November 2005, Issue 5

Understanding Political Change Through Economics

Enrico Spolaore, PhD, joined the Department of Economics in September 2004 as a professor of economics. He came to Tufts from Brown University where he was the Kutayba Alghanim Assistant Professor of Political Economy and a faculty associate of the Watson Institute for International Studies. Spolaore received a PhD in economics from the University of Siena and a PhD in economics from Harvard University.

Spolaore’s research interests are political economy, international economics, and economic growth. “The reason I was attracted to economics is because it deals with people and with pressing issues that people have,” says Spolaore. “Why some countries are rich and some are poor; why sometimes we have major recessions and sometimes we have prosperity.” Spolaore is interested in political economy because of the added breadth it brings to understanding the world’s economic issues. “I think economics has methodology and tools that can help us understand other phenomena that traditionally are considered outside economics, such as political institutions and political interactions.”

Much of Spolaore’s recent research has centered on trying to understand why countries form and break up. He recently co-authored The Size of Nations with Alberto Alesina (MIT Press). “It’s traditionally been an issue for historians, for political scientists,” says Spolaore. “So we said: ‘Can economists learn from historians and political scientists, but also contribute our own perspective?’” Economics brought to the discussion the concept of trade-offs between the benefits and costs of a larger country size. "Important benefits of scale are associated with the provision of public goods, which are cheaper in per capita terms when more taxpayers pay for them,” says Spolaore. However, more taxpayers often lead to a heterogeneity of preferences about public goods. “People have different preferences regarding the type of laws and policies to be implemented, the cultural and linguistic characteristics of the state, or other jointly supplied public goods; being part of the same country implies sharing those policies and characteristics in ways that cannot satisfy everybody's preferences,” says Spolaore. The conflict arising from this heterogeneity of preferences can be a cost of a larger country size.

“You may have groups of people who would like to become independent in order to implement policies closer to their own preferences, but there might also be political or economic costs, trade-offs,” says Spolaore. Often groups seeking independence are ethnic minorities who want more control over their own affairs. Spolaore contends that in a world of protectionism and barriers to trade, the economic costs of independence have often outweighed the benefits ― hence the formation and persistence of large, heterogeneous, multiethnic nations. But as democracy and global economic integration spread throughout the world, the political and economic costs of independence decrease, allowing groups within large countries to seek and attain independence, forming their own nations. “Within the past 50 years the number of independent nations has increased dramatically, from 76 in 1946 to 193 today. More economic integration tends to lead to political disintegration,” says Spolaore.

However, political disintegration does not have to occur if the country’s leaders allow each group a political voice in government. Heterogeneity can lead to division, civil war, or even secession, but lack of it can cause economic stagnation because of a lack of variety in skills and ideas. “The trick is [to find] those institutions, both domestically and internationally, that allow you to maximize the benefits of this diversity but minimize the costs that also exist, in terms of conflict and different preferences about the public good,” says Spolaore.

A good balance might be to have a central government that provides those public goods that must be provided to all the people in a similar way, such as defense, but to have decentralized governments, such as state governments, that would provide other public goods in a more localized manner that could respond to the preferences of the local populace. “So every community can provide those goods that are closest to their own preferences,” says Spolaore. “The US has been very successful in that way. It hasn’t come without cost. There has been civil war and tension, and sometimes decentralization has led to inequity. But overall, the system has been reasonably stable and efficient.”

The European Union (EU) is an example of a supranational organization that is trying to take advantage of the benefits of size. Spolaore recently gave a keynote speech at an international conference, held at the Flemish Parliament in Brussels, Belgium, on the current political and economic situation in Europe. The European Union has grown to include 25 countries and has been expanding its policies. “Overall, this is likely to produce increased economies of scale, but also the costs of heterogeneity are likely to increase for existing members,” says Spolaore. “Therefore it is not so surprising that a majority of voters in France and in the Netherlands might have concluded that their own preferences over all sorts of issues may be quite far from the preferences of many people and governments in other European countries.” These voters recently failed to ratify the EU constitution.

Spolaore suggests: “The European Union should concentrate on a few important tasks on which economies of scale are so large as to offset the high heterogeneity costs.” These tasks could include a common foreign policy, a common defense, and maintaining and strengthening a unified common market, including the existing common currency (the Euro). “On the other hand, the EU should drop any attempt to micromanage thousands of minor issues that are better left to national and local authorities,” says Spolaore.

Spolaore is currently working with Romain Wacziarg of Stanford University on two projects dealing with economic growth and development. In a forthcoming paper, they use real-world data to empirically estimate the relation between economic growth and its determinants, including the size of countries and the degree of international openness (participation in international trade). They found that size is very important for growth for those countries that are not open to international trade, but matters much less for open countries that trade extensively with the rest of the world. Conversely, they found that openness is very important to understanding growth for smaller countries, and that smaller countries do tend to be more open. These results are consistent with their theoretical framework, and help to understand the benefits and costs of political and economic integrations across countries.

In the second collaboration, Spolaore and Wacziarg study the determinants of income differences across countries. “This project is on the diffusion of development,” says Spolaore. “Why are some countries so poor? What are the barriers to the diffusion of innovation and technology?” The project involves collecting data on income per capita, institutions, and geographical differences such as latitude and distances between countries. Examining the data involves running regressions (statistical procedures for determining relationships between variables). Spolaore and Wacziarg test their theoretical models with the data, and the data help them refine their models so they more closely reflect real life.

Spolaore has discussed possible research interactions with many economists at Tufts, as well as some historians and political scientists. He teaches a course on the economies of Middle Eastern countries, so he’s especially interested in becoming involved with the Fares Center for Eastern Mediterranean Studies.

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