Reference no: EM132936616

Strategic Debt Accumulation

• This section investigates a specific mechanism through which strategic considerations can produce inefficiently high deficits. The key idea is that current policymakers realize that future policy may be determined by individuals whose views they disagree with. In particular, it may be determined by individuals who prefer to expend resources in ways the current policymakers view as undesirable. This can cause current policymakers to want to restrain future policymakers' spending. If high levels of government debt reduce government spending, this provides current policymakers with a reason to accumulate debt.
• This general idea has been formalized in two ways. Persson and Svensson (1989) consider disagreement about the level of government spending: conservative policymakers prefer low spending, and liberal policymakers prefer high spending. Persson and Svensson show that if the conservative policymakers' preference for low spending is strong enough, it causes them to run
• deficits. Persson and Svensson's model does not provide a candidate explanation of a general tendency toward deficits. In their model, the same forces that can make conservative policymakers run deficits can cause liberal ones to run surpluses. Tabellini and Alesina (1990) therefore consider disagreement about the composition of government spending. Their basic idea is that if each type of policymaker believes that the type of spending the other would undertake is undesirable, both types may have an incentive to accumulate debt.
• This section presents Tabellini and Alesina's model and investigates its implications. One advantage of this model is that it goes further than most political-economy models in building the analysis of political behavior from microeconomic foundations. In many political-economy models, political parties' preferences and probabilities of being in power are exogenous. But in Tabellini and Alesina's analysis, electoral outcomes are derived from assumptions about the preferences and behavior of individual voters. As a result, their model illustrates some of the microeconomic issues that arise in modeling political behavior.

Problem 1: After reading the article, critical examine the current decision making apparatus within the Fiji government policies towards debt accumulation and determine the type of policymaking that currently exists and what are the potential fiscal and political implications.