here using disaggregated employment data that identify employees’ geographic location as well as their sector of employment. These data reveal that real world employment patterns rarely conform to the assumptions adopted in theoretical models of economic policy making. Relaxing these assumptions reveals new predictions about the policy effects of electoral institutions and novel quantitative evidence supports these predictions. Subsidies for the manufacturing sector constitute a larger share of government expenditures in plurality systems than in proportional systems when manufacturing employment is geographically concentrated. When manufacturing employment is geographically diffuse, governments in proportional systems assign relatively more of their budgets to manufacturing subsidies than governments in plurality systems, holding all else equal. This finding suggests economic geography can help to solve the debate over which electoral institutions generate the most particularistic economic policies.
The mechanisms linking electoral institutions and economic geography to policy outcomes are examined via two cases: a subsidy program to support Cognac producers in France and a subsidy for Austrian wine makers. The two programs exhibit different characteristics largely because of the respective countries’ electoral institutions and economic geography. In France, where Cognac producers are geographically concentrated and legislators are elected via a majority-plurality electoral system, the subsidy is selectively targeted to only those producers in the Cognac designated region. In contrast, the Austrian subsidy is available to all farm-gate wine merchants regardless of their geographic location. Farm-gate wine merchants, who sell wine at the place of production, are spread across more than forty-five thousand hectares in Austria. Subsidizing this geographically diffuse group is politically expedient for parties competing in elections held via proportional rules and closed-party lists, as in Austria. Both subsidy programs violated the European Union rules on State Aid, which limit member-states’ ability to assist domestic producers. Yet despite EU State Aid rules, some governments choose to subsidize domestic producers. Novel evidence shows that countries’ electoral institutions and economic geography predict the likelihood of governments’ compliance with EU state aid rules.
In proportional systems, governments spend relatively more on subsidies when the beneficiaries are geographically diffuse. Among proportional systems, spending on subsidies for diffuse groups is higher in closed list systems, where voters select a party at the ballot box, as compared to open list systems where voters to select individual candidates from a party’s list. In open list systems, legislators have incentives to divert resources away from geographically diffuse groups towards their own electoral district or bailiwick. By doing so, legislators cultivate their own personal support base, which increases their reelection chances in open list systems. Given this, open list systems incentivize the provision of economic benefits to geographically concentrated groups. These incentives grow stronger as district magnitude increases and politicians compete against more co-partisans for voters’ support. Consequently, among PR systems, the most generous subsidies occur in open-list systems with high mean district magnitude and geographically concentrated groups. These findings demonstrate that the nature of electoral competition is an important mechanism linking electoral systems and economic geography to policy outcomes.
I investigate how government-funded subsidies vary between electoral districts within an archetypal proportional system: Norway. Political parties competing in this closed-list proportional system, where voters select a party at the ballot box rather than an individual candidate, engage in policy targeting – that is, parties provide economic benefits selectively to geographically-defined groups. Political parties target economic benefits to those districts where they have relatively more supporters. Districts where the largest government party won a greater share of the vote in the previous election receive more generous subsidies, all else equal.
My argument suggests a solution to the debate over which democratic institutions make politicians most responsive to special interests: economic geography. My findings further suggest the widespread use of the plurality/proportionality dichotomy obscures an important mechanism linking electoral institutions to policy: the nature of electoral competition. Further confusion about the policy effects of electoral institutions stem from poor measures of particularistic economic policy. I demonstrate a novel way to classify government programs by estimating the geographic distribution of potential beneficiaries using entropy indices. My argument also adds an important element to neo-institutional theories in political science by demonstrating that it matters not only what voters want from government but also where they are located. The logic of my argument is general and can be applied to issues where voters with shared preferences exhibit varied geographic patterns. One example may be ethnic politics. My argument also has important implications for international politics, as discussed in this chapter. My argument suggests which countries are most likely to violate international economic agreements, which countries are most likely to impede future economic integration and which countries are most likely to demand reforms to existing international agreements.