Lei, Yu-Hsiang
(2016)
Essays in political economics of development.
PhD thesis, London School of Economics and Political Science.
Abstract
The collection of three essays study how political factors can shape economic outcomes, with a particular regard to developing countries. My exploration in this direction begins with the government-firm connections and extends to the cause and prevention of internal armed conflicts.
The first chapter examines the reciprocal relationship between governments and firms. The rent-seeking behavior of politically connected firms and its associated costs have long been recognized by economists. The existing literature has mainly focused on the favors that firms receive, but much less attentions has been paid to what politicians gain in return. In my first chapter, titled ”Can Governments Harvest Connections with Firms? Evidence from China,” I provide evidence on the reverse - firms providing favors to governments in a reciprocal relationship - exploiting a natural experiment in China. In October 2001, the tax revenue sharing rule between central and local governments was unexpectedly reformed: the higher the local tax revenue in 2001, the higher the share that local governments would get post-2001. From a newly collected dataset, I find that before the reform the governments that granted more favors to firms - access to credit and tax deductions - were able to mobilize more assistance from firms in order to raise the tax revenue in 2001. Furthermore, this reciprocation is not an institutional relationship, but hinges on a repeated interaction between firms and local leaders. Exploring the variation in leadership turnover, I find that firms who had previously received government favors provided no assistance to leaders who would soon leave office. These results are consistent with a theory of reciprocal relationships between governments and firms. My findings not only suggest that governments and firms can form dynamic relationships to
exchange favors intertemporally, but also shed light on the government-business relationship in China.
The last two chapters focus on political violence, which has commonly been regarded as among the first-order issues in developing countries. The second chapter examines whether the endowment of natural resources might lead to internal armed conflict. To examine this question, we ideally require exogenous variation in resource windfalls. This is a challenging task as the quantity of natural resources extracted is a choice and oil prices may be affected by violent conflict. To address this issue, in a published paper co-authored with Guy Michaels at the London School of Economics, titled ”Do giant oilfield discoveries fuel internal armed conflicts?,” we use new data to examine the effects of giant oilfield discoveries around the world since 1946. We show that the timing of giant oilfield discoveries is plausibly exogenous. We find that on average these discoveries increase per capita oil production and oil exports by up to 50 percent. But these giant oilfield discoveries also have a dark side: they increase the incidence of internal armed conflict by about 5-8 percentage points. This increased incidence of conflict due to giant oilfield discoveries is especially high for countries that had already experienced armed conflicts or coups in the decade prior to discovery.
In the last chapter, I focus on the prevention of internal armed conflict. In order to lessen the likelihood of conflict, one important precaution is to ensure that military resources do not fall into the hands of non-state groups. Observing the recent conflicts in the Middle East, and, in particular, the issue of wide spread of military resources well beyond governments control, one main contributing feature is that governments sponsor weapons to non-state agents (militias) to fight the states enemies, but after the war ends these weapons cannot be called back. In my third chapter, titled ”Proxy Warriors: A Theory of Military Assistance”, I develop a theory to study government’s optimal strategy in sponsoring weapons to militias. Although giving militias more weapons may win the war more quickly, it puts more weapons into the hands of militias afterwards. Militias learn that they can benefit from holding more weapons when hostilities end. This incentivizes the militias to fight strategically in order to maximize their subsequent stock of weapons. Given this governmental dilemma, in a dynamic setting I rationalize a supply strategy featured with a stopgap proposed by the US security forces.
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