Technocracy, democracy and trust

25 Feb 13
M Hallerberg and J Wehner

The chequered history of  'technocratic' governments in Italy and other eurozone countries raises questions about the competence of leading policymakers. As Italy goes to the polls, we ask how important is a technocratic background for finance ministers, or does politics win out?

Should policymakers be experts in their fields? This is an especially relevant issue in the midst of a financial crisis. One potential reason for crises is that incompetent people make the wrong decisions. If one were to replace these leaders with competent policymakers, then the crisis might end and they might be avoided in the future.

This line of argument can explain the widespread enthusiasm both among pundits and some of the public for the appointment of 'technocratic' governments. These are thought to have ministers with narrow technical skills who are expected to produce better policy than their more political, and more generalist, predecessors.

The almost simultaneous appointments of Lucas Papademos as prime minister of Greece and Mario Monti as prime minister of Italy in November 2011 are examples of leadership changes that were meant to bring more competent people into government.

However, it is not a priori clear that technical competence in itself is a desirable trait. The staffs of ministries and central banks can number into the thousands and even the tens of thousands. Meanwhile, a good manager with little economic competence may do as well, or better, than one with an economics PhD. And a more politically inclined economic leader may have more success in selling and implementing a given policy than a former economics professor.

However, before considering whether technical competence affects policy, one first has to understand why governments sometimes appoint such people but often do not. The topic has not been systematically studied. But historical research and a booming industry in political memoirs and biographies highlight the importance of the personal characteristics of leaders when it comes to making political choices.

For citizens, choosing the right people for political office is arguably no less important than designing institutions that keep them from abusing their powers. (The empirical study of personal characteristics is more advanced in other areas, such as research on the financial performance of firms.)

When focusing on the type of economic policymaker, we need to consider political competence versus technical competence. Political competence, in turn, can have two interpretations. One is political skill; a finance minister with no economics training may be effective because she can impose spending cuts on her ministerial colleagues due to her political ability to do so. A second interpretation is that an appointment satisfies a given constituency and has political value regardless of the (political) skills of the appointee.

By economic policymaker we mean a head of government (either prime minister or president), a finance minister, or the governor or president of a central bank. In our research we have employed a new dataset that codes the educational and occupational backgrounds of prime ministers, finance ministers, and central bankers from 1973 through to 2010. The resulting dataset contains information on almost 1,200 economic policymakers, 427 prime ministers or presidents, 540 finance ministers, and 216 central bank chiefs.

We have also examined what determines whether policymakers have economics training. On the demand side, we ask, when do governments, and by extension the voters who elect them, want to have more technically competent economic leaders instead of generalists? On the supply side, we ask, when is there a constraint on the availability of technical policymakers?

On the demand side, we found that governments appoint more technically competent economic policymakers during financial crises. Those in power during an economic crisis need to gain the confidence of two groups.

First, investors in markets. If markets baulk at the government’s rescue plan, then it is not possible for a government to borrow money at a time when it needs funds quickly. And second, the voters. Someone bears both the economic and the financial costs of the crisis. Negotiating a politically viable set of policies to address the crisis is difficult.

This is especially important during banking crises – no private actor can buy out the financial sector to solve the crisis, and it falls to the government to propose solutions and to execute decisions. The appointment of a technically competent economic policymaker may the government gain credibility with both groups.

A second demand-side reason for appointing more technically competent economic leaders relates to partisanship. For example, governments on the left, seeking to gain credibility with capital markets to finance the state, may be more likely to appoint trained economists as either finance ministers or central bank governors, particularly in years involving a stock-market crash.

Third, new democracies select more technically competent leaders. Such governments have greater incentives to signal technical competence than their counterparts in established democracies. In terms of economic management, the appointment of competent economic policymakers following a transition to democracy can reassure investors who might be unsettled by political uncertainty.

A fourth finding on the demand side ran counter to our expectations. We had presumed that membership of an economic union, in particular the eurozone, would increase the demand for more competent economic policymakers. (The responsibilities of the EU more generally are strongly weighted towards economic policy). Yet we found that eurozone countries are less likely to have prime ministers with an economics education.

A demand-side perspective on competence, however, is incomplete; another relevant factor is the supply side. Why does the availability of potentially competent leaders vary across countries and across time?

There is a difference in how parliamentary and presidential systems appoint their cabinets, which in practice means that presidential systems have more technically competent finance ministers. In parliamentary systems, prime ministers may be constrained to select finance ministers from members of parliament.

Jim Flaherty, the Canadian finance minister in August 2012, was also a Conservative member of parliament from Ontario. In contrast, the US secretary of the treasury, Timothy Geithner, had no such background. Presidents are less constrained than prime ministers when it comes to appointing legislators to their cabinets who can coordinate the passage of legislation.

For these reasons, we expect a higher level of technical competence among presidential appointments. As Robert Skidelsky quips in his biography of John Maynard Keynes: 'In a Presidential … system he would probably have been Minister of Finance.'

A supply-side perspective also suggests that the number of economically competent individuals who could be appointed to the cabinet typically declines with a government’s time in office. This is especially true in those parliamentary systems where the main cabinet positions are drawn from parliament and where the available pool of ministerial talent is constrained – each ministerial change during an electoral term depletes the stock of potential ministers.

Indeed, the longer a government is in office, the less technically competent are the finance ministers appointed, but the more competent are central bankers.

Taken together, we found that levels of economics education amongst finance ministers are substantially higher in new democracies compared with old ones. It is not just the fact of democracy but the age of that democracy that plays a role.

It may also require a crisis to change thinking on what sorts of policies are effective. Indeed, our findings suggest that banking crises can lead to big jumps in the technical competence of central bank heads in terms of their education – the appointment of an central bank president with an economics PhD is 22 percentage points more likely during a banking crisis.

Mark Hallerberg is professor of public management and political economy at the Hertie School of Governance. Joachim Wehner is associate professor in public policy at the London School of Economics. A longer version of this post first appeared on the website

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