Economic outcomes are strongly related to political decisions, and states policies affect the economy in several ways. There is limited knowledge of the underlying processes behind the decisions to spend, tax, and fix regulatory mechanisms and laws. Hoffman (2015) suggests that such processes are even less explored for the local public spending and for economic system outside the US. The history of Europe provides an excellent platform for studying and understanding the central role played by the state over the long run. Thus, the current proposal is aimed at entering the debate about how politics shape economic outcomes through states' decisions and looks at local public finance in a peripheral country of Europe, Italy, using a historical perspective. We want to take a first deep look into these central matters, studying the political process behind the local decisions to spend and to tax in Italy from the Unification (1861) to the outbreak of World War II. The analysis would try to investigate whether changes in political participation modified the size and composition of public spending at local level and whether it is possible to determine the reasons of different patterns of expenditure across municipalities based on political entitlement and participation.
The proposal investigates whether institutional shocks such as the enfranchisement of population and polity regime changes in the decision to implement public policies (i.e. decentralization vs centralization), which occurred in Italy since its unification, translate into policies favouring the adoption of pro-growth public goods. Indeed, by evaluating the size and the nature of public finance, as well as the entitled political groups, we will be able to say more about which social class, or clusters of interests, were mostly advantaged. Moreover, we intend to shed light on whether public choices, inspired by the adoption of effective pro-growth public policies, are incentives compatible.
Our research proposal tries to put the current literature one step ahead from different angles. From a historical perspective, we intend to explain the political processes behind the decisions to spend and tax which are relatively unknown. From a methodological angle, we would employ a research design to identify causality rather than simple correlation among the phenomena we study. The process of democratization, with different enfranchisement episodes occurred in Post-Unification years, along with polity regime changes, allows us to account for institutional shocks, thus creating a "quasi-experiment" environment. This, in turn, can help to temperate the problem of endogeneity, which is highly plausible in such an analysis. In fact, political preferences address the choices of spending and taxing which in turn modify the society, changing the relative balance of power among different social groups and ushering future political changes. Moreover, both states decisions and democratization (or reversion of democracy) may be affected by unobserved characteristics generating a problem of omitted variable bias, which makes the identification of causal mechanisms problematic. The problems of reverse causality and omitted variable bias could be avoided, or at least reduced, in the "quasi-experiment" context provided by the Italian economic history. On this line, a first attempt was already advanced by Larcinese (2015), who exploits differences in enfranchisement rates across electoral districts to present evidence on the consequences of one of the most sizeable franchise extension in European history, the 1912 Giolitti reform in Italy, which trebled the electorate and left electoral rules and district boundaries unchanged. He documents the efforts of local elites to retain their privileges and preserve their parliamentary seats, meaning that the ultimate consequences of this institutional reform mostly depended on de facto rather than their de jure political power. We move one step forward, by linking the democratization process to collective action aimed to provide public goods. Moreover, we want to investigate whether institutional shocks such as the enlargement of the franchise and regime changes in the decision to implement public policies (decentralization vs centralization) translate into policies favouring the adoption of pro-growth public goods. From the external validity perspective of our proposal, the analysis would complement the current debate on the regional autonomy and federalism discussing whether it represents the best solution to solve collective action dilemma nowadays.
Furthermore, we believe that answering the question of how and why local governments taxed and spent is fundamental for the comprehension of the ultimate causes at the root of the North-South divide. A different fiscal capacity and/or political voice at local level may have been crucial for increasing territorial imbalances, generating different and persistent paths of development followed by the two geographic areas of the country, with immense costs in terms of future prospects for economic growth and human development.
Finally, the study of how past processes of democratization have affected economic outcomes and democratic consolidation will inform about the relationship among loss of political participation and policy choices in current democracies. Measures of political participation are nowadays different from the past because democracies are fully enfranchised. However, consolidated democracies are losing effectiveness in political participation (Macedo, 2005) and their consequences on public choices are potentially harmful to economic growth and to the persistence of democracy itself. Historical experience is likely to show that the enlargement of political participation forced political elites into allocating resources on pro-growth expenditure (infrastructure, education, social welfare) fostering, in turn, the process of democratization. Our study speaks also to the current debate about the political and economic outcomes of enfranchisement in current polities in transition towards democracy. The current wave of modernization and democratization will not necessary lead to pro-growth and democracy consolidation policies unless the bureaucracies in transition open up to political participation as much as possible.
References
Larcinese, V. (2014). Enfranchisement and representation: Evidence from the introduction of quasi-universal suffrage in Italy. Innocenzo Gasparini Institute for Economic Research Working Paper Series, 512.
Macedo, S. (2005) Democracy at Risk: How Political Choices Undermine Citizen Participation, and What We Can Do About It. Washington DC: Brookings Institution Press.