Thursday, July 26, 2018

ASCE 2018 Conference: Summary of Carlos Díaz-Alejandro Lecture, "Identity, Pluralism, and Democracy," delivered by Andrés Velasco, Former Finance Minister of Chile

A highlight of the 2018 Conference of the Association for the Study of the Cuba Economy is the Carlos Díaz-Alejandro Lecture. The 2018 Lecture, entitled Identity, Pluralism, and Democracy, was delivered by Andrés Velasco, Former Finance Minister of Chile. The Lecture was entitled Identity, Pluralism, and Democracy. In these remarks Professor Velasco considered the rise of identity politics, especially in its extreme form of populism, and its consequences for the understanding of democratic governance. 
This post includes a brief summary of the remarks of Professor Velasco's remarks. Much food for thought. The Lecture was recorded and may be accessed HERE.

 ACSE 2018 coverage: 
 Conference Program HERE.

ASCE 2018 Presentation Summary: "The Challenge of Preserving the Revolutionary Moment in Changing Times--Cuba's Integration into the Global Economy "

ASCE 2018 Conference: Summary of Carlos Díaz-Alejandro Lecture, "Identity, Pluralism, and Democracy," delivered by Andrés Velasco, Former Finance Minister of Chile

 ASCE 2018: Summary of Opening Plenary "Cuban Economic and Political Situation" / Resumen del Plenario de Apertura "Situación Económica y Política de Cuba"

"Cuba After Raúl?" Program of the 28th Annual Meeting of the Association for the Study of the Cuban Economy, Miami, Florida 26-28 July/La Asociación para el Estudio de la Economía Cubana (ASCE) realizará su XXVIII conferencia anual titulada Cuba: Después de Raúl?

ASCE 2018 Conference: Summary of Ernesto Betancourt Keynote Address delivered by Mark Sullivan, Congressional Research Service, Library of Congress

Identity, Pluralism, and Democracy
Andrés Velasco
2018  Carlos Díaz-Alejandro Lecture
Association for the Study of the Cuban Economy
26 July 2018

Brief Summary of Remarks (originally delivered in Spanish with English Language PowerPoints)

Professor Velasco started with his memories of Carlos Díaz-Alejandro and his own work on Díaz-Alejandro's thought.  Díaz-Alejandro was a formative influence both in his decision to study economics and for the way in which he approached those studies. He remembered the introduction he wrote to an collection of Díaz-Alejandro's essays.  Economists have an option to say more and more about less and less, or to say less and less about more and more.  Díaz-Alejandro managed to say more and more about more and more.  It is in that spirit that he developed his remarks for the day. 

He started with three political economy puzzles. The first is why do successful states like the U.K. vote for Brexit to abandon the E.U.  When one looks at the data those who voted in favor most unaffected by EU membership voted in favor of exit. Second, why do people chose to hire competent dentists but incompetent politicians.  In that respect he noted the results of recent elections. The third asks why do governments adopt policies that hurt many people.  He noted in that respect the policies producing hyperinflation in Venezuela. But also noted that this was neither the first time nor the first place that has witnessed this propensity. More generally, he noted, he wondered what explains the explosion of populism in the world today. There appears to be something in common with global populism, one which has nothing to do with politics and everything to do with the politics of identity.What common threads might be discerned from these questions, to what do these questions point? These point to decisions that are individually rational but collectively irrational; individually constrained-efficient but collectively inefficient. A political economy of sorts is at work that is worth exploring.  

One aspect of the exploration in political economy terms is the way in which politicians are selected--policies versus policymakers. The traditional model posits the centrality of policy.  But it may be that individuals hire policymakers , not chose politics. The reasons: understanding policy is too time consuming, the relationship between policies and outcomes is unclear; and political selection is a matter of agency voters choose an agent to represent them; that is easier and comprehensible. Voting is a means of delegation rather than an affirmation of certain specific policy choices. Key here is the need for economists to think about politics and politicians.  Theory tends to miss these relationships. 

The problem, he noted, is that voters cannot be sure about the preferences of policymakers, congruent or dissonant with those of voters. For most voters, it is hard ti judge competence of politicians; hard to judge the honesty of policymakers; and hard to judge the credibility of policymakers (campaigning on the left and governing from the right). This suggests the basic agency problem of politics: selection as an imperfect information game.  Solutions prove to be inefficient. Two problems:  Pooling equilibrium (bad politicians cannot be identified with confidence); and separating equilibrium (signals are costly, as we know from the case of education).  Examples of costly signals include populism and the incompetent politicians.  That produces a question: can't societies find more efficient ways of signalling competence/honesty/credibility?

This raises issues of agency problems and identity. Individuals do not differ only over policy preferences, they also differ over identities, and preferences depend on these identities. Introducing identity considerations helps alleviate the principal agent problem. Candidates may have many identity each if which can affect their policy preferences.  Changing the identity of policy makers can serve as a means for making policy change credible.  He noted the example of the design of labor contracts to prevent shirking and improve productivity;  if workers identify with the firm they shirk less and produce more. 

That leads to issues of identity and the election of preferred politicians. Here Professor Velasco spoke to a recent paper (Hausmann and Velasco (2018)). Voters prefer leaders with whom they share ab identity. Identity makes it easier to choose politicians with desires attributes. If politician selection is a principal-agent problem then identity can increase credibility. Yet identity cleavages can also have harmful political effects. One is polarization. The other is encouragement of detrimental behavior, especially as identity must be reaffirmed.  And the third is propensity toward manipulation. Thus societies are faced with balancing the pros and cons of the use of identity to select policymakers.  Yet that balancing is itself an issue of information and preference. And those analytics may be managed as well by those who can control the constraints within which such balancing is undertaken. 

And that leads to the core issue, that of identity and democracy. Start with notion that identities are endogenous. Assumptions (1) belong to a group has an identity cost; (2) people with some type of identity impose external costs  when meeting with people of other identities (3) people of one type of identity feels a cost when meeting with people of other identities (4) identities prescribe ideal types of behavior which are nore or less conducive to economic productivity, (5) people suffer an identity costs when they deviate from prescribed types of behaviors. The key result of the interaction of these assumptions  is that people endogenously sort themselves into three groups, each with their identity and level of income: insiders (elite), outsiders who collaborate (working class), and and outsiders who do not collaborate (underclass). There is a language element to this model as well. There are implications for politics. The benevolent planner would place everyone in the elite (inclusive speech).  Others would emphasize the detriment to groups (divisive speech). Where elections are decided along identity lines the size of the group matters and leaders manipulate parameters to enlarge the group that supports them. The implications are that divisive speech can work as well as inclusive speech. The optimal choice is contextual. 

In this context how does liberal democracy survive. Transitions to democracy are possible if differences between insiders and outsiders are not too large and the elite group is sufficiently large. But hollowing out also has consequences for democracy (for example fo the middle class). Here class membership is assumed to be an identity.  Leaders can change perceptions of qualities needed for belonging and thus manage perception of threat.  Possible alliance of elite and underclass then possible. He noted as well the implications for the viable size of nations. It is in this sense that nations may fracture on the basis of identity (Spain, etc.). 

Professor Velasco then turned to the definition of populism.  He focused on economic populism. These tend to fail because their premises are unsustainable in the long or middle run.  But in the short run these have a certain allure. He then suggested an alternative, viewing populism not as an economic but as a political concept.  That might better explain what appears to be poor choices to the classical economists, now seen as rational political choices.  But that also suggests that welfare maximization may not align classical economics and politics.  Within this conceptual universe identity populism may serve as a powerful force. Right wing versus left wing populism important.  But then again their may be a power to populism as an anti-identity politics. Taken together populism may be understood as an extreme version of identity politics. It comes in many flavors and varieties.  It brings costs as well as produce benefits.

Where does that leave us? There are implications for economic policy making. These include a radically different vision of how policies are perceives, understood and chosen; voters choose policymakers not policies; successful politicians are very conscious of how they are perceived and the identity they project (optics are everything?). There are also implications for political practice.  These center on the shaping of identities; that seems to be the core political project from out of which policy choices are a function. Examples of Lincoln, Gandhi, Trudeau, Martin Luther King and others.  But that leaves the ultimate question: in a world in which identity politics matter, and in which these are useful and costly, might there be a way a forging at some level a common "we" from out of  populism. 

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