How Does Democratization Affect the Composition of Government Expenditure?

Kotera, Go and Okada, Keisuke (2015): How Does Democratization Affect the Composition of Government Expenditure?

Abstract

This study examines the effects of democratization on the size and composition of government expenditure using the data of 125 countries between 1972 and 2010 at most. Specifically, we focus not only on the total expenditure but also on their composition and employ dichotomous indices of political regimes rather than score indices. Moreover, we construct instruments for democratization based on the democratization wave and conduct an instrumental variables estimation to address endogeneity problems. Our results show that while democratization does not have a significant impact on total expenditure, it increases expenditure on health and education and decreases expenditure on defense. Furthermore, considering the time-varying effect of democratization, defense expenditure starts decreasing immediately after a regime change and health expenditure increases in the medium and long run, while they do not significantly vary before a regime change. Thus, while focusing only on total expenditure does not uncover the effects of democratization, considering detailed categories of government expenditure enables us to understand how democratization changes governments' behaviors.

• Item Type: MPRA Paper
• Language: English
• Keywords: Democratization; Government behavior; Government expenditure
• Subjects: H - Public Economics > H1 - Structure and Scope of Government > H10 - General; H - Public Economics > H5 - National Government Expenditures and Related Policies > H50 - General; P - Economic Systems > P1 - Capitalist Systems > P16 - Political Economy

References

Acemoglu, D., Naidu, S., Restrepo, P., Robinson, J. A., 2014. Democracy does cause growth. NBER Working Paper, No. 20004.

Acemoglu, D., Naidu, S., Restrepo, P., Robinson, J. A., 2015. Democracy, redistribution, and inequality. In: Atkinson, A. B., Bourguignon, F. (Eds.), Handbook of Income Distribution, Volume 2, Elsevier, Amsterdam, pp. 1885-1966.

Acemoglu, D., Robinson, J. A., 2005. Economic Origins of Dictatorship and Democracy. Cambridge University Press, Cambridge.

Acosta-Ormaechea, S., Morozumi, A., 2013. Can a government enhance long-run growth by changing the composition of public expenditure? IMF Working Paper, WP/13/162.

Aidt, T. S., Jensen, P. S., 2013. Democratization and the size of government: evidence from the long 19th century. Public Choice 157 (3-4), 511-542.

Albalate, D., Bel, G., Elias, F., 2012. Institutional determinants of military spending. Journal of Comparative Economics 40 (2), 279-290.

Alesina, A., Wacziarg, R., 1998. Openness, country size and government. Journal of Public Economics 69 (3), 305-321.

Alvarez, M., Cheibub, J. A., Limongi, F., Przeworski, A., 1996. Classifying political regimes. Studies in Comparative International Development 31 (2), 3-36.

Avelino, G., Brown, D. S., Hunter, W., 2005. The effects of capital mobility, trade openness, and democracy on social spending in Latin America, 1980-1999. American Journal of Political Science 49 (3), 625-641.

Baliga, S., Lucca, D. O., Sjöström, T., 2011. Domestic political survival and international conflict: is democracy good for peace? Review of Economic Studies 78 (2), 458-486.

Bertrand, M., Duflo, E., Mullainathan, S., 2004. How much should we trust differences-in-differences estimates? Quarterly Journal of Economics 119 (1), 249-275.

Boix, C., 2003. Democracy and Redistribution. Cambridge University Press, Cambridge.

Brender, A., Drazen, A., 2008. How do budget deficits and economic growth affect reelection prospects? Evidence from a large panel of countries. American Economic Review 98 (5), 2203-2220.

Brender, A., Drazen, A., 2013. Elections, leaders, and the composition of government spending. Journal of Public Economics 97, 18-31.

Brown, D. S., Hunter, W., 1999. Democracy and social spending in Latin America, 1980-92. American Political Science Review 93 (4), 779-790.

Cheibub, J. A., Gandhi, J., Vreeland, J. R., 2010. Democracy and dictatorship revisited. Public Choice 143 (1-2), 67-101.

Diamond, L., 2002. Thinking about hybrid regimes. Journal of Democracy 13 (2), 21-35.

Dunne, J. P., Perlo-Freeman, S., Smith, R. P., 2008. The demand for military expenditure in developing countries: hostility versus capability. Defense and Peace Economics 19 (4), 293-302.

Easterly, W., Rebelo, S., 1993. Fiscal policy and economic growth: an empirical investigation. Journal of Monetary Economics 32 (3), 417-458.

Gleditsch, N. P., Wallensteen P., Eriksson, M., Sollenberg, M., Strand, H., 2002. Armed conflict 1946-2001: a new dataset. Journal of Peace Research 39 (5), 615-637.

Gradstein, M., Milanovic, B., 2004. Does libertè = egalité? A survey of the empirical links between democracy and inequality with some evidence on the transition economies. Journal of Economic Surveys 18 (4), 515-537.

Habibi, N., 1994. Budgetary policy and political liberty: a cross-sectional analysis. World Development 22 (4), 579-586.

Huntington, S. P., 1991. The Third Wave: Democratization in the Late Twentieth Century. University of Oklahoma Press, Norman.

International Monetary Fund, 1999. World Economic Outlook Database September 1999. International Monetary Fund, Washington, D.C.

International Monetary Fund, 2005. Historical Government Finance Statistics. International Monetary Fund, Washington, D.C.

International Monetary Fund, 2013. Government Finance Statistics. International Monetary Fund, Washington, D.C.

Kaufman, R. R., Segura-Ubiergo, A., 2001. Globalization, domestic politics, and social spending in Latin America: a time-series cross-section analysis, 1973-97. World Politics 53 (4), 553-587.

Keefer, P., 2007. The poor performance of poor democracies. In: Boix, C., Stokes, S. C. (Eds.) The Oxford Handbook of Comparative Politics. Oxford University Press, New York, pp. 886-909.

Laporte, A., Windmeijer, F., 2005. Estimation of panel data models with binary indicators when treatment effects are not constant over time. Economics Letters 88 (3), 389-396.

Mayer, T., Zignago, S., 2011. Notes on CEPII’s distances measures: the GeoDist database. CEPII Working Paper, No. 2011-25.

Meltzer, A. H., Richard, S. F., 1981. A rational theory of the size of government. Journal of Political Economy 89 (5), 914-927.

Mulligan, C. B., Gil, R., Sala-i-Martin, X., 2004. Do democracies have different public policies than nondemocracies? Journal of Economic Perspectives 18 (1), 51-74.

Mulligan, C. B., Gil, R., Sala-i-Martin, X. X., 2010. Social security and democracy. The B.E. Journal of Economic Analysis & Policy. 10 (1), Article 18.

Nelson, J. M., 2007. Elections, democracy, and social services. Studies in Comparative International Development 41 (4), 79-97.

Papaioannou, E., Siourounis, G., 2008a. Economic and social factors driving the third wave of democratization. Journal of Comparative Economics 36 (3), 365–387.

Papaioannou, E., Siourounis, G., 2008b. Democratisation and growth. Economic Journal 118 (532), 1520–1551.

Persson, T., Tabellini, G., 2003. The Economic Effects of Constitutions. MIT Press, Cambridge.

Persson, T., Tabellini, G., 2009. Democratic capital: the nexus of political and economic change. American Economic Journal: Macroeconomics 1 (2), 88-126.

Profeta, P., Puglisi, R., Scabrosetti, S., 2013. Does democracy affect taxation and government spending? Evidence from developing countries. Journal of Comparative Economics 41 (3), 684-718.

Rodrik, D., 1998. Why do more open economies have bigger governments? Journal of Political Economy 106 (5), 997-1032.

Seiferling, M., 2013. Recent improvements to the Government Finance Statistics Yearbook Database in response to analytical needs. IMF Working Paper, WP/13/15.

Shelton, C. A., 2007. The size and composition of government expenditure. Journal of Public Economics 91 (11-12), 2230-2260.

Solt, F., 2009. Standardizing the world income inequality database. Social Science Quarterly 90 (2), 231-242.

Staiger, D., Stock, J. H., 1997. Instrumental variables regression with weak instruments. Econometrica 65 (3), 557-586.

Svolik, M. W., 2012. The Politics of Authoritarian Rule. Cambridge University Press, Cambridge.

Themnér, L., Wallensteen, P., 2014. Armed conflicts, 1946-2013. Journal of Peace Research 51 (4), 541-554.

Töngür, Ü., Hsu, S., Elveren, A. Y., 2015. Military expenditures and political regimes: evidence from global data, 1963-2000. Economic Modelling 44, 68-79.

Wickens, T. M., 2002. Government Finance Statistics Manual 2001 Companion Material: Classification of GFSM 1986 Data to the GFSM 2001 Framework. International Monetary Fund, Washington, D.C.

World Bank, 2014. World Development Indicators. World Bank, Washington, D.C.