Economic Models Can’t Vote

CEYHUN Elgin is a professor of economics at Boğaziçi University in Istanbul. His research spans growth economics, public economics, and political economy, with a particular focus on informal economies and how political institutions shape a country’s long-run development outcomes.

The Confluence: Your work spans growth, public economics and political economics – what’s the throughline connecting those for you?

Dr. Elgin: Honestly, I have never really regarded them as separate subjects. The common question behind my work is why societies with similar resources and opportunities can nevertheless produce very different economic outcomes. Growth economics tells us about factors such as investment, productivity, technology and human capital. Public economics examines what the state taxes, spends and regulates. Political economics then asks who makes those decisions, what incentives they face and whose interests carry the most weight. In practice, these things are inseparable.

The informal economy is a good example. Whether people and firms operate outside formal rules is not simply a matter of income or tax rates. It also tells us something about the capacity of the state, citizens’ trust in institutions and whether they believe that complying with the rules will bring them meaningful benefits. Much of my research sits at precisely that intersection.

The Confluence: For a reader who thinks of economic growth as a purely technical, apolitical process, what does political economics add to the picture that a standard growth model misses?

Dr. Elgin: A standard growth model can tell us that a country should invest more in education, improve infrastructure or create better incentives for innovation. What it usually does not explain is why governments sometimes fail to do these apparently sensible things.

Policies are not selected by a neutral engineer trying to maximise national income. They are chosen by politicians facing elections, organised interest groups, budget constraints and pressure to produce visible results quickly. An education reform may generate large benefits twenty years from now, while a subsidy can generate votes before the next election. That difference matters.

Political economics also draws attention to distribution. A reform may raise total national income while imposing losses on a smaller but politically powerful group. That group may be able to block it even if most people would eventually benefit. Political economics does not replace conventional growth theory. It explains why the policies recommended by that theory are adopted in some places, distorted in others and sometimes never implemented at all.

The Confluence: Is there a finding from your own research on informal economies or measurement that surprised you, or that you think would surprise a general reader?

Dr. Elgin: One finding that continues to surprise people is that informality does not automatically disappear as countries become richer. It generally becomes smaller with development, but it can remain substantial even in relatively wealthy economies. It may also change form rather than vanish.

Another important point is that informal economic activity is not directly observable. By definition, much of it is hidden from tax authorities and statistical agencies. We therefore estimate it using indirect evidence, and different methods can produce noticeably different numbers. This does not mean that the estimates are useless, but it does mean we should be cautious when someone claims to know the size of an informal economy with great precision.

I also think the public discussion too often treats the informal economy as simply a collection of people evading taxes. In many cases, informality is a rational response to expensive regulation, weak public services or a lack of trust in the state. It can provide employment and income when the formal economy cannot. At the same time, it often means lower productivity, less protection for workers and a smaller tax base. That double character makes it much harder to address than simply increasing inspections or penalties.

The Confluence: How much do a country’s political institutions actually constrain its long-run growth prospects, in your view, versus more conventional economic factors?

Dr. Elgin: Institutions matter enormously, but I would avoid treating them as destiny. Geography, demographics, education, technology and access to international markets all matter as well. The difficulty is that political institutions influence how effectively a country can respond to nearly all of these factors.

A country with weak institutions can still grow rapidly for a period, perhaps because of a commodity boom, favourable demographics or technological catch-up. Sustaining that growth is much harder. Over the long run, countries need governments capable of providing public goods, enforcing rules reasonably consistently and correcting policy mistakes. They also need enough political consent behind a policy for it to survive beyond a single administration, which is often the harder half of the job.