Transparency, Political Polarization, and Political Budget Cycles in OECD Countries

We investigate the effects of fiscal transparency and political polarization on the prevalence of electoral cycles in fiscal balance. While some recent political economy literature on electoral cycles identifies such cycles mainly in weak and recent democracies, in contrast we show, conditioning on a new index of institutional fiscal transparency, that electoral cycles in fiscal balance are a feature of many advanced industrialized economies. Using a sample of 19 OECD countries in the 1990s, we identify a persistent pattern of electoral cycles in low(er) transparency countries, while no such cycles can be observed in high(er) transparency countries. Furthermore, we find, in accordance with recent theory, that electoral cycles are larger in politically more polarized countries.     

Making rules credible: divided government and political budget cycles

Political budget cycles (PBCs) can result from the credibility problems office-motivated incumbents face under asymmetric information, due to the temptation to manipulate fiscal policy to increase their electoral chances. We analyze the role of rules that limit public debt, because borrowing is a necessary condition for aggregate PBCs. Since the legislature must typically authorize new debt, divided government can make these fiscal rules credible. Commitment is undermined by either unified government or imperfect compliance with the budget law, which can help explain why PBCs are stronger in developing countries and in new democracies. When divided government affects efficiency, voters must trade off electoral distortions and government competence.     

Oil,elections and fiscal transparency

How does governments’ ability to gain financing from oil income affect their behaviour? Numerous studies have explored the effects of oil wealth on countries’ political characteristics, especially the level of democracy. Oil has also been associated with a significant electoral incumbency advantage across different political regimes. However, the relationship between oil wealth and incumbent governments’ behaviour, including election-year fiscal manipulation, has been studied to a lesser extent. This article argues that higher oil rents increase election-year public spending as they provide national governments both with direct revenue and increased financing opportunities. However, fiscal transparency mitigates this effect. Consequently, oil-induced electoral budget cycles decrease as fiscal transparency increases. Using a high-quality measure of fiscal transparency in a panel of countries, robust evidence in favour of this argument is found. The findings suggest that many of the previous results on the political effects of oil, including incumbency advantage, might run through an election-year spending channel, and that fiscal institutions might matter substantially for the political effects of oil.     

Do fiscal rules dampen the political business cycle?

This paper develops and tests the theory that fiscal rules limit politicians' ability to manipulate the budget for electoral gain. Using panel data from the American states, I find evidence suggesting that stringent balanced budget rules dampen the political business cycle. That is, while spending rises before and falls after elections in states that can carry deficits into the next fiscal year, this pattern does not exist in states with strict “no-carry” rules. Neither binding gubernatorial term limits nor the partisan composition of government appear to significantly affect the magnitude of the political business cycle.     

Electoral incentives and distributive politics in young democracies: Evidence from Chile

How do electoral incentives and institutional constraints vary as democracies consolidate? Are incumbents more inclined to behave opportunistically during transitions, or when the rules of the game are well established? Using Chile as a case study and exploiting panel data on public works investment at the municipal level, the article examines if the strategies to obtain electoral rewards have changed over time. From the first democratic elections and until the constitutional reforms of 2005, those municipalities where the coalition government won in national and local elections were systematically privileged before municipal polls. After the reforms, we find no sign of partisan preference but investment kept on rising during ballot years, indicative of the persistence of political budget cycles. Indeed, we identify stronger cycles as democracy was consolidated. The article concludes discussing the role played by institutional constraints and incentives shaping distributive politics.     

Political budget cycles and media freedom

This paper examines the effects of elections on the conduct of central governments' fiscal policies. To do so, it uses a unique panel database that includes disaggregated spending and revenue series at the central government level for multiple countries over the 1975–2010 period. Examining political environments under which incumbent governments generate political budget cycles (PBCs), and comparing the relative importance of factors influencing cycles, we identify media freedom as the factor that plays the most critical role. This result provides a micro-foundation for rational opportunistic models for PBCs that rely on asymmetry of information about politicians' competence, and also offers a way to relate different conditioning factors of PBCs, including fiscal transparency and the maturity of democracies. Further, we show that the election-year rise in budget deficits under low media freedom is primarily driven by an increase in the current, not capital, component of public expenditure.     

Delayed privatization

This paper studies the timing of privatization in 21 major developed economies in the 1977–2002 period. Duration analysis shows that political fragmentation plays a significant role in explaining government’s decision to privatize: privatization is delayed longer in democracies characterized by a larger number of parties and operating under proportional electoral rules, as predicted by war of attrition models of economic reform. Results are robust to various assumptions on the underlying statistical model and to controlling for other economic and political factors.     

On the political and fiscal determinants of income redistribution under federalism and democracy: evidence from Germany

Several recent studies suggest that transfers from central to regional governments are motivated by political considerations. In this paper we examine if this is also the case for transfers from regional to central governments in the context of the German fiscal equalization system. We examine the factors that contribute to differences in tax revenues across German states. The evidence indicates that both fiscal incentives and political factors can explain these differences, although in Germany the former are more important. Moreover, accounting for fiscal institutions has important consequences for the empirical assessment of political influences on taxation. Overall we find that the political affiliation of the state governor is an important factor in explaining differences in state tax revenues. Thus, the right-wing party (CDU/CSU) is effective in relaxing the tax burden at the state level. In contrast, partisan alignment between the state government and the federal government loses its importance once fiscal conditions enter the empirical model.     

Fighting with one hand tied behind the back: political budget cycles in the West German states

Theories of political budget cycles have been contested because scholars find that incumbents can manipulate deficits in the pre-election period only if fiscal transparency is low. I argue that these findings do not generally rule out the possibility of fiscal electioneering. Governments may increase spending on highly visible policies. The composition of the budget serves as a second-best strategy. It increases political support without straining the budget balance. An empirical analysis of the West German states reveals alternative electoral budget strategies and ultimately point to the importance of analyzing how governments choose between alternative fiscal instruments.     

The price of personalizing politics: Political distrust and economic performance in Latin America, 1996–2006

While research has provided evidence that culture and institutional performance shape individual level trust in political institutions, scholars have neglected to adequately estimate the effect of political institutions and macroeconomic conditions on trust. Using data from the World Value Surveys for eleven Latin American cases, we test if countries with “partyizing” electoral systems - those with rules that encourage voters to hold the party, not individuals, accountable for government performance - experience lower levels of distrust in political parties and the legislature in times of poor economic conditions than those countries with “personalizing” electoral rules. Our analysis shows that the macro political and economic context largely conditions the impact of culture and institutional performance on political trust.     

Political budget cycles and election outcomes

This paper addresses two empirical questions. Is fiscal policy affected by upcoming elections? If so, do election-motivated fiscal policies enhance the probability of re-election of the incumbent? Employing data for 65 democratic countries over 1975–2005 in a semi-pooled panel model, we find that in most countries fiscal policy is hardly affected by elections. The countries for which we find a significant political budget cycle are very diverse. They include ‘young’ democracies but also ‘established’ democracies. In countries with a political budget cycle, election-motivated fiscal policies have a significant positive (but fairly small) effect on the electoral support for the political parties in government.     

Do political budget cycles work? A micro-level investigation of pre-electoral budgeting and its electoral consequences

One of the most puzzling empirical patterns in political economy is the disconnect between the regular use of fiscal instruments for re-election purposes by incumbents (otherwise known as political budget cycles) on the one hand and their relative electoral ineffectiveness on the other. This article engages with this puzzle by shifting the analysis from the macro to the micro-level. It shows that when taking into account individual-level heterogeneity in the electoral response, one can gain a more nuanced understanding of the political consequences of pre-electoral budgeting. By relying on a set of multi-level random-effects regressions using data from the Comparative Study of Electoral System surveys, it points to two such sources of heterogeneity: social status and ideology. In particular, higher status individuals are considerably less responsive to pre-electoral deficits, though the effects depend on the composition of fiscal measures. Results for ideology are somewhat less consistent across different operationalizations of ideology as well as model specification.     

Political Support for Decentralization: An Analysis of the Colombian and Venezuelan Legislatures

A worldwide trend of decentralizing political power, fiscal authority, and the responsibility for providing services to subnational governments has been especially evident in Latin America over the past decade. This article focuses on variation in intracountry support for decentralization, using data on bill initiation from Colombia and Venezuela to determine the domestic sources of this policy. While the data support prior findings that decentralization is supported by parties whose future electoral prospects are better at the subnational level, the analysis also shows that citizen's trust in government and greater wealth affect a deputies' support for decentralization .     

Budget Transparency, Fiscal Performance, and Political Turnout: An International Approach

This paper attempts, for the first time, to assess the relationships between budget transparency, fiscal situation, and political turnout using a comparative international approach. With this aim, the authors build a comprehensive index of budget transparency encompassing 40 budget features based on international standards for a sample of 41 countries. They find a positive relationship between national government fiscal balance and budget transparency: The more information the budget discloses, the less the politicians can use fiscal deficits to achieve opportunistic goals. The univariate analysis shows a positive relationship between political turnout and transparency. This result gives some evidence of a positive answer to the question raised by James Alt and David Dreyer Lassen: Does transparency affect political outcomes such as turnout? To some extent, that the more transparent the budget reports are, the more incentives people have to vote. With respect to three variables—transparency, government fiscal balance, and electoral turnout—three clusters of countries arise: low transparency–fiscal imbalance, low transparency–small fiscal imbalance and high transparency–fiscal surplus.     

Do elections affect the composition of fiscal policy in?developed, established democracies?

This paper investigates the impact of elections on the level and composition of fiscal instruments using a sample of 19 high-income OECD democracies during the period 1972–1999. We find that elections shift public spending towards current expenditures at the cost of public investment. Although we find no evidence for an electoral cycle for government deficit and overall expenditures, we find a negative effect of elections on revenue attributed to a fall in direct taxation. Our results apply for predetermined electoral periods while endogenous elections seem to increase deficit and leave the composition of fiscal policy unaffected.     

Executive Authority, the Personal Vote, and Budget Discipline in Latin American and Caribbean Countries

Recent scholarship on budgeting in Latin American and Caribbean (LAC) countries indicates that political institutions impact the level of budget discipline. Building upon this previous research, we argue that the principal problem that must be addressed in both the government and the legislature to insure strong fiscal discipline is the common pool resource (CPR) problem. At the cabinet level, the CPR problem arises because ministers consider the implications of decisions on their ministries only. The level of the CPR problem in the legislature depends upon the electoral system. Using a data set of LAC countries for the period 1988–97, we find that executive power in the budget process is most effective in reducing budget deficits when electoral incentives for the personal vote is high in the legislature, while strengthening the president (or prime minister) in countries where the personal vote is low in the legislature has no effect .     

Fiscal consolidation under electoral risk

The European debt crisis has uncovered serious tension between democratic politics and market pressure in contemporary democracies. This tension arises when governments implement unpopular fiscal consolidation packages in order to raise their macroeconomic credibility among financial investors. Nonetheless, the dominant view in current research is that governments should not find it difficult to balance demands from voters and investors because the economic and political costs of fiscal consolidations are low. This would leave governments with sufficient room to promote fiscal consolidation according to their ideological agenda. This article re‐examines this proposition by studying how the risk of governments to be replaced in office affects the probability and timing of fiscal consolidation policies. The results show that governments associate significant electoral risk with consolidations because electorally vulnerable governments strategically avoid consolidations towards the end of the legislative term in order to minimise electoral punishment. Specifically, the predicted probability of consolidation decreases from 40 per cent after an election to 13 per cent towards the end of the term when the government's margin of victory is small. When the electoral margin is large, the probability of consolidation is roughly stable at around 35 per cent. Electoral concerns are the most important political determinant of consolidations, leaving only a minor role for ideological concerns. Governments, hence, find it more difficult to reconcile political and economic pressures on fiscal policy than previous, influential research implies. The results suggest that existing studies under‐estimate the electoral risk associated with consolidations because they ignore the strategic behaviour that is established in this analysis.     

Political parties, electoral systems and democracy: A cross-national analysis

Abstract.  The number of political parties and the type of electoral system may impact the level of democratic functioning within a government. Models are used to explore whether the number of political parties increases a country's democracy score on the POLITY IV measure of democracy, and whether countries with proportional representation electoral systems have higher democracy scores than those without. Multiple regression analysis reveals that countries with proportional electoral systems have higher democracy scores. Countries involved in the Third Wave of democracy may find the choice of an electoral system among the most important issues in structuring a democratic government.     

Political cycles and economic performance in OECD countries: empirical evidence from 1951–2006

This paper examines whether electoral motives and government ideology influence short-term economic performance. I employ data on annual GDP growth in 21 OECD countries over the 1951–2006 period and provide a battery of empirical tests. In countries with two-party systems GDP growth is boosted before elections and, under leftwing governments, in the first two years of a legislative period. These findings indicate that political cycles are more prevalent in two-party systems because voters can clearly punish or reward political parties for governmental performance. My findings imply that we need more elaborate theories of how government ideology and electoral motives influence short-term economic performance.     

Does Decentralization Improve Perceptions of Accountability? Attitudinal Evidence from Colombia

Decentralization is argued to create incentives for local and regional politicians to be more responsive and accountable to their constituents, but few studies have directly tested this claim. We use survey data from Colombia to examine individual‐level evaluations of the degree to which decentralization prompts citizens to view department government as more accountable. We estimate the effect of administrative, fiscal, and political decentralization, controlling for participation, political knowledge, confidence in government, education, and income on perceptions of accountability. Our results indicate that administrative and fiscal decentralization improve perceptions of accountability, while political decentralization does not.