Economic Effects of Post-Socialist Constitutions 25 Years from the Outset of Transition

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Chapter 1.  Constitutions and economic policy – the theoretical nexus

Economic studies view the constitution from different angles. The common feature of these approaches is, however, the treatment of constitutions as certain meta-rules defining the fundamental constraints within which political, economic and social actors make their choices and take their actions (Buchanan 1987). In this context the constitution is viewed as a crucial element of the institutional order within the state and thereby also an important factor shaping the functioning of the society. Based on such general approach economists have developed arguments emphasizing the constitution’s role in, inter alia, conflict-solving and coordinating collective action (e.g. North et al. 2009, Weingast 1993), improving efficiency of resource allocation by establishing property rights protection (e.g. Acemoglu and Robinson 2006), as well as in the distribution of political and economic rents (e.g. Greif 2008).

Taking as a starting point the view of the constitution as a kind of social contract, economists approach its analysis through the lens of: contract theory, treating it as an incomplete contract; agency theory, focusing on principal-agent relationships connected with its functioning; or (evolutionary) institutional economics, viewing it as the result of cultural evolution or a ‘bundle’ of conventions. Notwithstanding many significant differences between these perspectives, their common feature is the attempt to approach the constitution with the use of dynamic models of human behavior.

In this chapter we provide the theoretical background for those economic studies of constitutions which strive to explain the relevance of constitutional rules for policy-making in the state and thereby – economic outcomes. Systematic research focusing on economic effects of constitutions began in the 1990’s and has been developing intensively during the recent years. The starting point for many such analyses is the model of the democratic policy-making process proposed by Persson and Tabellini (2003). Constitutional rules, functioning as ‘rules of the game’ for political and economic actors in a state, determine the institutional setting for policy-making and influence political outcomes. By doing so these rules participate in transforming citizens’ preferences regarding policy into policy decisions. The latter influence the functioning of markets and economic performance of countries.

Several constitutional rules and their economic effects have so far been analyzed theoretically and empirically, e.g.: electoral rules and electoral systems, ← 13 | 14 → including differences between proportional and majoritarian voting rules or district size (e.g. Persson and Tabellini 2003); rules regarding structure of power within the state, in particular different models of government and separation of powers (e.g. Persson and Tabellini 2003, Treisman 2007, Blume et al. 2009b); rules introducing direct democracy mechanisms, e.g. mandatory referenda (e.g. Matsusaka 1995, Blume et al. 2009a); constitutional bills of rights (e.g. Blume and Voigt 2007); constitutional enforcement mechanisms, in particular rules determining the position and functioning of the constitutional judiciary (e.g. Feld and Voigt 2003); rules regarding constitutional change (e.g. Rasch and Congleton 2006). Among economic variables explained by reference to, inter alia, these constitutional rules are macroeconomic outcomes (economic growth, per capita income, labor productivity, total factor productivity), fiscal policy variables (government revenue, government expenditures, budget deficits, composition of government spending), governance variables (corruption, government efficiency), as well as other variables describing individual behavior (e.g. the propensity to cheat on taxes) or entire societies (e.g. reported life satisfaction).

Studies of economic effects of constitutions, though, as mentioned above, mainly based on Persson and Tabellini’s (2003) formal model of the democratic policy-making process, reach down in their fundaments to the research program of Constitutional Economics, as introduced and developed in particular by the Nobel Prize laureate James M. Buchanan². Therefore, we begin this chapter with a presentation of the Constitutional Economics research program with particular emphasis on these aspects which make it not only useful, but fundamental, for studies of economic effects of constitutions. Secondly, we describe the formal framework for studying economic effects of constitutions as proposed by Persson and Tabellini (2003) and applied by their numerous followers. Thirdly, we reflect on the future development prospects for the theory regarding economic effects of constitutions and on challenges that its verification faces. Finally, we relate the sketched theoretical background to the specific topic of our study, i.e. the potential significance of constitutional rules for performance in the area of post-socialist economic reforms.

The matter under consideration in this book is obviously also strongly linked to the literature on factors explaining successful performance in economic reforms during post-socialist transition from the centrally-planned economy to ← 14 | 15 → the market system, in particular as regards political and institutional determinants influencing this process. This literature underwent particularly intensive development at the turn of the century and is very rich (e.g. Roland 1994; Balcerowicz 1996; Dewatripont and Roland 1997; Amsden et al. 1998; Fish 1998; Kołodko 2000, 2001; Raiser et. al 2001; Roland 2000, 2002; Hare 2001; Winiecki 2001; Aslund 2002; Campos and Coricelli 2002; Dąbrowski and Gortat 2002a,b; Milczarek 2002; Fidrmuc 2003; Havrylyshyn and van Roode 2003; Godoy and Stiglitz 2006; Lissowska 2006; recently Hartwell 2013; Aslund and Djankov 2014, including Treisman 2014; works mentioned therein and many others³) but also to a significant degree matured. This book, in its theoretical dimension, is aimed, in particular, as a contribution to the development of a much less matured field of Constitutional Economics. Therefore in this chapter we present the theoretical underpinnings of our study originating from the constitutional economics literature, refraining at the same time from devoting a separate section to the literature on economic reforms in transition and directing an interested reader to one or more of the sources listed above (Hare and Turley 2013 is also a recent compendium of the works on economics and political economy of transition). The results and implications from this study can of course also be treated as an enrichment and extension of this literature.

1.1  The Constitutional Economics research program⁴

Economics is essentially a social science concerned with the conditions and principles of making choices. Until mid-20^th century economic theory focused on making choices within certain operative institutional structures. It was assumed that such structures constitute constant exogenous constraints on the choices that were made. In the 1950s a new research program developed – later known as Constitutional Economics – which allowed for broadening the research field of economics by introducing analysis of the choice of these constraints, i.e. the so-called ‘rules of the game’, with the use of standard tools of economic analysis – rational choice theory. ← 15 | 16 →