Leadership in economics

I teach in a public policy school, so hear constantly about leadership. But economists don't even have the language to talk about how or why leadership matters in economics--even though I guess that deep down most of them think it is very important.

Recently there has been some interesting work that may signal a change.  In an empirical paper, Ben Jones and Ben Olken link shifts in growth performance in countries to changes in the national leader. They find that exogenous leadership transitions (induced by the natural death of existing leaders) generate  effects on policy and growth, particularly in autocracies.  Surprise, surprise, right? Well, at least it has drawn economists' attention to it.

And now, there is a theoretical paper by Sumon Majumdar and Sharun Mukand which looks at how individual characteristics and "objective" circumstances interact in creating leadership "opportunities." Here is the abstract:

Individual leaders have been central to the transformation of organizations, political institutions and many instances of social and economic reform. In this paper we take a first step towards analyzing the role of leadership to ask: when and how does a leader engineer change? We show that while underlying structural conditions and institutions are important, there is an independent first-order role for individual agency in bringing about change and thus transforming the institutions. We emphasize the key nature of the symbiotic relationship between followers decisions' to willingly entrust their faith in the leader and the leader's initiative at leading them. This two-way interaction can endogenously give rise to threshold effects; slight differences in the leader's ability or the underlying structural conditions can dramatically improve the prospects for successful change. Given the centrality of this leader-follower relationship, we further explore conditions under which an individual may deliberately prefer to follow an ambitious leader with divergent interests rather than a benevolent one with congruent preferences. Thus by virtue of having followers, both `good' and `bad' leaders may be effective at bringing about change.

A couple of nice things about the paper. One is that it shows how bad leaders can emerge in equilibrium as well as good leaders. Mugabe versus Mandela, in other words.  Another is that it identifies an important threshold effect: small differences in leaders' ability and in circumstances can make a big difference to the possibility of reform.

Comments

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the irony is that it's a PRIVATE public policy school ...

[RT]

There is a wonderful paper on leadership:

Hermalin, Benjamin E. (1998), "Toward an Economic Theory of Leadership:
Leading by Example" ‐ The American Economic Review, Vol. 88 (5), pp. 1188‐206.

The following is the way I like to interpret it: if you had an organization with low potential productivity, no leader would like to "lead by example".
That is: the causal link between leadership and good results might be reversed. Only good organizations "deserve" good leaders, and bad organizations have bad leaders because they are bad (and not the way around).

[Ali Sohail (pakistan)]

'Only good organizations "deserve" good leaders, and bad organizations have bad leaders because they are bad (and not the way around)' --
For sure, in an idealistic sense!

Potential is the outcome of the mental state, driven by policies, atttitude and approach.

In the real world, I completely disagree especially given the developing world and the corrupt nature of the very institutions that surround its environment. It breeds havoc for the common man, the common so-called leader, but then the desperation of the mayhem provides the very basis for motivation, dailogue and upbringing of exhuberance, the need of quality leadership, goverance and a progressive stand. It gives the youth, the untried, the undriven, the basis to stand out, to be counted to push oneself to achieve greater heights. And thats when great leaders are formed and they have, to-date turned around fortunes of many companies if not countries in history.
In short, the bad environment can bring out the best and the very best of leadership, dynamiting and revolutionising the very bad practices. The good can be very easily subjected to complancency, hanky pankyness and mundanity to be precise!
This is true on a corporate aswell as nation wide level.

One example --Allwin Engineering(Pakistan) for years suffered great losses, came very close to shutdown on numerous counts due to unionisation and other reasons but today after 10years of the change around it is one of the better performing companies on the karachi stock exhange.

[Ali Sohail (pakistan)]

RT - Its like sayin, Brazil peformed badly in the Soccer Worldcup because they had a bad team hence a bad leadership without really understanding the underlying dynamic. Results do not always speak the entire truth or show the entire picture. It is the buildup, the showdown and the underlying infrastructure that makes it meaningful.

Its like they say, its not always whether you win or lose, it is how you play the game!

[Squid]

What is the point of the second paper. Everyone knows that bad leaders exist and that they are sometimes popularly elected and popularly supported. Why do economists need to show the obvious and say that it is an equilibrium. What possible use is this to anyone?

[Guccio]

Evo Morales is an example of a good leader that turned to a bad leader due to wrong policies and in particular because of the political ambitions of his followers. Does the paper cover this issue?

[R.T.]

First, you have to read Hermalin (1998) carefully. The (basic) idea is the following: suppose you have an organization (e.g. governmental office, business team, etc.) with private information about the returns to effort. Only some individuals (e.g. managers, heads of administration) have access to the expected productivity from the work in the entire organization. If the expected productivity was very high, those individuals would work hard to "tell" their co-workers (through a signaling device) that they expect high returns. Then, they would be considered "leaders". On the other hand, if expected productivity was very low, those individuals would not have incentives to "lead by example", and then we would not see any "leader" in the organization.
Again: Only good organizations "are suitable for the endogenous emergence" of good leaders, and in bad organizations good leaders do not emerge just because they productivity is low.
When I mentioned Hermalin (1998) I was not thinking about a president. I was thinking about firms, entrepreneurs, governmental agencies, etc. Usually a lot of time, money and effort is spent to "improve the leadership" of organizations that are simply unproductive.
I live in Argentina. I know all you have mentioned perfectly. You cannot imagine the astrological levels of corruption we are seeing under the administration of Nestor Kirchner (and probably since October under the presidency of… his wife!).

[Aqdas Afzal]

Dani -

It was heartening to see leadership being brought to the fore in your blog. I, for one, have often felt that when it comes to development, leadership --especially in the context of authoritarian regimes -- plays the role of a key ingredient.

The recent paper by Majumdar and Mukand is a classic agency-structure argument. Democratization literature -- that was all the rage in the 90s -- is replete with awesome examples. For instance, see Mahoney's (1999) "Rethinking Agency and Structure in the Study of Regime Change."

My advisor at Ohio-State, R. William Liddle has done some really interesting work that also must be reviewed by any serious scholar interested in the link between leadership and economic policy outcomes.

In "The Relative Autonomy of the Third World Politician: Soeharto and Indonesian Economic Development in Comparative Perspective (International Studies Quarterly, Vol. 35. No.4 Dec, 1991, pp 403-427) Liddle constructs a classic agent-structure analysis in order to assess how Soeharto was able to bring out pro-market economic policy decisions.

In this paper, Soeharto's agency, fuelled by his preferences to stay in power, works in tandem with the underlying conditions or variables (structure) that include International Economic Crisis and the presence of a Patrimonial state, among others.

The startling discovery in this research is that though convential literature would find the presence of a Patrimonial state as an obstacle to pro-market reforms, it works hand in hand with Soeharto's preferences to deliver pro-market reforms.

However, this is an ex-post in-depth analyis in which the n is limited to 1. I don't know how such type of qualitative research can pass muster in the Academy's prelediction for theorizing (your comments?).

Nontheless, such research can serve as an important heuristic if there are a number of parallels between pairs of countries.

[Aqdas Afzal]

Dani -

It was heartening to see leadership being brought to the fore in your blog. I, for one, have often felt that when it comes to development, leadership --especially in the context of authoritarian regimes -- plays the role of a key ingredient.

The recent paper by Majumdar and Mukand is a classic agency-structure argument. Democratization literature -- that was all the rage in the 90s -- is replete with awesome examples. For instance, see Mahoney's (1999) "Rethinking Agency and Structure in the Study of Regime Change."

My advisor at Ohio-State, R. William Liddle has done some really interesting work that also must be reviewed by any serious scholar interested in the link between leadership and economic policy outcomes.

In "The Relative Autonomy of the Third World Politician: Soeharto and Indonesian Economic Development in Comparative Perspective (International Studies Quarterly, Vol. 35. No.4 Dec, 1991, pp 403-427) Liddle constructs a classic agent-structure analysis in order to assess how Soeharto was able to bring out pro-market economic policy decisions.

In this paper, Soeharto's agency, fuelled by his preferences to stay in power, works in tandem with the underlying conditions or variables (structure) that include International Economic Crisis and the presence of a Patrimonial state, among others.

The startling discovery in this research is that though convential literature would find the presence of a Patrimonial state as an obstacle to pro-market reforms, it works hand in hand with Soeharto's preferences to deliver pro-market reforms.

However, this is an ex-post in-depth analyis in which the n is limited to 1. I don't know how such type of qualitative research can pass muster in the Academy's prelediction for theorizing (your comments?).

Nontheless, such research can serve as an important heuristic if there are a number of parallels between pairs of countries.

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