Ideas, Interests, Institutions and Information: Jagdish Bhagwati
and the Political Economy of Trade Policy1
B. Peter Rosendorff
Associate Professor of International Relations and Economics, Director of the
Center for International Studies, University of Southern California2
In his magnificent little book, Protectionism (1988), Jagdish Bhagwati gives a concise,
eloquent summary of the arguments and the 20th century history of free trade and its antithesis,
protectionism. Jagdish, in his inimitable way, demolishes the arguments of the anti-globalists in a
mere 130 pages.
Jagdish uses as a framework in the book what I might call the “Three I’s of International
Political Economy”: Ideas, Interests and Institutions. “Ideas”, of course, refer to the scholarly and
public policy discussions, and the observed examples, of free trade and its effects; “interests” are
about identifying who the gainers and losers are from policy shifts, and the “institutions” are the fora
in which negotiations take place (and within which conflict is managed and mitigated) over these
policy issues.
These three I’s (or some subset of them), identified by Jagdish as crucial in understanding the
historical ebb and flow of protectionism in the 20th century have been borrowed by many scholars,
both economists and political scientists since then (see, for instance Destler 1992, Garrett and
Weingast 1993, Irwin and Krozner 1999, Milner and Rosendorff 1997, Varshney 1988 among many
others).
In this talk, I want to

Highlight some of the insights that Jagdish developed linking the three I’s with observed
protectionist/free trade outcomes

Offer a brief review of where those sign pointers Jagdish provided have taken us

Argue that perhaps it is time to add a fourth I to the list: Information
1
Prepared for presentation at the Conference in Honor of Jagdish Bhagwati on the occasion of his 70 th birthday at
Columbia University, New York, August 5-6, 2005.
2
Center for International Studies, University of Southern California, Los Angeles, CA 90089-0037.
Ideas, Interests, Institutions, Information: Rosendorff
I.
Bhagwati’s Three I’s
The three legs of the tripod interact with each other in crucial ways, and much of Jagdish’s
work has been to highlight the role of ideas, as they interact with interests and institutions to address
the core questions of the research program. Jagdish has without doubt been an extraordinary
contributor to the “ideas” part of the story. His contributions on welfare effects of lobbying and other
“Directly Unproductive Profit-seeking” (DUP) activities (1982) are now well-known. The key
insight here is that lobbying activities designed either to extract a protective device (tariff-seeking),
or to have any revenues from protection awarded to the lobbyers (revenue-seekers) expend resources
that might otherwise have gone to more productive activities, and hence are socially wasteful; the
crucial caveat here of course, is that if there is a pre-existing distortion is in place, the shadow price
of the withdrawn resources could be negative, leading paradoxically to a social welfare improvement
(1980, with T.N. Srinivasan). While this is probably a curiosity, the overall impression is that
lobbying in international trade policymaking is socially harmful. In a clever piece (1982 with Rob
Feenstra), an institutional norm is added to the mix – if there is a rule that commits the government
to give any tariff revenues earned back to the import-competing industry then the efficient lobby
will pressure for a lower tariff than otherwise, and welfare may improve if tariff revenues exceed
lobbying costs. Nevertheless, the overall impression one draws from this work is that lobbying
efforts are more likely than not socially harmful even if they are beneficial to those interests engaged
in the efforts.
The Bhagwati approach takes the interests of the players (lobbyists want protection and
revenues, governments want social welfare maximization) as given, and interacts these interests with
rules that govern lobbying (the institutions) to understand the policy outcomes and their attendant
welfare effects. Later work focused more closely on the institutions leg of the tripod – here the
institution of concern is the multilateral negotiating arena of the GATT, later to become the WTO,
and its relationships with the regional and other preferential trading arrangements. Others will talk in
more detail about the Jagdish’s study of these institutional arrangements, but Jagdish clearly
reserved his most crucial policy advice on the design and architecture of the international trade
policymaking institutions, highlighting the need to keep policymaking insulated from protectionist
interests, while at the same time creating the optimal environment for multilateral and sometimes
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unilateral tariff reduction. (1990, 1991). And of course, Jagdish has led the charge in the debate as to
whether joining a regional trade agreement helps or hinders the goal of multilateral free trade (1993).
II.
The Age of Bhagwati (Samuelson 1996)
Jagdish’s students and colleagues embellished this agenda by providing further analytical
detail to the three I’s and their role in explaining the variables of interest – welfare effects, level and
type of protection and identifying the beneficiaries of protection.
Bhagwati offers a number of ways of conceptualizing the objective function of the
policymaker, which mirrors the approaches now taken in the American Politics literature. The
“Puppet” government is the pure social welfare maximizing government, parroting the often shrill
claim of the economist – liberalize, do not succumb to special interests, and apply tariffs on in the
rare instances where first best strategies to eliminate the distortion (domestic or international are not
available), or there are sound welfare-theoretic reasons for doing so – infant industries, monopoly
power in trade etc. The “self-willed” government corresponds to the policy-driven objective function
from the politics literature, in which the government has its own objective function – not driven by
welfare or pluralist politics, or concerns about reelection or survival in office. The third type, more
resembling observed government behavior, is what Jagdish calls the “Clearinghouse” government –
where the government attempts to manage the competing claims of often opposed interests, and,
usually driven by concerns about survival in office, and must make policy in the face of pluralist
politics. In the language of the political science, policymakers are both office (or political support)
and policy-motivated.
Early approaches adopting the clearinghouse model include Findlay and Wellisz (1982),
Mayer (1984), Magee Brock and Young (1989) but government in these is barely more than a black
box, producing trade policy from a tariff production function. Grossman and Helpman (1994, 1995)
adopt an objective function that is the weighted sum of social welfare and campaign contributions,
money presumably important to finance election campaigns. Here, given that some sectors are
organized and others are not, the level of lobbying activity (in this context, the level of campaign
contributions) is determined endogenously, as is the level of protection. Organized sectors are
protected (or subsidized) when neither all nor none of the sectors are organized, and the level that an
organized sector receives depends on the level of output relative to imports and the import demand
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Ideas, Interests, Institutions, Information: Rosendorff
elasticity. Mitra (1999) using this model as a baseline endogenizes the decision to “organize”
providing a crucial answer to the “who gets protected question”.
Nevertheless, government here too is largely a reduced form. Institutional features of the
polity are missing, and certainly cross-country variations in these institutions have not been
adequately considered. Rodrik (1995) observes the paucity of work on the cross-country variation in
the levels of protection, and identifies that institutions matter in this context (p. 1484).
Scholars in international relations and comparative politics have, on the other hand, focused
intently on “institutions”, both domestic and international, and this has recently been picked up by
the economists.
The international institutions of interest include, of course, the GATT/WTO and recent work by
Bagwell and Staiger (1999, 2002) explores the architectural elements of the agreement – nondiscrimination and reciprocity, and show how these lead to more efficient tariff setting rules. Others
will talk about the contributions to the regionalism debate, but this includes Bagwell and Staiger
(1997), Krishna (1998) and Levy (1997).
But most significantly, economists have largely ignored the importance of domestic political
institutions and their importance for trade.
On the domestic side, while Jagdish has always stressed the need for domestic policy makers to
be insulated from political pressure to assure freer trade policies, variations across domestic political
institutions has been shown to matter for the level of trade barriers and the willingness of countries
to cooperate on tariff reduction. In particular, the regime types with separation of powers and
electoral accountability behave differently to systems absent those features when it comes to trade
policy. Democracies are, in general, characterized by these features, which turn out to be influential
in the trade-liberalizing tendencies of these regimes. Some results in this vein:
1.
Pairs of democracies are more likely to negotiate to lower tariff bindings than mixed
dyads. (Mansfield et al. 2000)
2.
Democracies are more cooperative with respect to their willingness to join tariff-reducing
PTAs (Mansfield et al. 2002)
3.
Democracies have a greater tendency to unilateral liberalization; (Rosendorff 2005b)
4.
Democracies are better able to extract concessions (in the form of reduced tariffs) from
their trading partners than are non-democracies. (Rosendorff 2005b).
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This is consistent in some sense with the broader facts from international relations that
democracies to cooperate along a variety of dimensions: they fight fewer wars with each other, or
with autocracies than do autocracies with each other (Morrow et al 1998), or to recognize and
enforce one another’s laws.
More recent work examines the variations in the type of democracies for trade policy outcomes.
Grossman and Helpman (2004) establish that majoritarian democracies have a protectionist bias,
while with a student of mine, we have established that presidential systems are more protectionist on
average than are parliamentary systems (Doces and Rosendorff 2005). Rogowski (1987) argues that
PR systems with large electoral districts is a system more conducive to lower trade barriers than
majoritarian systems with small districts; McGillivray (1997) argues that as to which districts/sectors
get protection depends on the degree of party discipline operative within the political system – high
party discipline democracies lead more easily towards protection for widely dispersed industries in
safe districts; low party discipline leads concentrated industries in marginal districts to have more
lobbying power for protection, and this explains differences in US-Canada patterns of protection
rather well. Within the US variation across time in the degree of divided government leads to
variations in the degree to which congress is willing to delegate trade policy making to the executive
branch (Lohmann and O’Halloran 1994), While Bueno de Mesquita et al. argue that democratic
policymakers by virtue of having large “selectorates” and large winning coalitions, find survival in
office enhanced by the provision of public goods, free trade being one of them.
In summary, what we have in the field, is the emergence of what we might call the
“comparative political economy of trade” – where variations in domestic institutional form are
shown to be systematically related to trade policy outcomes.
III. Information and Institutions
A new generation of models of the political economy of trade policy recognize that tariffpolicy is made in an environment of incomplete information. Asymmetries of information occur at
both international and domestic level; and within the domestic level, various types of uncertainty are
present:
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Ideas, Interests, Institutions, Information: Rosendorff
International organizations play crucial information providing roles –
1.
when states aren’t sure of the behavior of their trading partners, or perhaps they see the
behavior but can’t determine if it is consistent with their obligations – Keohane (1984),
Rosendorff (2005a).
2.
voters can’t see the behavior of their policymakers, but can rely on the signals provided
by the international institutions to better monitor the behavior of policymakers that might
otherwise be extractive (Mansfield et al. 2002).
3.
Uncertainties about the political pressures governments may experience in the future lead
governments to design flexibility and opportunities for renegotiation (Rosendorff and
Milner 2001, Bagwell and Staiger 2005).
Domestic political uncertainty
1.
about identity off gainers and losers leads to a status quo bias (Fernandez and Rodrik
1991).
2.
say about the preferences of the median of the voter over trade policy lead government to
be “conservative” in its willingness to liberalize (Milner and Rosendorff 1997).
3.
uncertainty about one’s trading partners’ domestic politics can lead that state to extract
more – the Schelling conjecture (Milner and Rosendorff 1996, Schelling 1960).
4.
uncertainty, about the effect of policy choices under most circumstances makes
international trade agreements more difficult to strike (Milner and Rosendorff 1996).
5.
and lobbying generates information that can be used by the government and the special
interests to alter outcomes (Milner and Rosendorff 1996, Grossman and Helpman 2001).
Conclusion
Jagdish concludes his marvelous, little book, by reasserting his “guarded optimism in regard to the
long-run prospects for keeping protectionism at bay”. Let me express my enthusiastic optimism for
the prospects for the field of the political economy of international trade, and let me congratulate
Jagdish for his long and productive career as producer of ideas, and may there be many more I’s to
come.
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