Abstract
According to an influential theoretical argument, presidential systems tend to present smaller governments relative to parliamentary countries because the separation between those who decide the size of the fiscal purse and those who allocate it creates incentives for lower public expenditures. In practice, however, presidential and parliamentary countries come in many forms. In particular, variation in procedural rules that assign budget prerogatives across the popular branches of government may affect the underlying incentives that differentiate these types of regimes in terms of fiscal outcomes. More specifically, we argue that more hierarchical rules that concentrate budgetary power in the executive relative to the legislature do not only reduce the extent of the common pool problem but also limit the degree of separation of powers, which may have a countervailing effect. Consequently, the effect of the form of government on public expenditures is conditional on specific procedural rules. We test this hypothesis on a broad cross-section of countries and find that presidentialism has a negative impact on government size only when executive discretion in the budget process is low (that is, in a context of separation of powers). However, the negative effect of presidentialism on expenditures vanishes when the executive’s discretion over the budget process is higher. This result, in addition to highlighting that not all budget institutions have the same effect on incentives and outcomes, points out how important it is to go beyond broad characterizations of political institutions for explaining policy outcomes, and more generally, for moving forward the research agenda in constitutional political economy.
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Notes
See in particular Persson et al. (1997, 2000). Even though Persson and Tabellini (2003) are not the only authors who have explored this relationship, we base our analysis on their work because they are the ones who have received the most attention and praise. For example, according to Keefer (2004: 258) “The analysis in Persson et al. (2000) is the most rigorous linking characteristics of presidential and parliamentary systems to policy outcomes”. See also Acemoglu (2005) and Rodden (2009) for similar appreciations.
“Our results suggest that the two political regimes are associated with very different policy outcomes. Separation of powers in the presidential-congressional regime produces a smaller government… Intuitively, separation of powers enables the voters to discipline the politicians, and this reduces waste and moderates the tax burden…Legislative cohesion in the parliamentary regime, on the other hand, leads to a larger government…Intuitively, there is now further scope for collusion among politicians…” Persson and Tabellini (2000: 252).
While Blume et al. (2009) find that the negative association between presidentialism and public expenditure vanishes once a larger sample of countries is included, Rockey (2012) recovers the PT results with the introduction of novel instruments even in relatively larger samples. In terms of the original PT specification, our paper recovers PT’s results using an even larger sample (Table 1, Column 1) and follows Rockey in the selection of instrumental variables to address endogeneity concerns.
It is important to mention that the mechanisms behind the role of budget institutions in Blume and Voigt (2013) and this article come from different sources. In Blume and Voigt the mechanism is similar to the one in the traditional budget institutions literature where institutional constraints reduce the ability of the actors to inflate budgets for political gain. In this article, while we also acknowledge their traditional effect, the key—and novel—factor is their role reducing the separation of powers and, hence, affecting politician’s incentives at the margin in terms of the size of government expenditures.
“The notion of separation of budgetary powers…has received scant attention by researchers in comparative politics. Further research is required to develop precise measures of separation of powers corresponding to theory (Persson et al. 2000, p. 1151).
See Persson et al. (1997).
See Persson et al. (2000).
Ferejohn and Kreihbel (1987) provide an earlier theoretical treatment of sequential budgeting in the context of a median voter model. Alternative and more recent modeling approaches to the separation of powers problem, heavily inspired by the work of PT, include Acemoglu et al. (2013) and Robinson and Torvik (2013).
Which results from the fact that each individual wants to extract the maximum he or she can from a common fund, ignoring the effect of this behavior on the total size of the fund, and therefore, collective welfare. See Weingast et al. (1981), Buchanan et al. (1987), and von Hagen and Harden (1995), among others.
Of course, the independent effect of budget institutions as a mechanism to reduce common-pool problems should still be in place for both types of regimes. The key difference we stress here is that there is an additional (and inverse) channel of influence based on the reduction in the separation of powers.
See especially Chapter 10. We don’t replicate here their models for space restrictions and because they have become part of the standard toolkit of most political economists.
If “the decisions on taxes is combined with allocative decisions, we return to the equilibrium of the simple legislature” (Persson et al. 2000: 1143).
We also use fiscal revenues as an alternative dependent variable (see Robustness section).
This definition thus encompasses PT’s classification, which code regimes as presidential based only on whether a confidence requirement is in place (e. g. if the confidence requirement is not necessary for the executive to remain in power, the regime is presidential). The source of the data on government forms is the latest version (2012) of the Database on Political Institutions (see Beck et al. 2001).
As a robustness check we have also used Cheibub et al (2010) definition as described later.
The OECD International Database of Budget Practices and Procedures has been conducted by the OECD and the World Bank since the early 2000s, with the collaboration of the IDB. This comprehensive database covers 359 questions on various topics related to budget practices and procedures. It includes information on the preparation, approval, and execution stage of the budget process, and details the prerogatives of the different branches of government at each stage. In the last round of the survey, 92 countries were included. The database goes beyond capturing only the formal or “de jure” aspects of the budget process by concentrating instead on actual practices: “Unless otherwise requested the responses should refer to current practice” (OECD Survey, page 6) This is not the first paper to make use of this survey for constructing budget institutions indicators (see for example, Filc and Scartascini 2007).
Given the timing of the budget survey, variables in the empirical analysis are expressed as averages for the 2005–2008 period. This 4 year period generally coincides with the timing of the budget survey, and its average is used to avoid yearly fluctuations in expenditures common to business cycles. We were reluctant to shift the period of analysis beyond 2008 given changes in the institutional coverage level of government expenditures (starting in 2009, the World Economic Outlook reports general government instead of central government expenditures).
We run this regression in the largest possible sample in order to make our results comparable with Blume et al. (2009), which shows that PRES in not significant in large samples. In this paper we don’t put much attention to the results regarding MAJ. Because introducing budget institutions reduces the significance of MAJ, this could open the door for further investigation in future work.
Blume and Voigt (2013) identify spending constraints explicitly spelled out in a country's constitution (e.g. a constitutional deficit rule) and find they are negatively correlated with government expenditures. Wehner (2010) shows that procedural rules (the power of legislators to amend the budget, in the form of accept or reject restrictions) have large effects on government size.
The Freedom House or Gastil Index on political rights and civil liberties varies on a discrete scale from 1 to 7, with low values associated with better democratic institutions. According to each index, countries scoring 1 or 2 are “free”, countries scoring from 3 to 5 are “semi-free”, while those scoring 6 or 7 are “non-free”.
The Polity score subtracts the country’s score in an “Autocracy” index from its score in a “Democracy” index (resulting in a range from −10 to 10).
In particular, Acemoglu questions whether PT’s IV procedure fulfils the exclusion restriction, and requests an underlying argument justifying that the instruments have no effect on government expenditures other than through their impact on the form of government. Looking at the particular instruments at hand, it could be argued that in the case of age of democracy, the instrument picks up the fact that constitutional reforms are often adopted during political regime transitions, as well as the timing of constitutional adoption, for which there is little reason to expect a systematic effect on fiscal performance (Persson and Tabellini 2003, p. 130). The rest of the instruments reflect the influence of colonial experience (and culture) on the form of government, and thus, echo the choices of political elites under different initial conditions, and the legacy of different types of colonial institutions. As argued in Rockey (2012), other than through their impact on the form of government, it is hard to envisage another mechanism through which colonial era variables consistently affect the size of government to any meaningful extent (p. 315).
While it is important to highlight these results, one must also take into account its shortcomings. In particular, the sample size falls significantly (drops more than 25 %) which has effects on the reliability of the estimations. The sample size coupled with a large number of instruments may make matters worse (even though the estimates tend to remain relatively larger than the OLS ones).
We have run the same models using 2SLS and Fuller, with the three sets of instruments (age of democracy, date of elections, and date of constitutions). In every case, the coefficients remain significant and larger, as it was shown in Table 1. Again, even though the coefficient behave in line with Rockey’s results, they should be considered with caution because of the smaller sample size and larger set of instruments we have here.
Gastil lower than 5, Gastil lower than 3.5, and Polity 2 greater than zero.
We are indebted to Joachim Wehner for providing us with this suggestion and data.
Available at http://www.imf.org/external/datamapper/FiscalRules/map/map.htm (accessed September 2013).
Available at http://internationalbudget.org/what-we-do/open-budget-survey/ (accessed January 2014). Given the timing of our data, we use the 2006–2008 rounds to generate an average fiscal transparency score.
We have run all of the models using the 2SLS and Fuller (4) models as well as the alternative instruments sets and found the same results.
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Acknowledgments
We have received very valuable comments from Mark Hallerberg, Virginia Oliveros, Ernesto Stein, Mariano Tommasi, Joachim Wehner, seminar participants at the 2013 Public Choice Society Meetings, the editor of the journal and two anonymous referees. We are also thankful to James Rockey for providing access to his dataset on different proxies for age of democracy, to Valerie Lankaster-Campos for helping us to compile the budget institutions data, and to Maria Franco Chuaire for her extraordinary assistance during the entire research process. Any remaining errors are our own. The views expressed here are those of the authors and do not necessarily reflect the views of the Inter-American Development Bank, its Management, its Board of Executive Directors or its member Governments.
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Ardanaz, M., Scartascini, C. The economic effects of constitutions: do budget institutions make forms of government more alike?. Const Polit Econ 25, 301–329 (2014). https://doi.org/10.1007/s10602-014-9166-y
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DOI: https://doi.org/10.1007/s10602-014-9166-y