Money, Politics, and Democracy Adam Przeworski May 21, 2011
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Introduction
Decisions made by governments a¤ect the welfare of particular groups and individuals. Hence, it is only natural that those whose well-being would be in‡uenced by these decisions seek to in‡uence them. Indeed, the essence of democracy is that citizens exert in‡uence over governments by freely exercising their equal rights to participate in elections, public speech, peaceful demonstrations, and other forms of political activity. But in any market society, the resources which the participants can bring to the competition for political in‡uence are unequal. Equality of rights is not su¢ cient to sustain the equality of political in‡uence in economically unequal societies. This observation is almost as old as democracy itself. Already in 1844 Marx characterized the duality between universalistic rules and unequal resources as follows: The state abolishes, in its own way, distinctions of birth, social rank, education, occupation, when it declares that birth, social rank, education, occupation, are non-political distinctions, when it proclaims, without regard to these distinctions, that every member of the nation is an equal participant in national sovereignty.... Nevertheless the state allows private property, education, occupation to act in their way – i.e., as private property, as education, as occupation, and to exert the in‡uence of their special nature. This duality was repeatedly diagnosed ever since. The chairman of the Drafting Committee of the Indian 1950 Constitution, B. R. Ambedkar (quoted in Guha 2008: 133), saw the future Indian republic as entering a "life of contradictions": In politics we will be recognizing the principle of one man one vote and one vote one value. In our social and economic life, we shall, by reason of our social and economic structure, continue to deny the principle of one man one value. How long shall we continue to live this life of contradictions? How long shall we continue to deny equality in our social and economic life? If we continue to deny it 1
for long, we will do so only by putting our political democracy in peril. The idea that political equality is not possible without social and economic equality was the cornerstone of Social Democracy. Jean Jaures (1971: 71) thought that "The triumph of socialism will not be a break with the French Revolution but the ful…llment of the French Revolution in new economic conditions," while Eduard Bernstein (1961) saw in socialism simply "democracy brought to its logical conclusion." Yet economic and social inequality persist and their impact on political inequality continues to be a burning issue of democracy. Tracing the impact of economic resources, to which I refer simply as "money," on democratic politics and the resulting policy outcomes is not a simple task for several reasons: (1) The point of departure must be that this impact is to some extent inherent in the capitalist economic system in which the decisions a¤ecting the entire society, primarily those concerning investment and employment, are a prerogative of private owners of productive resources. The democratic process, even when it operates perfectly, is constrained by these private decisions. (2) Socioeconomic inequality may cause political inequality without any expenditures of money or other costly e¤orts by wealthy individuals or groups if either poverty or inequality directly a¤ect political participation of lower income groups. Except for the United States, and to a lesser extent France and Switzerland, the rates of electoral participation do not di¤er much by income and education (see Przeworski 2010: 93-94 for a summary of …ndings). Yet Salt (2006) found that among the countries for which data on inequality are available from Luxembourg Income Studies, greater inequality depresses political interest, the frequency of political discussions, and electoral participation of all but the most a- uent income quintile. Because this paper concerns the e¤ects of active uses of economic resources to in‡uence policy outcomes, I not delve into this topic any further, but it is important to have in mind that economic inequality may be su¢ cient to generate political inequality without any actions by a- uent groups. Indeed, one identi…cation problem, about which see below, is to distinguish the direct e¤ect of economic inequality from its e¤ect via di¤erential political expenditures. (3) The impact of money on politics cannot be reduced to "corruption." True, corruption scandals abound: suitcases …lled in cash are found in the prime minister’s o¢ ce, government contracts are awarded to …rms co-owned by government ministers, insider trades are rampant, political parties are found to have bank accounts in Switzerland, local governments operate systematic bribe schedules on their contractors, the list goes on and on. Moreover, such scandals are by no means limited to less developed countries or to young democracies: these examples are drawn from Germany, Spain, France, Italy, and Belgium. But reducing the political role of money to instances of "corruption" is deeply misleading. Conceptualized as "corruption," the in‡uence of money becomes something anomalous, out-of-ordinary. We are told that when special interests 2
bribe legislators or bureaucrats, democracy is corrupted. And then nothing needs to be said when special interests make legal political contributions. In order to exist and to participate in elections, political parties need money; because election results matter for the private interests, they understandably seek to befriend parties and in‡uence results of elections: the logic of political competition is inexorable. That the same acts are legal in some countries and illegal in other systems –U.S. political …nancing practices would constitute corruption in several democracies –is in the end of secondary importance. The in‡uence of money on politics is a structural feature of democracy in economically unequal societies. (4) The information about the uses of money in politics is scant. To some extent this lack of knowledge is due to the very nature of the phenomenon: legally or not, money in…ltrates itself into politics in ways that are intended to be opaque. A general conclusion of surveys conducted in twenty-two countries by the National Democratic Institute for International A¤airs (Bryan and Baer 2005: 3) is that "Little is known about the details of money in political parties or in campaigns. Political party …nancing patterns are extremely opaque...." With regard to Latin America, Zovatto (2003: 10) comments that "information about …nances of political parties is scarce because the culture of transparency and the obligation of these forces to give accounts to the State and the civil society has been in general absent from the political-partisan scene of the region." Information about political contributions is available only for a recent period in a handful of countries. Information about lobbying expenditures exists only in the United States. Hence, if the evidence summarized below is U.S.-centric, it is because studies of the impact of political contributions or of lobbying activities on electoral and policy outcomes are rare outside the United States. (5) Even when the information is available, the causal impact on money on the electoral process, on legislative outcomes, and on bureaucratic and regulatory decisions is di¢ cult to identify because the direction of causality is often unclear. Estimates of these e¤ects vary broadly across di¤erent studies, perhaps due to their di¤erent methodological designs. These di¢ culties imply that the design of regulatory frameworks that would counteract the e¤ect of economic on political inequality is far from obvious. Various regulatory schemes have been proposed and various are in use but we have no systematic knowledge of their e¤ects. Moreover, some well-intentioned proposals may be counterproductive. Perhaps instead of legal regulation, more e¤ective are mechanisms by which poor people can pool their resources in order to counterbalance the in‡uence of the rich. In what follows, I …rst discuss the limitations imposed on the democratic process by the structure of ownership of productive resources. The core of the paper is the analysis of various ways in which the in‡uence of money may a¤ect the political process and the policy outcomes. Finally, I review and comment on the regulatory mechanisms used in di¤erent countries. An analysis of the impact of money on the quality of democracy closes the paper.
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2
Capitalism and Democracy: Structural Dependence on Capital
Private ownership of productive resources limits the range of outcomes that can ensue from the democratic process (Przeworski and Wallerstein 1988). Collective decisions are constrained in any capitalist economy by the fact that crucial economic decisions, those a¤ecting employment and investment, are a private prerogative. Hence, the exclusive focus on the political process can be misleading. Institutions do matter, so do partisan di¤erences. But how much? Unless this question is posed each time, we end up with an ideological view of the political process; a glori…cation of popular impotence. Indeed, the ideology of democratic capitalism is self-contradictory: people are simultaneously told that when they vote they choose and that some choices will result in their impoverishment because of the e¤ect they have on the behavior of those who control the productive resources. Clearly, this ideology portrays the fact that property has this constraining power as impersonal and natural, just a fact of life. But tensions remain: if masses of people are disa¤ected from the political process, it is because what can be decided by voting is limited by the private ownership of capital. As Bobbio (1989) put it, “the question is not who votes but on what.” Capitalism is a system in which most productive resources are owned privately. Yet under capitalism property is institutionally distinct from political authority: this separation is necessary for markets to exist. As a result, there are two mechanisms by which resources are allocated to uses and distributed among households: the market and the state. Individuals are simultaneously market agents and citizens. The market is a mechanism in which resources are allocated by their owners. The state is also a system that allocates resources, including those it does not own, with rights distributed di¤erently from the market. The market is a decentralized mechanism: households and …rms decide how to allocate the resources they own. The state is a centralized mechanism: it coerces economic agents to do what they would have not chosen to do voluntarily. Given the coexistence of these two mechanisms, one way to see the political process is the following. Political actors reveal their preferences for policies by voting; the result are policies, such as the tax rate, that are supposed to be implemented by the elected governments; and then economic agents maximize their utility, subject to the constraint of the policy, by deciding how much to save and how much labor to supply. The result is an allocation of resources to uses and a distribution of incomes to households. The constraining e¤ect of private ownership on collective decisions can be shown already at this level of abstraction. Each voter knows that the policy resulting from an election will a¤ect the decisions of individuals as economic agents to save and to work. Speci…cally, they know that redistribution of incomes (or consumption) would cause the owners of capital to reduce investment, thus future employment and incomes.1 Even if a majority would want to redis1 Note
that the assumption concerns the redistibution of incomes that would be entirely
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tribute more incomes, it must exercise self-restraint in anticipation of decisions concerning investment and employment, which are made by owners of capital in pursuit of their own welfare. As a result, some allocations of resources and some distributions of welfare are inaccessible to the collectivity even if they are technologically feasible given the endowments of the economy. One can cite alternative formulations (Bertola 1993) but the general logic is the same. Whenever private agents respond in a decentralized way to government policies, the policy choice, and the resulting allocation of resources and distribution of incomes, are constrained by private decisions. The constraining power of agents with di¤erent endowments depends on the magnitude of these endowments and the elasticity with which they are supplied. The constraining power of capital stems from the fact that no collective organization or collective action is required for this constraint to bite: it is su¢ cient that each …rm independently pursues its self-interest. Thus, while the state may be politically dependent on labor or other organized groups, it is structurally dependent only on capital. Because the collectivity is dependent on private decisions for the realization of its objectives, it is constrained in its policy choice and limited in the range of outcomes that it can generate. If they are well informed, voters anticipate these constraints; if they are not perfectly informed, they will vote only to …nd that they have been betrayed by governments they elected. Globalization, speci…cally the international mobility of factors of production, may tighten the constraints facing the particular countries, but its role tends to be excessively dramatized. As Clark (2005) puts it in the title of his book, it is "Capitalism, not Globalism." Structural dependence on capital is inescapable in any private ownership economy even when this capital is exclusively local. Moreover, while globalization may cause redistributions of income to be more expensive in terms of their e¤ect on investment and employment, it does not necessarily restrict the range of choices available to voters. Indeed, Przeworski and Meseguer (2006) argue that if globalization increases inequality, the distance between redistributional platforms o¤ered by left and right-wing political parties increases. Hence, while the entire range of choices moves toward lower degree of redistribution, this range becomes larger. To the extent to which governments are structurally dependent on private agents, therefore, the scope of political decisions is limited. This is not to say that all democratic capitalist systems are the same: structural dependence need not imply that partisan and institutional di¤erences are irrelevant. But a science of politics that ignores economic constraints on popular sovereignty misses what all democracies have in common, namely, that they exist in societies where the future of all depends on private decisions of those who control productive resources. Popular sovereignty is constrained by private ownership of collective resources. consumed or directly of consumption, as in Bertola (1993). The e¤ect of taxes on investment is ambiguous, because tax revenues can be spent to increase the supply of factors or their productivity. See, for example, Barro’s (1990).
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This structural dependence of the entire society on capital does not undermine the value of elections as a mechanism of collective decision making. The structure of the economy imposes limits on the collective choice but within these limits elections still align the collective decision with the distribution of individual preferences. That a choice is exogenously constrained does not imply that the mechanism by which it is made is faulty. If the voters know the consequences of the choices they would collectively made, they make the best choice given their beliefs about these consequences.
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Political Dependence on Money
Politics costs money: this much is inescapable. Parties need money to exist, to organize election campaigns, to survey public opinion, to bring their supporters to the polls, to persuade those undecided to vote for them. They need to cover costs of meeting rooms, transportation, printing their materials, access to television. The point is obvious but it should be kept in mind: in some countries the general public both opposes public …nancing of political parties and perceives private …nancing as corrupting. How much money is another question. Elections are expensive but their costs varies greatly across countries, and in some countries they are excessively expensive: in 2000, expenditures per voter were higher in Mexico than in the United States. Nevertheless, the elementary fact is that without money parties cannot exist, not to speak of competing in elections, so it is only natural that they try to …nd it wherever they can. They can …nd it only where the money is. As Becker (1983) has argued, all politics is a process of competition for in‡uence. But he neglected to observe that this competition is not among equals. Some competitors cannot equalize their marginal cost of in‡uence over politics with their marginal bene…ts because, in the language of economics, they are "budget constrained." Given the inequality of …nancial resources – between producers and consumers, between large and small …rms, a- uent and poor individuals – competition for political in‡uence may not only generate excessive costs of politics, not only ine¢ cient allocations of productive resources, but it may bias political outcomes in favor of those with larger resources, to perpetuate various inequalities. The last e¤ect is the exclusive focus here: I review only those studies of political in‡uence that assess whether political expenditures or other costly e¤orts by special interest groups bene…t them economically. Interest group activities include in‡uencing and mobilizing the electorate, …nancing electoral campaigns, lobbying legislators and the executive branch, and using courts. Schematically, one may think that money biases political outcomes in favor of the donors if (1) political contributions a¤ect the platforms o¤ered by parties in elections, (2) campaign contributions a¤ect the outcomes of elections, (3) political contributions or lobbying e¤orts a¤ect legislative decisions, (4) political contributions, lobbying e¤orts, or outright bribes in‡uence executive or regulatory decisions. Note that, following Walecki (2007) and Zovatto (2003: 6
12), I treat together campaign contributions and other expenditures to support political parties, referring in general to "political contributions" or "political …nancing." Note as well that in some countries money is raised by individual candidates while in other countries it is collected and distributed by political parties. Some potential causal paths through which money can in‡uence political outcomes are illustrated below but, as shown below, political contributions may also have direct e¤ects on legislative outcomes as well as on executive or regulatory decisions. Political Contributions .& Party Platforms ! Election Results & # Lobbying ! Legislative Outcomes & # Bribes ! Executive Decisions Regulatory Decisions To appreciate how complex these causal mechanisms can be, consider the study of Grossman and Helpman (2001), attempting to distinguish the role of money in buying platforms and buying votes in the U.S. context. In their model parties maximize the probability of winning a majority of seats, while special interest groups maximize the welfare of their members. Voters come in two kinds: strategic voters maximize expected utility while impressionable voters are favorably in‡uenced by campaign advertising. Special interests make campaign contributions, politicians choose policies, and voters vote; not necessarily in this order because contributions can play a twofold role. They can be used early in the campaign to induce parties to announce platforms that are to the liking of the lobbies or they can be used once the platforms have been announced to sway voters to vote for the party closer to the lobby. If there is only one interest group, the conclusions are that: (1) To in‡uence their platforms, the group contributes to both parties, giving more to the party that is the ex ante favorite to win; (2.1) If the resulting platforms are the same, the special interest is indi¤erent as to which party would win and contributes no more. (2.2) If the resulting platforms di¤er, the group contributes additional funds to tilt the election in favor of the party closers to its interests. ”Overall,” Grossman and Helpman conclude (2001: 339), ”the contributions bias the policy outcome away from the public interest both by in‡uencing the parties’positions and perhaps by tilting the election odds.” The electoral motive – contributions designed to tilt elections in favor of party whose announced position is more to the liking of the special interest – is even weaker when several interest groups compete for in‡uence because each group can ride free on the contributions of other groups. In the end, platforms re‡ect contributions and deviate from the welfare of the 7
average voter. Parties act as if they were maximizing a weighted average of campaign contributions and of the aggregate welfare of strategic voters.
3.1
Methodological Di¢ culties
Before summarizing empirical …ndings, it is important to realize that the e¤ects of political contributions on party platforms, individual voting decisions, and legislative outcomes are di¢ cult to identify. Consider di¤erent, not mutually exclusive, possibilities: (1) Special interest groups, "lobbies," use political contributions to in‡uence party platforms. (1.1) If an interest group succeeds in persuading all major parties to adopt programs to its liking, then it does not care which party wins and it does not need to make campaign contributions designed to in‡uence voters. Moreover, if a lobby manages to establish a long-term relation with a party, then it does not need to buy legislative votes each time a issue on the agenda a¤ects its interests, "on the spot market." (1.2) If the interests of a lobby are embraced by only some parties, this lobby contributes to increase the likelihood that this party or parties would enter the government. (2) Candidates have di¤erent preferences with regard to policies. Lobbies know who is who. They contribute to the candidates whose position would lead them to adopt policies favorable to their interests. Campaign money buys votes. While in o¢ ce, the elected candidates pursue policies they prefer, thus advancing special interests. (3) Lobbies expect particular parties or candidates to win the election. They contribute to the expected winners, hoping to receive favors in exchange. The direction of causality is di¤erent in these alternative scenarios. All the research shows that winners of elections received higher contributions than the losers. But is it because money buys votes or because it follows the winners? In the statistical language, this is an "identi…cation" problem, and it is not an easy one to resolve. True, in the end, the policies may be the same whether campaign contribution tilt the election in favor of a candidate supported by a lobby or a candidate who would have won anyway becomes indebted to a lobby. But without a due attention to this problem, claims that if winners received (or spent) more money, their victory must have been due to campaign contributions are untrustworthy. The same holds for the relation between political contributions and legislative votes: it is again possible that legislators vote in particular ways because they are bribed by lobbies or that lobbies support legislators whose preferences are close to them. These methodological issues may explain the wide range of empirical assessments of the impact of money.
3.2
E¤ects of Political Contributions on Elections.
Zovatto (2003: 16) puts it simply: "El dinero sí compra votos y no sólo en los Estados Unidos." Does it? Does money buy votes or do votes generate money? 8
Moreover, if it does, how does money buy votes? Is it because political advertising changes voters’preferences, because some voters are "impressionable" as Grossman and Helpman (2001) have it, or is it because campaign contributions …nance the activities of parties –ranging from registration e¤orts to provision of transportation –to bring their supporters to the polls; hence, they di¤erentially a¤ect turnout, as argued by Hansen and Rosenstone (1996)? Whose votes does money buy: of the undecided or of people who otherwise would not vote? In favor of whom: incumbents or challengers? The e¤ect of campaign spending on outcomes of elections is controversial (Stratmann 2005). The observed facts are simple and robust: those who receive and spend more money win. This much has been observed at least in the United States, Brazil (Samuels 2001), Chile (Morales Quiroga and Piñeiro Rodríguez 2010), France (Palda and Palda 1998), Japan (Cox and Thais 2000), South Korea (Shin et al. 2005), and Uruguay (Morales Quiroga and Piñeiro Rodríguez 2007). But the causal question –do they win because they spend more money? – has received widely divergent answers. Moreover, in addition to the issue of causal direction, the e¤ect of spending is confounded by e¤ects of incumbency. There is extensive evidence that the marginal impact of campaign expenditures on votes is lower for the incumbents, who already enjoy a high level of support, than for the challengers. Yet even this observation is contested. Hence, it is not surprising that in a penetrating summary of …ndings, Stratmann (2005: 137) is led to observe that "academic researchers for the most part have trouble establishing a causal and quantitatively important connection between spending and vote shares.... To date, no consensus has been reached regarding the e¤ectiveness of campaign spending on vote shares." The …rst salvo in these debates was …red by Jacobson (1978), who found that campaign expenditures do not increase the vote share of incumbents in the U.S. Congressional elections. Beginning with Green and Krasno (1988), however, several scholars argued that the statistical methods used by Jacobson were ‡awed in that they did not consider the endogeneity of campaign contributions. Note again that contributions may ‡ow to candidates whose policy positions are close to those of potential donors, those who are likely to change their position in response to the contributions, or those who are more likely to win. Hence, to assess the causal e¤ect of spending, it is necessary to consider why the contributions are made to the particular candidates. Studies that fail to do so and which, moreover, do not control for the "quality" of the candidates, su¤er from the endogeneity and the omitted variables biases. Particularly interesting is a recent study by Campante (2007) of the relation between income inequality, individual campaign contributions, and turnout of di¤erent income groups in the U.S. states and counties in the 2000 presidential election. He found that when inequality is greater, fewer individuals make contributions but their contributions are larger, to the extent that the total sum of contributions increases with greater inequality. In turn, inequality reduces the turnout of the poor relative to that of the rich.2 Note that Campante does 2 This
e¤ect has also been found by Salt (2006) among the countries for which data on
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not identify the causal e¤ect of contributions on the results of elections, only separate e¤ects of inequality on contributions and on di¤erences in turnout, which jointly add up to a bias in favor of the a- uent. The net e¤ect is that if at stake in the election is redistribution of income, the e¤ect of inequality is non-monotonic: redistribution …rst increases and then declines as inequality becomes larger. This is an important conclusion, for it suggests that equal societies tend to become more equal while those originally unequal becomes even more so. Hence, this paper supports the argument of Benabou (2000), who simply assumed that the political weight of individuals increases with income, and came to the conclusion that depending on initial conditions countries may end up with high inequality and little redistribution or with equality and more redistribution. Short-cutting long debates, it seems that money is more productive for challengers than for incumbents, that it matters most in close races, and that it has a signi…cant e¤ect in open races (those in which there is no incumbent). Yet these generalizations must be treated with caution, because this is a subject in which di¤erent methods tend to generate di¤erent results. 3.2.1
E¤ects of Political Contributions and Lobbying E¤orts on Legislative Decisions
E¤ects of political contributions on the votes of the elected legislators are equally controversial. Several early studies were reviewed by Potters and Sloof (1996). Ansolabehere, de Figueiredo, and Snyder (2003) were puzzled by the fact that the amounts of money contributed to legislators are much smaller than the value the contributors gain from the legislative decisions: a …nding that goes against economic theory in general and Becker’s (1983) in‡uential model of political competition in particular. Moreover, they concluded that the impact of contributions on legislative votes is miniscule in the U.S. House of Representatives. This …nding, however, is not universally accepted. Stratmann (1998) has discovered that contributions from agricultural groups increase in period preceding important legislative votes concerning agricultural policies. In a particularly inventive study, Stratmann (2002) has shown that after a bill to deregulate …nancial …rms failed in the Congress, …nancial …rms increased their contributions and the new bill passed with the votes of the recipients. Thus, Stratmann (2005: 146) concludes that political contributions do a¤ect legislative votes and that, moreover, this is a "spot market" relation in which contributions increase when issues important for the potential donors are at stake. Lobbying has been a subject of widespread scrutiny but the evidence about its e¤ects comes almost exclusively either from case studies of particular pieces of legislation or from surveys. In particular, inspired by the seminal article of Grossman and Helpman (1994), there has been an outpouring of research on protectionist policies: these studies are too numerous to be summarized here. Because data on lobbying expenditures is limited only to the United States in a inequality from Luxembourg Income Studies are available.
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recent period, the systematic e¤ect of lobbying activities is almost unknown in other countries. As Gordon and Hafer (2005: 245) observe, "Because data on lobbying expenditures have been harder to come by [than on political expenditures], we know little about their e¤ect on policy." The evidence that does exist indicates that lobbies have a powerful e¤ect on legislation. Perhaps most comprehensive to date is a study based on a World Bank survey by Macher, Mayo, and Schi¤er (2011) of self-reported in‡uence on government of about …rms 6,000 in 60 countries. They …nd that this in‡uence is higher in common law than in civil law countries, in more concentrated industries, by larger and older …rms, and of multinational, exporting, and government-owned …rms as opposed to privatized and foreign-owned …rms. The same factors determine the in‡uence of business associations. About onethird of all …rms report being in‡uential, with almost no di¤erence with regard to the branch of government over which the in‡uence is exercised. Campos and Giovanonni use another survey, of 3,945 …rms in 25 transition economies, to examine whether lobbying and bribes are substitutes or complements and …nd in favor of the former. Lobbying is more e¤ective than bribes as an instrument of in‡uence. Moreover, lobbying is more prevalent in higher income countries, while bribes are more frequent in poorer countries, where they are cheaper. They also learn that lobbying is perceived as increasing political in‡uence by between 25 and 30 percent of …rms. Adhikari, Derashid, and Zhang (2006) discovered that …rms with political connections pay lower e¤ective tax rates in Malaysia. They claim that capitalism in developed countries – U.S. cited as an example – is "market based," while in less developed ones it is "relationship-based" or "crony." Yet Richter, Samphantharak, and Timmons (2009) found that in the United States lobbying reduces the e¤ective tax rate paid by the lobbying …rms: increasing registered lobbying activities by 1 percent lowers the e¤ective tax rates by between 0.5 and 1.6 percentage points. Kim (2008) found that lobbying expenditures by US …rms have a positive e¤ect on the …rm’s equity returns relative to the market and, to a lesser extent, relative to its industry. De Figueiredo and Silverman (2006) learned that universities that lobby receive a larger share of federal research funds. Monographic studies of the in‡uence of lobbies on the passage of particular laws are numerous. Notably, Graetz and Shapiro (2006) describe how a majority of the U.S. public became convinced by special interests to support abolishing the inheritance tax that was imposed only on the very rich. In another well documented study, Mancuso (2003) tells the story of lobbying in favor of public concessions in Brazil. These …ndings should not be interpreted as implying that lobbying is always politically successful. When interests of powerful lobbies are in con‡ict, they neutralize each other. When public opinion overwhelmingly supports or opposes a particular law, corporate interests do not prevail. Tobacco industry,
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for example, su¤ered several defeats at the federal level in the United States.3 While Santos (2011) reports that the Confederac¸ ao Nacional da Industria exerts powerful in‡uence over legislation in the Brazilian Camâra dos Diputados, this in‡uence is limited to committees: if a bill reaches a plenary session and, in particular, if the vote is nominal, the industrial lobby is no longer e¤ective. But both the statistical evidence and numerous case studies show that lobbies have a powerful e¤ect on legislation. While this e¤ect can be due to the fact that special interests often have information and expertise that legislators lack, the studies that use lobbying expenditures indicate that more than information is entailed in their in‡uence. 3.2.2
E¤ects of Political Contributions and Lobbying E¤orts on Executive and Regulatory Decisions
Studies examining this relation seem rare. Particularly illuminating is the work of Gordon and Hafer (2005) on inspections by the U.S. Nuclear Regulatory Commission, in which they found that large political donors are less compliant than smaller ones but the bureaucracy monitors them less. Their explanation is that political donations signal the willingness of …rms to contest adverse rulings in courts and, given that the regulatory agency has a limited budget and personnel, it prefers to avoid potential costly …ghts. This study is innovative in that it shows that "…rms can extract policy concessions from regulators through political expenditures on elected o¢ cials, even holding legislative behavior constant [i.e. without lobbying]." Moreover, it provides an explanation of the apparent paradox, noted by Ansolabehere, de Figueiredo, and Snyder (2003), that the bene…ts accruing to political contributions are much larger than these contributions. As Gordon and Hafer (2005: 246) point out, "corporate political expenditures seem small relative to the bene…ts of legislative actions because signalling a willingness to …ght is always less costly than the …ght itself." De Figuereido and Edwards (2005) …nd that campaign contributions have a signi…cant e¤ect on regulatory decisions of state public utility commissions in the United States but they do not specify the mechanism by which this in‡uence occurs.
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Regulation
Given the prima facie corrupting and inegalitarian impacts of money, attempts at regulation are numerous and recommendations about what should be regulated and how even more. Regulation di¤ers importantly across countries with regard to transparency, public, and private …nancing. Pierre, Svåsand, and Widfeldt (2000) report that as of 1989, the proportion of state subsidies in the total income of Western European political parties ranged from 25.1 percent in Austria to 84.2 in Finland. According to IDEA (www.idea.int/parties/…nance), out of 116 countries 3 Worldwide
lobbying by tobacco industry is a subject on an entire journal, Tobacco Control.
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for which this information was available as of 2002, seventy-…ve have some kind of regulation of political …nancing while forty-one have none. Fifty-nine countries have provisions for disclosure of contributions to political parties while …fty-two do not. Most countries allow private contributions, even from government contractors (eighty-six do, twenty-seven do not). In turn, in eighty-three countries there is some scheme of direct public …nancing of political parties, while in sixty-one there was none, and in eighty-one countries parties receive free television time during electoral campaigns while in thirty-four they do not. Another source (http:nnaceproject.org) reports that 156 countries allow private funding and twenty-eight do not, while 106 provide direct and 110 indirect public funding and forty-six provide none. US AID (2003) provides information about rules governing disclosure of political contributions in 118 countries. Of those, …fteen are classi…ed as having "high" disclosure, with Brazil as the only Latin American country in this category. Disclosure levels are classi…ed as "medium" in twenty-six countries, which include Argentina and Colombia. Bolivia, Chile, Costa Rica, Ecuador, Mexico, and Peru are included among the thirty countries that have "low" disclosure rules. Twenty countries collect this information but do not release it to the public, among them the Dominican Republic, Guatemala, Honduras, Panama, Paraguay, and Venezuela. Finally, twenty-seven countries do not have any disclosure rules, including El Salvador and Uruguay. The legal aspects of regulation of political …nancing in Latin America are now well known, due mainly to the pioneering e¤ort of Zovatto (2003). Except for Venezuela, all Latin American countries combine di¤erent forms of public …nancing with private contributions. Public …nancing was introduced in Uruguay as early as in 1928, followed by Costa Rica in 1949, and after 1997 it was used by all countries in the region. The formulas of public …nancing distribute resources mainly on the basis of past electoral strength of the parties, with minimal thresholds, and sometimes in combination with other criteria. Most countries prohibit private contributions by some potential donors, most frequently from foreign sources, but it is striking that only eight ban contributions by …rms that have contracts from the State and only ten prohibit anonymous contributions. In turn, only seven Latin American countries impose caps on individual contributions. All countries provide free access to state media and some also to private ones during elections campaigns. Except for Uruguay, in all countries some speci…c organ is designated to monitor compliance, with a variety of sanctions. It bears repeating, however, that all these legal provisions did not generate systematic information about the actual patterns of …nancing. To my best knowledge, there are no comparative studies of the e¤ect of these regulatory regimes on the policy outcomes, although there are claims that private political …nance plays little role in some countries, notably the Netherlands, Denmark, or Sweden, while it is large in Italy, the United Kingdom, and the United States (Prat 1999). Proposals for reforming regulatory regimes are a subject of an intense activity by various international, particularly regional bodies (see Walecki 2007 13
for a summary). The U.S. Government is as always eager to provide advice to other countries (US AID 2003, US AID 2007). The 2003 document, entitled "Money in Politics Handbook: A Guide to Increasing Transparency in Emerging Democracies," pursues the view of the U.S. Supreme Court that buying political in‡uence is a form of free speech. Having observed that "disclosure of campaign and political party …nance is the cornerstone upon which all other attempts to control money in politics rest," the Executive Summary (2003: 1) goes on to claim that "Like a form of free speech, political …nance is linked to the health and strength of a democracy. Laws and regulations to control political …nance risk sti‡ing the basic rights of citizens to provide funding to the candidate or party of their choice." This approach is in sharp contrast to that of the Council of Europe (Walecki 2007), which in addition to transparency calls for funding caps, prohibitions of some sources of funds, as well as for public …nancing. The one area in which all recommendations converge is transparency. Transparency is supposed to be e¤ective because informed and rational citizens would be less likely to vote for candidates or parties that are known to have debts to interests di¤erent from their own. There is some empirical evidence that this is true: Stratmann (2005: 136) reports that both theoretical models and experimental studies indicate that "voters are less responsive to campaign messages when they believe that candidates have obtained campaign funds by promising policy favors to contributors." Yet Persily and Lammie (2004) argue that while a large majority of U.S. respondents believe that the campaign …nance system contributes to corruption in government, this perception became less widespread just as soft-money contributions skyrocketed. Moreover, experimental studies are of dubious value because they provide the information to the experimental subjects while real-life voters have to seek this information among the deluge with which they are bombarded at election times. While transparency is necessary, limiting regulation to disclosure puts an excessive burden on individual voters. Most controversial are limits and restrictions of individual and group contributions. If campaign contributions have little e¤ect on the vote for incumbents but a larger e¤ect on the vote for challengers, limitations of political spending would favor incumbents. Hence, Sahuguet and Persico (2006) claim that spending caps have anti-competitive e¤ects. In turn, Campante (2007) argues that limits on private contributions would have equalizing e¤ects but only if they were very tight. As plausible as these claims may be, however, they do not receive much empirical support. Having examined legislative elections in forty-…ve states of the United States between 1980 and 2000, Stratmann and Aparicio-Catillo (2005) found that stricter limits are associated with lower margins in favor of incumbents and a larger number of candidates. In turn, Houser and Stratmann (2005) found that publicly …nanced campaigns induce "higher quality" candidates, who win by larger margins. The explanation may be that while spending caps make it more di¢ cult for challengers to make themselves known vis-a-vis already prominent incumbents, they also equalize the costs of entry for budget-constrained high-quality challengers. Yet another argument
14
against spending caps is that if marginal di¤erences in campaign spending have a large e¤ect on vote shares and if enforcement is not perfect, spending limitations would favor undetected cheaters. The technical di¢ culty of public …nancing schemes, in turn, is how to allocate the funds and free resources, mainly access to television. The predominant practice is to distribute them according to past electoral results. The main argument against this procedure is that it ossi…es the party system. Moreover, as Morales Quiroga and Piñeiro Rodríguez. (2010) point out in the case of Chile, this rule induces incumbents who have safe seats to overspend, trying to maximize their vote share with the eye on the next election. A more general argument against public …nancing is that providing funds to parties without them having to raise funds from their supporters isolates party elites from their bases. Yet another criticism is that regulations that provide free in-kind transfers in equal amounts have anti-competitive e¤ects (Sahuguet and Persico 2006). Yet none of the arguments against public …nancing – that it makes parties dependent on the state, that it petri…es the party system, and that it induces apathy in mobilizing members – seems to hold at least in the Western European context (Pierre, Svåsand, and Widfeldt 2000). The attempts to regulate the access of money to politics by law are wellmeaning but they raise two political economy questions: (1) Whether regulation that equalizes the playing …eld is likely to be adopted by the current winners, those who are in power and their powerful supporters, (2) Whether they would be enforced. As Pinto-Duschinski (2002: 81) observes, "There is ... too much law and too little enforcement." Enforcement is supposed to be implemented by independent monitoring and meaningful sanctions but the question is why bodies regulating political …nance would not be subject to the same in‡uence of money as are other regulatory agencies. This is clearly an area where popular pressure and the organizations of civil society have an important role to play. Perhaps most importantly, regulation is not the only way to equalize political in‡uence of economically unequal groups. The political playing …eld seems to be more equal in countries in which the poorer sections of society have been organized by political parties associated with powerful trade unions or other mass organizations. Inequality of political …nancing, with the attendant political in‡uence, arises from the inequality of economic resources in society. Wealthy individuals and groups outspend poorer ones just because they have more resources to spend: this is why political competition is unequal.4 Yet poorer citizens can counter-balance this inequality if they pool their resources (Corvalan 2011). In the past, left-wing parties could counteract economic inequality by raising dues from their many members or by relying on …nancial support from trade unions. Yet member contributions declined for all parties around the world and union power has been eroded in many countries, which 4 More techically, wealthy people can spend their resources to the point in which the marginal bene…ts of their political expenditures equal the marginal cost of the contributions, while poor people are cannot do it because they are budget constrained (and perhaps because they have more to gain).
15
made parties more dependent on wealthy donors. The anti-union drives in some countries, notably in the United States, have therefore political as well as economic consequences, undermining the ability of poor people to pool resources in the political competition. Nevertheless, mechanisms and organizations via which those with smaller …nancial resources could pool them are an important alternative to legal regulation.
5
Money and Democracy
With all the limitations of the available information and the divergent …ndings, the overall picture is overwhelmingly somber. Money has endless ways to in…ltrate itself into politics. When limits are imposed on political advertising by candidates, advertising is conducted by "independent" groups in favor of positions that the candidates are known to stand for. When corporations are prohibited from contributing to candidates, their employees do it as individuals. When regulation caps contributions to political parties, special interest groups just turn around and spend more money trying to persuade voters directly (Hogan 2005). Parties and individual politicians accept money from special interests because they need money to pursue political activities but there is also a cloud of suspicion that they bene…t materially from favors extended by special interests. Some systematic and much anecdotal evidence indicates that the gains are often …nancial. Statistical studies show that U.S. representatives get signi…cantly higher returns on investment in common stocks than the market average, indicating that they bene…t from insider information (Ziobrowski et al. 2011). Ways in which politicians leave o¢ ce much wealthier than when they were when they entered remain mysterious but examples abound. So do examples of retired politicians …nding lucrative jobs in the private sector. Such private gains constitute "corruption" as this term is popularly understood, but the e¤ects of money on perpetuating inequality operate whether the particular forms of political in‡uence are or are not legal in a particular country. No wonder, then, that masses of democratic citizens around the world see politics as corrupt. In addition to the deligitimizing e¤ect of the perception of corruption, the unequal in‡uence of private money over politics has several corrosive e¤ects on democracy: (1) It perpetuates economic and social inequality. If the in‡uence of the a- uent increases with the already existing inequality, the result is that unequal societies redistribute less than more equal ones (Benebou 2000). Thus, originally unequal countries become more unequal while those more equal remain equal. (2) It often leads to an ine¢ cient allocation of productive resources. Even if the government is not corrupt, guided solely by the criterion of economic e¢ ciency, if both wealthy and highly productive …rms organize indistinguishable lobbies, the government may adopt ine¢ cient poliicies in response to their pressures (Esteban and Ray 2006).
16
(3) It discourages political participation and political interest of the poorer sections of society. If poor people perceive that their political participation is futile because policies are in‡uenced by special interests, they do not participate. (4) It reduces the range of choices available to citizens in elections. If political contributions in‡uence electoral platforms of all parties that have a chance to enter the government, the range of voters’ choice is reduced (Grossman and Helpman 2001). (5) It increases the total costs of political competition. This e¤ect, however, may depend on the form of regulation (Sahuguet and Persico 2006). (6) It undermines the con…dence in the rules of the political game not only among the general public but also among the political actors. This e¤ect is particularly dangerous for democratic institutions because if some political forces believe that they have no fair chance to prevail according to the rules, they may be prone to seek recourse outside the institutional framework (Przeworski 2011). (7) It leads to the permeation of the state by private interests, "privatization of the state" (Garcia Laguardia 2000). Perfect political equality is not feasible in economically unequal societies. But democracies cannot fail in their commitment to political equality. Even if some dose of political inequality may be inevitable, even if we do not quite understand how economic resources a¤ect political outcomes, the corrupting in‡uence of money is the scourge of democracy. Yet controlling the access of money to politics is not a simple matter. Regulatory reforms must be based on a clear analytical understanding of the causal paths through which unequal resources a¤ect political outcomes and on solid empirical evidence: otherwise they will be futile or even counterproductive. While passing laws may be easy, their e¤ective enforcement by government agencies is subject to the same pressures as are other policies. The role of civil society associations is thus crucial. These associations are necessary to monitor enforcement of regulations independently of the government and, perhaps even more importantly, to pool resources of the many people with low incomes in order to counterbalance the inequality of access.
6
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