Abstract

We have on the table two excellent papers, rich in policy implications. Let me first make a few comments on Alberto Alesina’s paper. It is a very well argued paper, and his model of the two different political and economic equilibria—of governments that “fail” because they are “too large,” and governments that “fail” because they are too “small and inefficient”—is powerful. The possibility of a “bad” equilibrium, with a small government and a large informal sector, has already been studied by Norman Loayza (1997), both theoretically and empirically, with special reference to Latin America. Also, as shown by Johnson, Kaufmann, and Shleifer (1997), the events following the dissolution of the former Soviet Union have lent a lot of credibility to the possibility of this type of equilibrium.