The rest of Oates: Laboratory Federalism, Suboptimalities and Thresholds for Decentralization.

Temporarily, I have bitten off more than I can chew.


Today I will finish a reevaluation of Oates and then I will write about either “Agrofuels in the Americas” by the Institute of Food and Development Policy or Pobreza Alimentaria en México (Nutritional Poverty in Mexico).  Afterwards I want to read a paper from UNICAMP and revisit some papers from a course in International Trade.

[I have introduced this paper in an earlier article dated: ______]

Laboratory Federalism assumes that states not only can, but want to absorb negative externalities.  The concept of the poor as a “negative externality” was introduced in the paper.  Regardless of any philosophical arguments, let’s make a very crude and general assumption that they are a “negative externality”.

If states view this socio-economic group in these terms, what incentives do they have to internalized this externality?  I believe that the distinction between “will” and “capacity” will be hard to measure.  It will be best to just determine a definition of “effectiveness” of internalizing this externality and then to look at the results.

A state can be judged as internalizing this externality by reaching a certain threshold for poverty aleviation, in whatever terms that society would like to classify this as.  This will have to be near-optimum for all strata of the society, because if not, the Tybout model assumes that wealthier individuals could just “vote” against such measures by moving to another state.

I think the following factors will be important to measure.

  • relative size of the state
  • relative size of the state’s economy
  • the type of economy [determine a threshold and place a state in 1-3 major economic sectors (industrial, commerical, service, pharmaceutical, etc.)
  • What type of education do these careers demand?  Were their educational experiences “well rounded”?
  • relative population concentrations in the state
  • relative amount of “economic/regional poles” in the state (if any)
  • what are the “humane” conditions in the state [these can change every two years, disregarding major changes in opinions following major world events, wars, etc.]
  • the previous category can have subcomponentes (A) the location of the state, (B) the attributes of the governor, (C) the majority party in control taking into account both local and state statespersons, (D) other (to be determined..) or simply “room for error”

Susan Rose-Ackerman (1980) and Strumpf (1997) say that states may “free-ride” through the existence of an informational externality.  Montana may be less prone to “experiment” if it is just waiting on California to flip the bill and use the Californian population as the test subjects for a new policy.

Another consideration would be what suboptimalities decentralization imposes.  Also, how do we even measure suboptimalities?  According to Schumpeter, should we even really be trying to find an equilibrium?!  He urged us to see the economic model as a “evolutionary process”, when we consider the role of technology in economic growth [Richard R. Nelson p.158].  Given that technology has been a significant impetus for economic growth over the last pair of decades, this is essential to recognize.

How can I relate “efficient businesses that use new technology” to “efficient states trying to internalize externalities”?  In Laboratory Federalism, states are trying to not only find the most successful policy, but also produce and maintain wealth.

When we consider Nelson’s analysis on Schumpeter we find that Schumpeter’s thoughts  could invalidate the notions of Game Theory “people make the ‘rational’ and ‘most economically efficient’ choice.  Humans do not make automactic decisions as if their were machines in most socieities.  Maybe they move instead of fight new state legislation internalizing negative social externalities?

William Baumol believed that the maximization of wealth could not lead as a general business policy.  Maybe the same applies to state policy?

“Em todos esses [modelos de maximização] os homens são considerados autônomos maximizadores e como tais permanecem.  E isso mostra por que nosso conjunto de teorias, conforme se tem desenvolvido, não nos oferece qualquer promessa de sermos capazes de lidar efetivamente com a descrição e a análise da função empresarial. (Baumol, 1968, p.68)  _(Nelson 156).

Returning to address another variable..

How can suboptimalities be measured in the original context?  Why can’t the effectiveness of tax policy and the actual tax rates be considered?  This could be analyzed per socio-economic sector in every state.

Oates & Schwab (1988) also discuss Niskanen-type political agents that seek to maximize wealth for personal gain over the considerations for their constitutencies [Oates 1136].  However, what makes us believe the Decentralization results in complete disengagement of the Federal Government.  The national government has no interest in seeing a member state completely fall into anarchy or an oligarchic status-quo.  The federal government cannot function if there are no highways, basic education, basic services and utilities in a given state.  Therefore, even if states are not going to “directly” consider environmental costs in the moment, they will be forced to eventually in an “indirect” way.  If not their economic growth will eventually be halted.  Over the long run, this is erode large economic gains witnessed in previous periods.

To bring this discussion into an international context.. is decentralization responsible for the economic growth witnessed over the centuries?

Roy Bahl and Johannes Linn (1992) say that, well, it depends.

They say that “Decentralization more likely comes with the achievement of a higher stage of economic development” (p.391); the ‘threshold level of economic development’ at which fiscal decentralization becomes attractice ‘appears to be quite high’ (p.393).

So what is this threshold?  Should be consider the evolution of the public sector and when countries acquired independence (Oates 1143)?

[“sidenote”: Even thoough those generally newer countries are highly centralized.. isn’t this a huge simplification?  New countries come into existence in various sizes and “from” various colonial powers (addressing Richard Bird 1986).]

Jeff Huther and Anwar Shah (1996) found that there is a “significant and positive coorelation between increased decentralization and improved performance (either in political or economic terms)” (Oates 1140).  Should we look at the increased decentralization of countries such as Brazil or China as examples of successful decentralization in coorelation with economic growth?

Brazil is moving large portions of its population inland, while simultaneously creating new states.

China grants different states of autonomy to different economic regions and states.

Davoodi and Zou (1998) and Zhang and Zou (1998) have concluded two different sets of results regarding if decentralization leads to economic growth.

As a contrast, consider Russia.  Ever more centralized, is its economy really growing?  Or is this a result of energy resources that are temporarily masking a more serious economic problem?


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