Political constraints and discretionary fiscal policy during the recent economic crisis.

AuthorDuma, Daniel
PositionReport

Introduction

Many policies adopted by governments differ significantly between countries, despite no apparent justification in terms of "general will," social or economic context. In other words, while people may prefer similar solutions to similar problems, governments may end up having truly different policies to address them. This phenomenon is often understood as the result of the constraints faced by political actors in the process of policy formulation, adoption and implementation (Weir and Skocpol 1985). The explicit rules, crystallized and ossified in time, that stipulate how inputs from the body politic, are gathered and transformed into policy initiatives and laws differ greatly from one country to another. It is believed that these can influence structurally the capacity of governments to take action, irrespective of what that action may be. Convincing evidence from different levels of policy has been presented in the political economy literature (Persson and Tabellini 2003; Iversen and Soskice 2006). It has been argued that countries have chosen different solutions for healthcare provision, social policy or even energy markets, not so much because of different convictions or preferences of the electorate, but because of the way in which institutions changed the incentives for political behaviour (Immergut 1992; Milesi-Ferretti et al. 2002; Henisz and Zelner 2006).

The argument here will be for a similar effect of institutions when looking at the different approach of governments during the economic crisis of 2008. Faced with similar problems, a shortfall in economic output and rising unemployment, most governments chose fiscal policy to address them but with significant differences in terms of magnitude.

This could of course be explained simply by the different severity of the crisis or budget constraints. There could be many reasons why governments ended up having different responses to similar problems. However, it will be argued here that the institutional configuration of different countries may have played a role in shaping the policy outcomes. After all, institutions represent constraints to behaviour, and similar institutions may impose similar constraints (North 1991). The number, alignment and authority of political actors involved in the policy process contribute to the so called veto power which could reduce the decision making capacity. This may have prevented some governments from adopting an adequate fiscal package even in contexts when it would have been both economically viable and socially desirable.

The literature on discretionary fiscal spending has focused more on its consequences, being driven by the well-known disagreement over the size of the fiscal multiplier. Thus, when looking at the response to the crisis, most studies have centred on the effects, composition and duration of fiscal interventions, less so on why certain policies, sizes or scopes have been chosen over others (Aizenman and Jinjarak 2012; Khatiwada, 2009]. The few studies attempting to identify the determinants of fiscal stimulus relied entirely on economic indicators such as the output gap, automatic stabilizers or the fiscal space (Ahrens 2009; Horton and Ivanova 2009, Prasad and Sorkin 2009). What will be argued here is that further to the most intuitive explanations focusing on the economic context, there are also political and institutional mechanisms that systematically influence the decision to design the fiscal response to an economic contraction. Thus, the research question to be explored will be whether the political configuration operationalized as political constraints can explain in part the difference of magnitude between the fiscal stimulus policies chosen by different countries. In order to build an answer to this research question, the article will start with a brief introduction to institutional veto points and their interaction with political behaviour. This will be followed by an exposition of the different discretionary fiscal policy choices of governments around the world and the most plausible sources for this difference, including political constraints. Afterwards, a limited empirical test will be attempted based on an OLS model and a sample of 46 countries, and some conclusions will be suggested.

Institutions, veto power and public policy

The role of institutions is essentially that of formalizing the rules of interaction and decision. These formal rules, according to institutional theory, in time, consolidate certain stable structures of behaviour, guided by incentives and constraints (North 1991).

Taken as exogenous, on an abstract level, these formal rules become limits for individual behaviour, defining the type, timing and terms under which interaction between them occurs. More concretely, looking at political behaviour and at choice in particular, a certain institutional setup creates the structure of incentives that drives policy making (Shepsle 2010). What this implies is that one can observe patterns of policy associated with particular institutions, with regard to both the type of policies adopted and their scope. In other words, certain institutional settings can be both systematically associated with the dominance of certain policies. There is a growing body of literature that provides models whereby there appear to be systematic policy differences stemming from the variation in institutional settings (Austen-Smith 2000). At the most fundamental level for a democracy, different electoral institutions have been shown to be associated with significant effects on the redistribution function of the government (Persson and Tabellini 2003). The particular structure of voting systems, especially districting and formula choice, alters the distribution of preferences and results in different policy outcomes. In other words, assuming there are two political units with similar individual preferences, the rule of the game that establishes how the aggregation takes place is enough to significantly influence the decision that the group gets to take.

In a similar line of argument, the institutional configuration has been considered as a determinant for the inherent capacity or incapacity of deciding on important policies. In that sense, an important constraining role is played by the so called "veto points" (Immergut 1992; Tsebelis and Chang 2004; Crepaz and Moser 2004). These represent the actors formally capable of rejecting policy actions at different stages in the process of design or implementation. Intuitively, the greater the number and heterogeneity of such points translate into greater obstacles to overcome for a proposal to become reality. Thus, the way in which the institutional architecture of a country is built can determine the capacity of taking decisions, especially on highly divisive issues. The higher the number of such points where initiatives can be delayed, changed, or even blocked, the lower the chances for policies to come to fruition.

Veto points essentially allow relatively smaller groups to have a disproportionate influence in blocking initiatives that may be against their interests (Huber et al. 2003). This is equivalent to a high degree of aggregate veto power as the capacity to address collective issues according to changing circumstances is diminished, and policy stability or even inertia becomes the norm (Tsebelis and Chang 2004).

However, there are important differences in nuance between veto points. They can be either partisan, with the power to reject stemming circumstantially from negotiations under certain conditions, or institutional, i.e. the ones that have the statutory role of giving consent before legislation is enacted (Warntjen 2008). More specifically, in the case of the latter, the formal constitutional power given to certain actors in the process of decision making determines the number of veto points. For example, a situation where the government can by-pass Parliament in passing legislation where there is a single chamber of Parliament would imply a lower veto power than one where the cabinet needs formal approval of any piece of legislation before enforcement or the Parliament is bicameral with different functions for the two chambers.

The theory of veto points started from the observation that parliamentary systems, particularly unicameral ones, usually produce coalition governments that tend to be very effective in implementing legislation in a relatively straightforward and contestation-free fashion. After the stage of negotiating and reaching consensus within the coalition, decisions are then implemented with apparent ease. However, in systems with multiple levels of decision such as federal, central and local, with two parliamentary chambers or presidential veto power, the process of implementing policies is simply more difficult, as an initiative may be delayed, significantly changed or even stopped, at any of the checkpoints on its way to becoming law (Huber et al. 2003). The number of veto points has generally been considered to be directly proportional with policy inertia. There seems to be evidence that veto points are indeed linked to a constraining effect on government (Warntjen 2008).

Constitutional veto players in conjunction with the degree of alignment and heterogeneity between them forms the basis of the notion of political...

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