I investigate the inseparable ties between voters, political agents, economic policies and economic growth. To be specific, the relation between voters (principal) and politicians (agent) through campaign pledges, and political party characteristics and economic growth through government policies and foreign capital flows are the focus of this research. Party manifestos and policy outcomes are the main tools in analyzing commitment issues the electorate face in a world with imperfect information, understanding the reelection chances of politicians through retrospective voting, linking party identification with capital inflows, and addressing economic progress through policy choices.
After an overview on the literature between political economy and economic growth, first essay centers around the political party ideologies and foreign investor decisions. The premise is that pro-business party favors capital investment and conduct capital friendly policies, attracting forward-looking foreign investors just ahead of the elections if the party leads the polls. Similarly, pro-labor party favors labor-owners and conduct prohibitive capital taxing policies, deterring foreign investment in times where the pro-labor victory is eminent. The other side of the coin is that the higher the foreign debt through capital inflows, the less likely that the incumbent gets elected in the next election. I investigate the implications of this hypothesis on US political parties, Democrats and Republicans, with capital inflows from 1970 to 2009 and see how macropartisanship, or party identification, affects foreign investment. I find considerable impact on foreign direct investment, but a feeble effect on portfolio inflows in United States. The second implication of the model is tested through the quarterly changes in presidential approval rate in US responding to changes in foreign debt, after controlling for the consumer sentiment from 1973 to 2010. I find negative effects of higher foreign debt stock on the popularity of Republican administrations.
In the second essay, confident from the US data that party identification matters in capital flows, we set out to explore the political party characteristics that are influential in foreign investor decisions. Using party manifesto data from six developed economies, compiled by the Comparative Manifesto Project, and extreme bounds analysis technique, I test the 61 governing party characteristics (56 unique and 5 combination) on economic, political and social issues on changes in foreign direct investment flows, from 1970s to 2009. Party characteristics on military expenditures, administrative efficiency, controlling corruption, and social welfare spending are significant and robust to changes in the conditioning information set. I also look at the probability of electoral victory for right and left-wing parties in the context of changing foreign debt - higher debt increases the likelihood of left government formation, after controlling for past economic growth.
Final essay follows the well trodden path of principal-agent conflict in political context, focusing on the honesty of politicians by utilizing party manifestos and policy outcomes from 25 countries (24 OECD countries and Mexico) for the time period between 1970 and 2010. After categorizing governing political parties in terms of their stance on economic growth, I show the honesty of politicians in static and dynamic models using government expenditures, fixed capital investment, inflation, trade openness and exchange rate distortion as policy outcomes. For the static model, feasible generalized least squares, and for the dynamic model, Arellano-Bond and Blundell-Bond dynamic panel estimation technique with GMM moments are utilized. I show the fact, that the politicians are in general honest, is due to the retrospective nature of the electorate's voting behavior, by testing reelection probabilities of incumbents against the deviation of their policies from their campaign pledges. Finally, I relate economic policies to economic growth, after controlling for economic slowdowns and party characteristics, and find that governments affect country growth through the policies they conduct, which are, indeed, in parallel to their party platforms.