Money, Politics, and Democracy

Adam Przeworski
May 21, 2011

Introduction

Decisions made by governments aect the welfare of particular groups and individuals. Hence, it is only natural that those whose well-being would be inuenced by these decisions seek to inuence them. Indeed, the essence of democracy is that citizens exert inuence over governments by freely exercising their
equal rights to participate in elections, public speech, peaceful demonstrations,
and other forms of political activity. But in any market society, the resources
which the participants can bring to the competition for political inuence are
unequal. Equality of rights is not su cient to sustain the equality of political
inuence in economically unequal societies.
This observation is almost as old as democracy itself. Already in 1844 Marx
characterized the duality between universalistic rules and unequal resources as
follows:
The state abolishes, in its own way, distinctions of birth, social rank,
education, occupation, when it declares that birth, social rank, education, occupation, are non-political distinctions, when it proclaims,
without regard to these distinctions, that every member of the nation is an equal participant in national sovereignty.... Nevertheless
the state allows private property, education, occupation to act in
their way i.e., as private property, as education, as occupation,
and to exert the inuence of their special nature.
This duality was repeatedly diagnosed ever since. The chairman of the Drafting Committee of the Indian 1950 Constitution, B. R. Ambedkar (quoted in
Guha 2008: 133), saw the future Indian republic as entering a "life of contradictions":
In politics we will be recognizing the principle of one man one vote
and one vote one value. In our social and economic life, we shall,
by reason of our social and economic structure, continue to deny
the principle of one man one value. How long shall we continue to
live this life of contradictions? How long shall we continue to deny
equality in our social and economic life? If we continue to deny it
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for long, we will do so only by putting our political democracy in

peril.
The idea that political equality is not possible without social and economic
equality was the cornerstone of Social Democracy. Jean Jaures (1971: 71)
thought that "The triumph of socialism will not be a break with the French
Revolution but the fulllment of the French Revolution in new economic conditions," while Eduard Bernstein (1961) saw in socialism simply "democracy
brought to its logical conclusion." Yet economic and social inequality persist and
their impact on political inequality continues to be a burning issue of democracy.
Tracing the impact of economic resources, to which I refer simply as "money,"
on democratic politics and the resulting policy outcomes is not a simple task
for several reasons:
(1) The point of departure must be that this impact is to some extent inherent in the capitalist economic system in which the decisions aecting the entire
society, primarily those concerning investment and employment, are a prerogative of private owners of productive resources. The democratic process, even
when it operates perfectly, is constrained by these private decisions.
(2) Socioeconomic inequality may cause political inequality without any expenditures of money or other costly eorts by wealthy individuals or groups
if either poverty or inequality directly aect political participation of lower income groups. Except for the United States, and to a lesser extent France and
Switzerland, the rates of electoral participation do not dier much by income
and education (see Przeworski 2010: 93-94 for a summary of ndings). Yet
Salt (2006) found that among the countries for which data on inequality are
available from Luxembourg Income Studies, greater inequality depresses political interest, the frequency of political discussions, and electoral participation
of all but the most a- uent income quintile. Because this paper concerns the
eects of active uses of economic resources to inuence policy outcomes, I not
delve into this topic any further, but it is important to have in mind that economic inequality may be su cient to generate political inequality without any
actions by a- uent groups. Indeed, one identication problem, about which see
below, is to distinguish the direct eect of economic inequality from its eect
via dierential political expenditures.
(3) The impact of money on politics cannot be reduced to "corruption."
True, corruption scandals abound: suitcases lled in cash are found in the prime
ministers o ce, government contracts are awarded to rms co-owned by government ministers, insider trades are rampant, political parties are found to
have bank accounts in Switzerland, local governments operate systematic bribe
schedules on their contractors, the list goes on and on. Moreover, such scandals
are by no means limited to less developed countries or to young democracies:
these examples are drawn from Germany, Spain, France, Italy, and Belgium.
But reducing the political role of money to instances of "corruption" is deeply
misleading. Conceptualized as "corruption," the inuence of money becomes
something anomalous, out-of-ordinary. We are told that when special interests
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bribe legislators or bureaucrats, democracy is corrupted. And then nothing

needs to be said when special interests make legal political contributions. In
order to exist and to participate in elections, political parties need money; because election results matter for the private interests, they understandably seek
to befriend parties and inuence results of elections: the logic of political competition is inexorable. That the same acts are legal in some countries and illegal
in other systems U.S. political nancing practices would constitute corruption
in several democracies is in the end of secondary importance. The inuence of
money on politics is a structural feature of democracy in economically unequal
societies.
(4) The information about the uses of money in politics is scant. To some
extent this lack of knowledge is due to the very nature of the phenomenon:
legally or not, money inltrates itself into politics in ways that are intended to
be opaque. A general conclusion of surveys conducted in twenty-two countries
by the National Democratic Institute for International Aairs (Bryan and Baer
2005: 3) is that "Little is known about the details of money in political parties or
in campaigns. Political party nancing patterns are extremely opaque...." With
regard to Latin America, Zovatto (2003: 10) comments that "information about
nances of political parties is scarce because the culture of transparency and the
obligation of these forces to give accounts to the State and the civil society
has been in general absent from the political-partisan scene of the region."
Information about political contributions is available only for a recent period in
a handful of countries. Information about lobbying expenditures exists only in
the United States. Hence, if the evidence summarized below is U.S.-centric, it is
because studies of the impact of political contributions or of lobbying activities
on electoral and policy outcomes are rare outside the United States.
(5) Even when the information is available, the causal impact on money on
the electoral process, on legislative outcomes, and on bureaucratic and regulatory decisions is di cult to identify because the direction of causality is often
unclear. Estimates of these eects vary broadly across dierent studies, perhaps
due to their dierent methodological designs.
These di culties imply that the design of regulatory frameworks that would
counteract the eect of economic on political inequality is far from obvious.
Various regulatory schemes have been proposed and various are in use but we
have no systematic knowledge of their eects. Moreover, some well-intentioned
proposals may be counterproductive. Perhaps instead of legal regulation, more
eective are mechanisms by which poor people can pool their resources in order
to counterbalance the inuence of the rich.
In what follows, I rst discuss the limitations imposed on the democratic
process by the structure of ownership of productive resources. The core of the
paper is the analysis of various ways in which the inuence of money may aect
the political process and the policy outcomes. Finally, I review and comment
on the regulatory mechanisms used in dierent countries. An analysis of the
impact of money on the quality of democracy closes the paper.

Capitalism and Democracy: Structural Dependence on Capital

Private ownership of productive resources limits the range of outcomes that can
ensue from the democratic process (Przeworski and Wallerstein 1988). Collective decisions are constrained in any capitalist economy by the fact that crucial
economic decisions, those aecting employment and investment, are a private
prerogative. Hence, the exclusive focus on the political process can be misleading. Institutions do matter, so do partisan dierences. But how much? Unless
this question is posed each time, we end up with an ideological view of the
political process; a glorication of popular impotence. Indeed, the ideology of
democratic capitalism is self-contradictory: people are simultaneously told that
when they vote they choose and that some choices will result in their impoverishment because of the eect they have on the behavior of those who control
the productive resources. Clearly, this ideology portrays the fact that property
has this constraining power as impersonal and natural, just a fact of life. But
tensions remain: if masses of people are disaected from the political process, it
is because what can be decided by voting is limited by the private ownership of
capital. As Bobbio (1989) put it, the question is not who votes but on what.
Capitalism is a system in which most productive resources are owned privately. Yet under capitalism property is institutionally distinct from political
authority: this separation is necessary for markets to exist. As a result, there are
two mechanisms by which resources are allocated to uses and distributed among
households: the market and the state. Individuals are simultaneously market
agents and citizens. The market is a mechanism in which resources are allocated
by their owners. The state is also a system that allocates resources, including
those it does not own, with rights distributed dierently from the market. The
market is a decentralized mechanism: households and rms decide how to allocate the resources they own. The state is a centralized mechanism: it coerces
economic agents to do what they would have not chosen to do voluntarily.
Given the coexistence of these two mechanisms, one way to see the political
process is the following. Political actors reveal their preferences for policies by
voting; the result are policies, such as the tax rate, that are supposed to be
implemented by the elected governments; and then economic agents maximize
their utility, subject to the constraint of the policy, by deciding how much to
save and how much labor to supply. The result is an allocation of resources to
uses and a distribution of incomes to households.
The constraining eect of private ownership on collective decisions can be
shown already at this level of abstraction. Each voter knows that the policy
resulting from an election will aect the decisions of individuals as economic
agents to save and to work. Specically, they know that redistribution of incomes (or consumption) would cause the owners of capital to reduce investment,
thus future employment and incomes.1 Even if a majority would want to redis1 Note

that the assumption concerns the redistibution of incomes that would be entirely

tribute more incomes, it must exercise self-restraint in anticipation of decisions

concerning investment and employment, which are made by owners of capital
in pursuit of their own welfare. As a result, some allocations of resources and
some distributions of welfare are inaccessible to the collectivity even if they are
technologically feasible given the endowments of the economy.
One can cite alternative formulations (Bertola 1993) but the general logic is
the same. Whenever private agents respond in a decentralized way to government policies, the policy choice, and the resulting allocation of resources and
distribution of incomes, are constrained by private decisions. The constraining
power of agents with dierent endowments depends on the magnitude of these
endowments and the elasticity with which they are supplied. The constraining
power of capital stems from the fact that no collective organization or collective action is required for this constraint to bite: it is su cient that each rm
independently pursues its self-interest. Thus, while the state may be politically
dependent on labor or other organized groups, it is structurally dependent only
on capital. Because the collectivity is dependent on private decisions for the
realization of its objectives, it is constrained in its policy choice and limited in
the range of outcomes that it can generate. If they are well informed, voters
anticipate these constraints; if they are not perfectly informed, they will vote
only to nd that they have been betrayed by governments they elected.
Globalization, specically the international mobility of factors of production,
may tighten the constraints facing the particular countries, but its role tends to
be excessively dramatized. As Clark (2005) puts it in the title of his book, it
is "Capitalism, not Globalism." Structural dependence on capital is inescapable
in any private ownership economy even when this capital is exclusively local.
Moreover, while globalization may cause redistributions of income to be more
expensive in terms of their eect on investment and employment, it does not
necessarily restrict the range of choices available to voters. Indeed, Przeworski
and Meseguer (2006) argue that if globalization increases inequality, the distance
between redistributional platforms oered by left and right-wing political parties
increases. Hence, while the entire range of choices moves toward lower degree
of redistribution, this range becomes larger.
To the extent to which governments are structurally dependent on private
agents, therefore, the scope of political decisions is limited. This is not to say
that all democratic capitalist systems are the same: structural dependence need
not imply that partisan and institutional dierences are irrelevant. But a science
of politics that ignores economic constraints on popular sovereignty misses what
all democracies have in common, namely, that they exist in societies where
the future of all depends on private decisions of those who control productive
resources. Popular sovereignty is constrained by private ownership of collective
resources.
consumed or directly of consumption, as in Bertola (1993). The eect of taxes on investment
is ambiguous, because tax revenues can be spent to increase the supply of factors or their
productivity. See, for example, Barros (1990).

This structural dependence of the entire society on capital does not undermine the value of elections as a mechanism of collective decision making. The
structure of the economy imposes limits on the collective choice but within these
limits elections still align the collective decision with the distribution of individual preferences. That a choice is exogenously constrained does not imply
that the mechanism by which it is made is faulty. If the voters know the consequences of the choices they would collectively made, they make the best choice
given their beliefs about these consequences.

Political Dependence on Money

Politics costs money: this much is inescapable. Parties need money to exist, to
organize election campaigns, to survey public opinion, to bring their supporters
to the polls, to persuade those undecided to vote for them. They need to
cover costs of meeting rooms, transportation, printing their materials, access
to television. The point is obvious but it should be kept in mind: in some
countries the general public both opposes public nancing of political parties
and perceives private nancing as corrupting. How much money is another
question. Elections are expensive but their costs varies greatly across countries,
and in some countries they are excessively expensive: in 2000, expenditures
per voter were higher in Mexico than in the United States. Nevertheless, the
elementary fact is that without money parties cannot exist, not to speak of
competing in elections, so it is only natural that they try to nd it wherever
they can.
They can nd it only where the money is. As Becker (1983) has argued, all
politics is a process of competition for inuence. But he neglected to observe
that this competition is not among equals. Some competitors cannot equalize
their marginal cost of inuence over politics with their marginal benets because, in the language of economics, they are "budget constrained." Given the
inequality of nancial resources between producers and consumers, between
large and small rms, a- uent and poor individuals competition for political
inuence may not only generate excessive costs of politics, not only ine cient
allocations of productive resources, but it may bias political outcomes in favor
of those with larger resources, to perpetuate various inequalities. The last eect
is the exclusive focus here: I review only those studies of political inuence that
assess whether political expenditures or other costly eorts by special interest
groups benet them economically.
Interest group activities include inuencing and mobilizing the electorate, nancing electoral campaigns, lobbying legislators and the executive branch, and
using courts. Schematically, one may think that money biases political outcomes
in favor of the donors if (1) political contributions aect the platforms oered by
parties in elections, (2) campaign contributions aect the outcomes of elections,
(3) political contributions or lobbying eorts aect legislative decisions, (4) political contributions, lobbying eorts, or outright bribes inuence executive or
regulatory decisions. Note that, following Walecki (2007) and Zovatto (2003:
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12), I treat together campaign contributions and other expenditures to support

political parties, referring in general to "political contributions" or "political
nancing." Note as well that in some countries money is raised by individual
candidates while in other countries it is collected and distributed by political
parties.
Some potential causal paths through which money can inuence political
outcomes are illustrated below but, as shown below, political contributions may
also have direct eects on legislative outcomes as well as on executive or regulatory decisions.
Political Contributions
.&
Party Platforms ! Election Results
&
#
Lobbying ! Legislative Outcomes
&
#
Bribes ! Executive Decisions
Regulatory Decisions
To appreciate how complex these causal mechanisms can be, consider the
study of Grossman and Helpman (2001), attempting to distinguish the role of
money in buying platforms and buying votes in the U.S. context. In their model
parties maximize the probability of winning a majority of seats, while special
interest groups maximize the welfare of their members. Voters come in two
kinds: strategic voters maximize expected utility while impressionable voters are
favorably inuenced by campaign advertising. Special interests make campaign
contributions, politicians choose policies, and voters vote; not necessarily in this
order because contributions can play a twofold role. They can be used early in
the campaign to induce parties to announce platforms that are to the liking
of the lobbies or they can be used once the platforms have been announced
to sway voters to vote for the party closer to the lobby. If there is only one
interest group, the conclusions are that: (1) To inuence their platforms, the
group contributes to both parties, giving more to the party that is the ex ante
favorite to win; (2.1) If the resulting platforms are the same, the special interest
is indierent as to which party would win and contributes no more. (2.2) If
the resulting platforms dier, the group contributes additional funds to tilt the
election in favor of the party closers to its interests. Overall, Grossman and
Helpman conclude (2001: 339), the contributions bias the policy outcome away
from the public interest both by inuencing the partiespositions and perhaps
by tilting the election odds. The electoral motive contributions designed to
tilt elections in favor of party whose announced position is more to the liking of
the special interest is even weaker when several interest groups compete for
inuence because each group can ride free on the contributions of other groups.
In the end, platforms reect contributions and deviate from the welfare of the
7

average voter. Parties act as if they were maximizing a weighted average of

campaign contributions and of the aggregate welfare of strategic voters.

3.1

Methodological Di culties

Before summarizing empirical ndings, it is important to realize that the eects

of political contributions on party platforms, individual voting decisions, and
legislative outcomes are di cult to identify. Consider dierent, not mutually
exclusive, possibilities:
(1) Special interest groups, "lobbies," use political contributions to inuence
party platforms. (1.1) If an interest group succeeds in persuading all major
parties to adopt programs to its liking, then it does not care which party wins
and it does not need to make campaign contributions designed to inuence
voters. Moreover, if a lobby manages to establish a long-term relation with a
party, then it does not need to buy legislative votes each time a issue on the
agenda aects its interests, "on the spot market." (1.2) If the interests of a
lobby are embraced by only some parties, this lobby contributes to increase the
likelihood that this party or parties would enter the government.
(2) Candidates have dierent preferences with regard to policies. Lobbies
know who is who. They contribute to the candidates whose position would
lead them to adopt policies favorable to their interests. Campaign money buys
votes. While in o ce, the elected candidates pursue policies they prefer, thus
advancing special interests.
(3) Lobbies expect particular parties or candidates to win the election. They
contribute to the expected winners, hoping to receive favors in exchange.
The direction of causality is dierent in these alternative scenarios. All the
research shows that winners of elections received higher contributions than the
losers. But is it because money buys votes or because it follows the winners? In
the statistical language, this is an "identication" problem, and it is not an easy
one to resolve. True, in the end, the policies may be the same whether campaign
contribution tilt the election in favor of a candidate supported by a lobby or a
candidate who would have won anyway becomes indebted to a lobby. But without a due attention to this problem, claims that if winners received (or spent)
more money, their victory must have been due to campaign contributions are
untrustworthy. The same holds for the relation between political contributions
and legislative votes: it is again possible that legislators vote in particular ways
because they are bribed by lobbies or that lobbies support legislators whose
preferences are close to them.
These methodological issues may explain the wide range of empirical assessments of the impact of money.

3.2

Eects of Political Contributions on Elections.

Zovatto (2003: 16) puts it simply: "El dinero s compra votos y no slo en los
Estados Unidos." Does it? Does money buy votes or do votes generate money?
8

Moreover, if it does, how does money buy votes? Is it because political advertising changes voterspreferences, because some voters are "impressionable" as
Grossman and Helpman (2001) have it, or is it because campaign contributions
nance the activities of parties ranging from registration eorts to provision of
transportation to bring their supporters to the polls; hence, they dierentially
aect turnout, as argued by Hansen and Rosenstone (1996)? Whose votes does
money buy: of the undecided or of people who otherwise would not vote? In
favor of whom: incumbents or challengers?
The eect of campaign spending on outcomes of elections is controversial
(Stratmann 2005). The observed facts are simple and robust: those who receive
and spend more money win. This much has been observed at least in the United
States, Brazil (Samuels 2001), Chile (Morales Quiroga and Pieiro Rodrguez
2010), France (Palda and Palda 1998), Japan (Cox and Thais 2000), South Korea (Shin et al. 2005), and Uruguay (Morales Quiroga and Pieiro Rodrguez
2007). But the causal question do they win because they spend more money?
has received widely divergent answers. Moreover, in addition to the issue of
causal direction, the eect of spending is confounded by eects of incumbency.
There is extensive evidence that the marginal impact of campaign expenditures
on votes is lower for the incumbents, who already enjoy a high level of support, than for the challengers. Yet even this observation is contested. Hence, it
is not surprising that in a penetrating summary of ndings, Stratmann (2005:
137) is led to observe that "academic researchers for the most part have trouble
establishing a causal and quantitatively important connection between spending and vote shares.... To date, no consensus has been reached regarding the
eectiveness of campaign spending on vote shares."
The rst salvo in these debates was red by Jacobson (1978), who found
that campaign expenditures do not increase the vote share of incumbents in the
U.S. Congressional elections. Beginning with Green and Krasno (1988), however, several scholars argued that the statistical methods used by Jacobson were
awed in that they did not consider the endogeneity of campaign contributions.
Note again that contributions may ow to candidates whose policy positions are
close to those of potential donors, those who are likely to change their position
in response to the contributions, or those who are more likely to win. Hence,
to assess the causal eect of spending, it is necessary to consider why the contributions are made to the particular candidates. Studies that fail to do so and
which, moreover, do not control for the "quality" of the candidates, suer from
the endogeneity and the omitted variables biases.
Particularly interesting is a recent study by Campante (2007) of the relation
between income inequality, individual campaign contributions, and turnout of
dierent income groups in the U.S. states and counties in the 2000 presidential
election. He found that when inequality is greater, fewer individuals make
contributions but their contributions are larger, to the extent that the total sum
of contributions increases with greater inequality. In turn, inequality reduces
the turnout of the poor relative to that of the rich.2 Note that Campante does
2 This

eect has also been found by Salt (2006) among the countries for which data on

not identify the causal eect of contributions on the results of elections, only
separate eects of inequality on contributions and on dierences in turnout,
which jointly add up to a bias in favor of the a- uent. The net eect is that
if at stake in the election is redistribution of income, the eect of inequality
is non-monotonic: redistribution rst increases and then declines as inequality
becomes larger. This is an important conclusion, for it suggests that equal
societies tend to become more equal while those originally unequal becomes
even more so. Hence, this paper supports the argument of Benabou (2000), who
simply assumed that the political weight of individuals increases with income,
and came to the conclusion that depending on initial conditions countries may
end up with high inequality and little redistribution or with equality and more
redistribution.
Short-cutting long debates, it seems that money is more productive for challengers than for incumbents, that it matters most in close races, and that it has
a signicant eect in open races (those in which there is no incumbent). Yet
these generalizations must be treated with caution, because this is a subject in
which dierent methods tend to generate dierent results.
3.2.1

Eects of Political Contributions and Lobbying Eorts on Legislative Decisions

Eects of political contributions on the votes of the elected legislators are equally
controversial. Several early studies were reviewed by Potters and Sloof (1996).
Ansolabehere, de Figueiredo, and Snyder (2003) were puzzled by the fact that
the amounts of money contributed to legislators are much smaller than the
value the contributors gain from the legislative decisions: a nding that goes
against economic theory in general and Beckers (1983) inuential model of political competition in particular. Moreover, they concluded that the impact of
contributions on legislative votes is miniscule in the U.S. House of Representatives. This nding, however, is not universally accepted. Stratmann (1998) has
discovered that contributions from agricultural groups increase in period preceding important legislative votes concerning agricultural policies. In a particularly
inventive study, Stratmann (2002) has shown that after a bill to deregulate nancial rms failed in the Congress, nancial rms increased their contributions
and the new bill passed with the votes of the recipients. Thus, Stratmann (2005:
146) concludes that political contributions do aect legislative votes and that,
moreover, this is a "spot market" relation in which contributions increase when
issues important for the potential donors are at stake.
Lobbying has been a subject of widespread scrutiny but the evidence about
its eects comes almost exclusively either from case studies of particular pieces
of legislation or from surveys. In particular, inspired by the seminal article of
Grossman and Helpman (1994), there has been an outpouring of research on
protectionist policies: these studies are too numerous to be summarized here.
Because data on lobbying expenditures is limited only to the United States in a
inequality from Luxembourg Income Studies are available.

10

recent period, the systematic eect of lobbying activities is almost unknown in

other countries. As Gordon and Hafer (2005: 245) observe, "Because data on
lobbying expenditures have been harder to come by [than on political expenditures], we know little about their eect on policy."
The evidence that does exist indicates that lobbies have a powerful eect on
legislation. Perhaps most comprehensive to date is a study based on a World
Bank survey by Macher, Mayo, and Schier (2011) of self-reported inuence
on government of about rms 6,000 in 60 countries. They nd that this inuence is higher in common law than in civil law countries, in more concentrated industries, by larger and older rms, and of multinational, exporting,
and government-owned rms as opposed to privatized and foreign-owned rms.
The same factors determine the inuence of business associations. About onethird of all rms report being inuential, with almost no dierence with regard
to the branch of government over which the inuence is exercised.
Campos and Giovanonni use another survey, of 3,945 rms in 25 transition
economies, to examine whether lobbying and bribes are substitutes or complements and nd in favor of the former. Lobbying is more eective than bribes
as an instrument of inuence. Moreover, lobbying is more prevalent in higher
income countries, while bribes are more frequent in poorer countries, where they
are cheaper. They also learn that lobbying is perceived as increasing political
inuence by between 25 and 30 percent of rms.
Adhikari, Derashid, and Zhang (2006) discovered that rms with political
connections pay lower eective tax rates in Malaysia. They claim that capitalism in developed countries U.S. cited as an example is "market based,"
while in less developed ones it is "relationship-based" or "crony." Yet Richter,
Samphantharak, and Timmons (2009) found that in the United States lobbying
reduces the eective tax rate paid by the lobbying rms: increasing registered
lobbying activities by 1 percent lowers the eective tax rates by between 0.5 and
1.6 percentage points. Kim (2008) found that lobbying expenditures by US rms
have a positive eect on the rms equity returns relative to the market and,
to a lesser extent, relative to its industry. De Figueiredo and Silverman (2006)
learned that universities that lobby receive a larger share of federal research
funds.
Monographic studies of the inuence of lobbies on the passage of particular
laws are numerous. Notably, Graetz and Shapiro (2006) describe how a majority
of the U.S. public became convinced by special interests to support abolishing
the inheritance tax that was imposed only on the very rich. In another well
documented study, Mancuso (2003) tells the story of lobbying in favor of public
concessions in Brazil.
These ndings should not be interpreted as implying that lobbying is always politically successful. When interests of powerful lobbies are in conict,
they neutralize each other. When public opinion overwhelmingly supports or
opposes a particular law, corporate interests do not prevail. Tobacco industry,

11

for example, suered several defeats at the federal level in the United States.3
While Santos (2011) reports that the Confederac
ao Nacional da Industria exerts
powerful inuence over legislation in the Brazilian Camra dos Diputados, this
inuence is limited to committees: if a bill reaches a plenary session and, in
particular, if the vote is nominal, the industrial lobby is no longer eective. But
both the statistical evidence and numerous case studies show that lobbies have
a powerful eect on legislation. While this eect can be due to the fact that
special interests often have information and expertise that legislators lack, the
studies that use lobbying expenditures indicate that more than information is
entailed in their inuence.
3.2.2

Eects of Political Contributions and Lobbying Eorts on Executive and Regulatory Decisions

Studies examining this relation seem rare. Particularly illuminating is the work
of Gordon and Hafer (2005) on inspections by the U.S. Nuclear Regulatory Commission, in which they found that large political donors are less compliant than
smaller ones but the bureaucracy monitors them less. Their explanation is that
political donations signal the willingness of rms to contest adverse rulings in
courts and, given that the regulatory agency has a limited budget and personnel, it prefers to avoid potential costly ghts. This study is innovative in that it
shows that "rms can extract policy concessions from regulators through political expenditures on elected o cials, even holding legislative behavior constant
[i.e. without lobbying]." Moreover, it provides an explanation of the apparent paradox, noted by Ansolabehere, de Figueiredo, and Snyder (2003), that
the benets accruing to political contributions are much larger than these contributions. As Gordon and Hafer (2005: 246) point out, "corporate political
expenditures seem small relative to the benets of legislative actions because
signalling a willingness to ght is always less costly than the ght itself." De
Figuereido and Edwards (2005) nd that campaign contributions have a signicant eect on regulatory decisions of state public utility commissions in the
United States but they do not specify the mechanism by which this inuence
occurs.

Regulation

Given the prima facie corrupting and inegalitarian impacts of money, attempts
at regulation are numerous and recommendations about what should be regulated and how even more.
Regulation diers importantly across countries with regard to transparency,
public, and private nancing. Pierre, Svsand, and Widfeldt (2000) report that
as of 1989, the proportion of state subsidies in the total income of Western
European political parties ranged from 25.1 percent in Austria to 84.2 in Finland. According to IDEA (www.idea.int/parties/nance), out of 116 countries
3 Worldwide

lobbying by tobacco industry is a subject on an entire journal, Tobacco Control.

12

for which this information was available as of 2002, seventy-ve have some kind
of regulation of political nancing while forty-one have none. Fifty-nine countries have provisions for disclosure of contributions to political parties while
fty-two do not. Most countries allow private contributions, even from government contractors (eighty-six do, twenty-seven do not). In turn, in eighty-three
countries there is some scheme of direct public nancing of political parties,
while in sixty-one there was none, and in eighty-one countries parties receive
free television time during electoral campaigns while in thirty-four they do not.
Another source (http:nnaceproject.org) reports that 156 countries allow private
funding and twenty-eight do not, while 106 provide direct and 110 indirect public
funding and forty-six provide none.
US AID (2003) provides information about rules governing disclosure of political contributions in 118 countries. Of those, fteen are classied as having
"high" disclosure, with Brazil as the only Latin American country in this category. Disclosure levels are classied as "medium" in twenty-six countries, which
include Argentina and Colombia. Bolivia, Chile, Costa Rica, Ecuador, Mexico,
and Peru are included among the thirty countries that have "low" disclosure
rules. Twenty countries collect this information but do not release it to the
public, among them the Dominican Republic, Guatemala, Honduras, Panama,
Paraguay, and Venezuela. Finally, twenty-seven countries do not have any disclosure rules, including El Salvador and Uruguay.
The legal aspects of regulation of political nancing in Latin America are
now well known, due mainly to the pioneering eort of Zovatto (2003). Except
for Venezuela, all Latin American countries combine dierent forms of public nancing with private contributions. Public nancing was introduced in Uruguay
as early as in 1928, followed by Costa Rica in 1949, and after 1997 it was used
by all countries in the region. The formulas of public nancing distribute resources mainly on the basis of past electoral strength of the parties, with minimal
thresholds, and sometimes in combination with other criteria. Most countries
prohibit private contributions by some potential donors, most frequently from
foreign sources, but it is striking that only eight ban contributions by rms
that have contracts from the State and only ten prohibit anonymous contributions. In turn, only seven Latin American countries impose caps on individual
contributions. All countries provide free access to state media and some also
to private ones during elections campaigns. Except for Uruguay, in all countries some specic organ is designated to monitor compliance, with a variety of
sanctions. It bears repeating, however, that all these legal provisions did not
generate systematic information about the actual patterns of nancing.
To my best knowledge, there are no comparative studies of the eect of
these regulatory regimes on the policy outcomes, although there are claims
that private political nance plays little role in some countries, notably the
Netherlands, Denmark, or Sweden, while it is large in Italy, the United Kingdom,
and the United States (Prat 1999).
Proposals for reforming regulatory regimes are a subject of an intense activity by various international, particularly regional bodies (see Walecki 2007
13

for a summary). The U.S. Government is as always eager to provide advice

to other countries (US AID 2003, US AID 2007). The 2003 document, entitled
"Money in Politics Handbook: A Guide to Increasing Transparency in Emerging
Democracies," pursues the view of the U.S. Supreme Court that buying political
inuence is a form of free speech. Having observed that "disclosure of campaign
and political party nance is the cornerstone upon which all other attempts to
control money in politics rest," the Executive Summary (2003: 1) goes on to
claim that "Like a form of free speech, political nance is linked to the health
and strength of a democracy. Laws and regulations to control political nance
risk stiing the basic rights of citizens to provide funding to the candidate or
party of their choice." This approach is in sharp contrast to that of the Council
of Europe (Walecki 2007), which in addition to transparency calls for funding
caps, prohibitions of some sources of funds, as well as for public nancing.
The one area in which all recommendations converge is transparency. Transparency is supposed to be eective because informed and rational citizens would
be less likely to vote for candidates or parties that are known to have debts to
interests dierent from their own. There is some empirical evidence that this is
true: Stratmann (2005: 136) reports that both theoretical models and experimental studies indicate that "voters are less responsive to campaign messages
when they believe that candidates have obtained campaign funds by promising
policy favors to contributors." Yet Persily and Lammie (2004) argue that while
a large majority of U.S. respondents believe that the campaign nance system
contributes to corruption in government, this perception became less widespread
just as soft-money contributions skyrocketed. Moreover, experimental studies
are of dubious value because they provide the information to the experimental
subjects while real-life voters have to seek this information among the deluge
with which they are bombarded at election times. While transparency is necessary, limiting regulation to disclosure puts an excessive burden on individual
voters.
Most controversial are limits and restrictions of individual and group contributions. If campaign contributions have little eect on the vote for incumbents
but a larger eect on the vote for challengers, limitations of political spending would favor incumbents. Hence, Sahuguet and Persico (2006) claim that
spending caps have anti-competitive eects. In turn, Campante (2007) argues
that limits on private contributions would have equalizing eects but only if
they were very tight. As plausible as these claims may be, however, they do
not receive much empirical support. Having examined legislative elections in
forty-ve states of the United States between 1980 and 2000, Stratmann and
Aparicio-Catillo (2005) found that stricter limits are associated with lower margins in favor of incumbents and a larger number of candidates. In turn, Houser
and Stratmann (2005) found that publicly nanced campaigns induce "higher
quality" candidates, who win by larger margins. The explanation may be that
while spending caps make it more di cult for challengers to make themselves
known vis-a-vis already prominent incumbents, they also equalize the costs of
entry for budget-constrained high-quality challengers. Yet another argument

14

against spending caps is that if marginal dierences in campaign spending have

a large eect on vote shares and if enforcement is not perfect, spending limitations would favor undetected cheaters.
The technical di culty of public nancing schemes, in turn, is how to allocate the funds and free resources, mainly access to television. The predominant
practice is to distribute them according to past electoral results. The main argument against this procedure is that it ossies the party system. Moreover, as
Morales Quiroga and Pieiro Rodrguez. (2010) point out in the case of Chile,
this rule induces incumbents who have safe seats to overspend, trying to maximize their vote share with the eye on the next election. A more general argument
against public nancing is that providing funds to parties without them having
to raise funds from their supporters isolates party elites from their bases. Yet
another criticism is that regulations that provide free in-kind transfers in equal
amounts have anti-competitive eects (Sahuguet and Persico 2006). Yet none
of the arguments against public nancing that it makes parties dependent
on the state, that it petries the party system, and that it induces apathy in
mobilizing members seems to hold at least in the Western European context
(Pierre, Svsand, and Widfeldt 2000).
The attempts to regulate the access of money to politics by law are wellmeaning but they raise two political economy questions: (1) Whether regulation
that equalizes the playing eld is likely to be adopted by the current winners,
those who are in power and their powerful supporters, (2) Whether they would
be enforced. As Pinto-Duschinski (2002: 81) observes, "There is ... too much
law and too little enforcement." Enforcement is supposed to be implemented
by independent monitoring and meaningful sanctions but the question is why
bodies regulating political nance would not be subject to the same inuence of
money as are other regulatory agencies. This is clearly an area where popular
pressure and the organizations of civil society have an important role to play.
Perhaps most importantly, regulation is not the only way to equalize political inuence of economically unequal groups. The political playing eld
seems to be more equal in countries in which the poorer sections of society
have been organized by political parties associated with powerful trade unions
or other mass organizations. Inequality of political nancing, with the attendant
political inuence, arises from the inequality of economic resources in society.
Wealthy individuals and groups outspend poorer ones just because they have
more resources to spend: this is why political competition is unequal.4 Yet
poorer citizens can counter-balance this inequality if they pool their resources
(Corvalan 2011). In the past, left-wing parties could counteract economic inequality by raising dues from their many members or by relying on nancial
support from trade unions. Yet member contributions declined for all parties
around the world and union power has been eroded in many countries, which
4 More techically, wealthy people can spend their resources to the point in which the marginal benets of their political expenditures equal the marginal cost of the contributions, while
poor people are cannot do it because they are budget constrained (and perhaps because they
have more to gain).

15

made parties more dependent on wealthy donors. The anti-union drives in some
countries, notably in the United States, have therefore political as well as economic consequences, undermining the ability of poor people to pool resources
in the political competition. Nevertheless, mechanisms and organizations via
which those with smaller nancial resources could pool them are an important
alternative to legal regulation.

Money and Democracy

With all the limitations of the available information and the divergent ndings, the overall picture is overwhelmingly somber. Money has endless ways to
inltrate itself into politics. When limits are imposed on political advertising
by candidates, advertising is conducted by "independent" groups in favor of
positions that the candidates are known to stand for. When corporations are
prohibited from contributing to candidates, their employees do it as individuals.
When regulation caps contributions to political parties, special interest groups
just turn around and spend more money trying to persuade voters directly
(Hogan 2005).
Parties and individual politicians accept money from special interests because they need money to pursue political activities but there is also a cloud
of suspicion that they benet materially from favors extended by special interests. Some systematic and much anecdotal evidence indicates that the gains
are often nancial. Statistical studies show that U.S. representatives get signicantly higher returns on investment in common stocks than the market average,
indicating that they benet from insider information (Ziobrowski et al. 2011).
Ways in which politicians leave o ce much wealthier than when they were when
they entered remain mysterious but examples abound. So do examples of retired politicians nding lucrative jobs in the private sector. Such private gains
constitute "corruption" as this term is popularly understood, but the eects
of money on perpetuating inequality operate whether the particular forms of
political inuence are or are not legal in a particular country. No wonder, then,
that masses of democratic citizens around the world see politics as corrupt.
In addition to the deligitimizing eect of the perception of corruption, the
unequal inuence of private money over politics has several corrosive eects on
democracy:
(1) It perpetuates economic and social inequality. If the inuence of the
a- uent increases with the already existing inequality, the result is that unequal
societies redistribute less than more equal ones (Benebou 2000). Thus, originally
unequal countries become more unequal while those more equal remain equal.
(2) It often leads to an ine cient allocation of productive resources. Even
if the government is not corrupt, guided solely by the criterion of economic
e ciency, if both wealthy and highly productive rms organize indistinguishable lobbies, the government may adopt ine cient poliicies in response to their
pressures (Esteban and Ray 2006).

16

(3) It discourages political participation and political interest of the poorer

sections of society. If poor people perceive that their political participation is
futile because policies are inuenced by special interests, they do not participate.
(4) It reduces the range of choices available to citizens in elections. If political
contributions inuence electoral platforms of all parties that have a chance to
enter the government, the range of voters choice is reduced (Grossman and
Helpman 2001).
(5) It increases the total costs of political competition. This eect, however,
may depend on the form of regulation (Sahuguet and Persico 2006).
(6) It undermines the condence in the rules of the political game not only
among the general public but also among the political actors. This eect is particularly dangerous for democratic institutions because if some political forces
believe that they have no fair chance to prevail according to the rules, they
may be prone to seek recourse outside the institutional framework (Przeworski
2011).
(7) It leads to the permeation of the state by private interests, "privatization
of the state" (Garcia Laguardia 2000).
Perfect political equality is not feasible in economically unequal societies.
But democracies cannot fail in their commitment to political equality. Even
if some dose of political inequality may be inevitable, even if we do not quite
understand how economic resources aect political outcomes, the corrupting
inuence of money is the scourge of democracy. Yet controlling the access of
money to politics is not a simple matter. Regulatory reforms must be based on
a clear analytical understanding of the causal paths through which unequal resources aect political outcomes and on solid empirical evidence: otherwise they
will be futile or even counterproductive. While passing laws may be easy, their
eective enforcement by government agencies is subject to the same pressures
as are other policies. The role of civil society associations is thus crucial. These
associations are necessary to monitor enforcement of regulations independently
of the government and, perhaps even more importantly, to pool resources of
the many people with low incomes in order to counterbalance the inequality of
access.

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