Optimal policies, middle class development and human capital accumulation under elite rivalry
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Optimal policies, middle class development and human capital accumulation under elite rivalry Elena Sochirca1,2 · Pedro Cunha Neves3 Received: 18 November 2019 / Revised: 16 April 2020 / Accepted: 8 May 2020 © Eurasia Business and Economics Society 2020
Abstract We build a dynamic model with endogenous middle class development, human capital accumulation, and policy choices, in order to analyze the interactions between the optimal policies implemented by the ruling elite and the key drivers of economic growth in the presence of elite rivalry. We consider that: (1) the specific policy choices depend on economic and political incentives of the elite; (2) the individuals’ decisions regarding their children’s education are endogenously determined by specific economic and political factors. Our results suggest that, contrarily to the economically motivated policies, the politically motivated policy choices imply inefficient economic outcomes and limit the development of the middle class and human capital accumulation. The results also show that higher middle class and human capital accumulation growth rates can lower the degree of elite rivalry by reducing the level of the optimal tax rate, increase public investments in education, and yield positive changes in all economic outcomes. Keywords Elite rivalry · Middle class · Public policy · Economic growth and development · Human capital JEL Classification O1 · O4 · P16 · P5
This paper won the Best Paper Award in the 29th EBES Conference, which was held in Lisbon, Portugal on October 10–12, 2019. * Pedro Cunha Neves [email protected] 1
NECE Research Unit, Covilhã, Portugal
2
NIPE Research Unit, Braga, Portugal
3
CEFAGE Research Unit, Covilhã, Portugal
13
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Eurasian Economic Review
1 Introduction Successful economic performance has been traditionally associated with the implementation of a spectrum of supply and demand-oriented policies, designed to support the key sectors of economic activity and provide a strong foundation for sustainable economic growth. The vast experience gathered from numerous countries shows that physical and human capital accumulation, middle class development, and implementation of efficient growth-enhancing policies are fundamental economic and social factors contributing to this objective (e.g., Affandi et al. 2019). These factors, in turn, are crucially determined by the established economic and socio-political environment (e.g., Shuaibu and Oladayo 2016). In this paper, we examine the interaction between middle class development, human capital accumulation, and policy choices in the presence of elite rivalry. Regarded as negative form of political competition, elite rivalry is generally associated with (both economic and political) competition for power between the political elite and other political groups, aimed at keeping the ruling elite in office and in control for as long as possible. In this case, policy choices are determined by the goals pursued by the political elite and not by the general interest or by
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