Three essays on the political economy of development policy

This project consists of three self-contained essays that deal with various political economy aspects of development policies, economic reforms, and international reform-plus-loan programs. The first essay examines the theories of international trade in the presence of imperfect factor mobility; it also evaluates the political prospect of rapid reforms in a democratic regime, when factor mobility changes over time. It shows that under reasonable conditions a variation of the standard trade theories can be extended to the model with imperfectly mobile factors. Furthermore, relative factor mobility plays a central role in explaining key empirical irregularities and paradoxes. Finally, the political superiority of a big-bang approach vis-a-vis a gradual approach to structural reforms depends upon the transitory and long-run mobility of factors. Absence of a transition period is a special case that underlies the argument for drastic economic reforms in a direct democracy.;The second essay uses a game-theoretic analysis in order to characterize a government's commitment to a reform-plus-loan agreement with an international development agency. Concurrent to the reform-plus-loan program, the government plays a domestic political game in which voters observe the reform-plus-loan program and then decide whether to reelect the incumbent government. A reform agreement with the agency conveys the agency's sponsorship of reform to voters who are uncertain of the benefits from reform, and thus reduces popular opposition to reform. In the presence of this sponsorship effect, a partially enforceable agreement may emerge as an equilibrium outcome, despite the agency and the government having complete information. Furthermore, contrary to conventional wisdom, the government's intrinsic attitude toward reform and the agency's propensity to lend have ambiguous effects on the implemented reform.;The final essay uses a Rubinstein-style bargaining model to examine the way in which a lending agency's information about the bureaucratic inefficiency of a borrowing government affects the design and success of reform-plus-loan programs. Bureaucratic inefficiency leads to unproductive use of resources. Therefore, when the agency knows with certainty the inefficiency of the government, the level of inefficiency affects the extent of policy reform. However, when the level of inefficiency is private information, the extent of reform may be larger or smaller than that under complete information. Specifically, the extent of reform depends upon the agency's off-equilibrium conjectures but not upon the actual level of inefficiency. This means that the success of reform-plus-loan programs depends upon both the level of bureaucratic inefficiency and the agency's off-equilibrium beliefs under incomplete information. This has important implications for lending policies and also for empirical estimations of program effectiveness.