Page 3 - Working Paper (Analysis of Political Budget Cycles in Emerging South East Asian Economies)
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DDTC Working Paper 0414  DDTC Working Paper 0414

                   1. Background Context                            election year. However, the effect of  executive
                                                                    election on political budget cycles is more obvious
                      Analysis of the causal effects of an election on   compared to legislative election.
                   macroeconomic  policy (e.g. tax-cut, government
                                                                       The rest of this paper is structured as follows.
                   spending, monetary policy, etc.) or famously
                                                                    Section 2 discusses the data and methodology used
                   known as political budget cycles has been widely
                                                                    in the analysis. Section 3 estimates the relationship
                   studied primarily in developed countries such as
                                                                    using  dynamic  panel  data  techniques  specifically
                   the  OECD  countries.  The  first  political  economy
                                                                    two-stage  least  square  and  Generalized  Methods
                   literature to explain  the economic  effect of
                                                                    of  Moment  to  accommodate  endogeneity  cases.
                   elections  was  written  by  Nordhaus  (1975)  and
                                                                    Finally, Section 4 is the conclusion.
                   then followed by Lindbeck (1976). They both found
                   out the existence of political business cycles where
                   incumbents kept growth high and unemployment     2. Election Years in Five South  East
                                                                    Asian Countries
                   low just before a general election. Further, Alberto
                   Alesina  and  Nouriel  Roubini  (1997)  studied  the
                   relationship between political cycles and broader   Based  on  our  time  frame,  Indonesia  held  3
                   macroeconomic  variables.  Similar  analyses  have   legislative elections in 1987, 1992,  and  1997
                   also been replicated with some modifications for   during the period after 1985 to before the Asian
                   developing countries.                            Crisis emerged in 1998. After the collapse of the
                                                                    New  Order  era  due  to  Asian  financial  crisis,  the
                      In addition, Min Shin and Jakov Svensson (2002)
                                                                    first election was held in 1999 where forty-eight
                   analyzed political budget cycles in developed and
                                                                    political  parties  participated.  Similar  to  the  New
                   developing countries. They identified larger budget
                                                                    Order  era,  the  new  President  was  elected  by  the
                   deficit  during  election  year  using  a  large  panel
                                                                    parliament. Beginning in 2004, all the seats in the
                   data  set.    Yet,  they  unsurprisingly  demonstrated
                                                                    parliament  would  be  directly elected. Given an
                   that political  budget cycles are  much larger  in
                                                                    amendment of Indonesian constitution, it provides
                   developing than in developed countries. Compared
                                                                    a pathway for a direct election of the President and
                   to developed country, emerging or  developing
                                                                    Vice President. This considers as major steps for
                   countries have relatively unstable  democratic
                                                                    Indonesia political  system and  the road towards
                   systems and therefore prone to political  rent-
                                                                    a full democracy. Indonesia still faces an ongoing,
                   seeking manipulation.  Due to limited government
                                                                    and as yet incomplete, governance transition from
                   effectiveness,  corruption,  bureaucracy, as well
                                                                    a centralized regime to a decentralized democratic
                   as political  education, most voters  chose  their
                                                                    state. Furthermore, decentralization has changed
                   candidate  based  on  myopic  and impulsive
                                                                    accountability  structures, as the division  of roles
                   judgment. Asymmetric  information becomes
                                                                    and responsibilities between the various  levels
                   apparent as the cause of political  instability  in a
                                                                    of government often remains unclear  in many
                   new democratic country.
                                                                    spheres of activity.
                      Similar  to  Nordhaus  (1975),  Persson  and
                                                                         Over  the  past  decades,  the  Constitution  of
                   Tabellini (1990) provided evidence that incumbents
                                                                    Malaysia  requires  that  a  general  election  at  the
                   would conduct pre-election expansionary policies
                                                                    federal  and  state  level  be  held  every  five  years.
                   leading to temporary higher inflation. Rogoff and
                                                                    Over 1985 - 2011 , general election was conducted
                   Sibert (1988) predicted short-term political budget
                                                                    six times and usually controlled  by the Barisan
                   cycles,  where  incumbent  utilizes  fiscal  policy  to
                                                                    Nasional  in  most  of  the  states.  The  member  of
                   affect  consumption.  Alesina  and  Roubini  (1992)
                                                                    House  of  Representatives,  then,  elects  the  Prime
                   identified  that  inflation  tends  to  increase  due  to
                                                                    Minister of Malaysia. The Prime Minister appointed
                   loose fiscal policy in election years (with low taxes
                                                                    by the Yang-di-Pertuan Agong. Moreover, they are
                   and high spending). Khemani (2000)  addressed
                                                                    currently parliamentary and presidential elections
                   that  for  fiscal  policy  during  election  years  have
                                                                    in  Singapore,  which  must  be  conducted  within
                   negative effects on some  commodity  taxes,  a
                                                                    5-6  years.  Unlike  the  parliamentary  election,
                   positive  effect on investment spending,  but  no
                                                                    presidential elections have been only held since
                   effect on deficits, primarily because consumption
                                                                    1993.  The politics of Singapore are currently based
                   spending is reduced.
                                                                    on the framework of a constitutional parliamentary
                                                                    democratic republic, whereby the President is act
                      This paper analyzes the effect of parliamentary
                                                                    as the head of state or Country’s symbol and the
                   and executive election separately in five emerging
                                                                    Prime Minister is the head of the government.
                   South East Asian countries on fiscal policies during
                   the  course  of  1985  to  2011.  We  find  evidence
                   that  government  expenditure increase while tax
                   revenue falls, leading to a larger fiscal deficit during   2  Please check Appendix 2 for details list of election years.
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