Page 5 - 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

                      procedures for the management.                the data such as tax revenue (%GPD), government
                   •  Non-Tax Subsidy: decreasing oil price subsidy;   expenditure, unemployment, industrial share of
                      decreasing  electricity  subsidy;  increase   GDP,  household  consumption  and  Real  GDP  are
                      national program for poor, basic infrastructure,   obtained  from  International  Financial  Statistics
                      health,  and education; extending small  credit   (IFS)  and  Government  Financial  Statistics  (GFS),
                      access.  Other  strategies  are  enhancement  of   yearly  published  by  the  IMF.  To  simplify  the
                      infrastructure spending  and controlling  the   analysis, we assume that  both  executive and
                      deficit within safe limits.                   legislative  elections  are  positively correlated  and
                                                                    will bring similar effect to other variables. 10
                      Despite the needs of well-executed fiscal policy,
                   there are few others  important  factors  needed    We convert some  variables into logarithmic
                   to attract  direct  investment,  for instance,  legal   function,  such  as  GDP,  in  order  to  reduce  the
                   certainty, credible  monetary policy, political  and   skewness  that  might  exist.  Logarithmically
                   economic  stability, availability  of infrastructure,   transforming variables in a regression model is a
                   wood quality of labor force, etc.                very common way to handle situations where non-
                                                                    linear relationships exist between the independent
                      Another critical issue that is worth exploring is
                                                                    and dependent variables (Moon & Benoit, 2011).
                   fiscal policy integration beyond 2015 . In 2007, the
                                                                    The sample ranges from 1985 to 2011.  Summary
                   ASEAN leaders affirmed their strong commitment
                                                                    statistic of the key variables is represented in the
                   to  accelerate  the  establishment  of  an  ASEAN
                                                                    Appendix 1.
                   Community  by  2015.  The  ASEAN  Community  is
                   comprised  of  three  pillars,  namely  the  ASEAN   We use Two Stage Least Squares and General
                   Political-Security  Community,  ASEAN  Economic   Method  of  Moments  to  find  out  the  causal  effect
                   Community and ASEAN Socio-Cultural Community.    between  election  and  fiscal  performances.  The
                   Essentially for ASEAN Economic Community (AEC),   point of utilizing these two dynamic panel models is
                   it will considerably transform ASEAN into a region   consistent estimation of the parameter determined
                   with free movement of goods, services, investment,   in a model. We believe the endogeneity problems
                   skilled labor, and freer flow of capital.        exist in one of the regressors, some of which are
                                                                    correlated  with  the  disturbance  process.  2SLS
                      Although  each member  is  still  having
                                                                    is nothing more than  the Instrumental  Variable
                   sovereignty  in  their  fiscal  policy  discretions  and
                                                                    (IV) estimator with  a decision  rule that  reduces
                   rules, they need  to  adopt there beyond  2015
                                                                    the number  of instruments to the exact number
                   policies to support the AEC Blueprint. One example
                                                                    needed to estimate the equation and fill in the Z
                   is  to gradually eliminate tariffs and non-tariff
                                                                    matrix (Baum, 2006).  As discussed, when we have
                   barriers on agricultural products, processed food,
                                                                    multiple endogenous variables, we need at least the
                   and  manufactured  products.  Further,  Custom
                                                                    same number  of instruments as the endogenous
                   administration  in  those  ASEAN  –  6  (i.e.  Brunei
                                                                    variables (exact identification).
                   Darussalam,  Indonesia,  Malaysia,  Philippines,
                   Singapore,  and  Thailand)  have  to  accelerate    To  fulfill  requirement  of  these  models,  the
                   to modernization of customs techniques and       instruments should satisfy two conditions. The first
                   procedures to enhance trade facilitation.        is that they should not be correlated with the error
                                                                    term. Second is that they should be correlated with
                    4. Data and Methodology                         the endogenous variables. When we have multiple
                                                                    endogenous variables, the second condition has a
                      Similar to previous researches, we consider the   more complex expression, called a rank condition.
                   database on political institutions from the World   Moreover, the second methodology that we apply
                   Bank that provides a wide coverage of countries’   is the Generalize Method of Moments (GMM). GMM
                   political  systems and  elections between 1975   estimators  use assumptions about  the moments
                   and 2013 . We create a binary election indicator,   of the random variables  to derive an  objective
                   Exelec  and  Legelec,  which  take  the  value  1  in   function (Baum, 2006).  Based on GMM, we obtain
                   election years  and 0  otherwise.  We  include the   parameters  estimates  by  finding  the  parameters
                   two indicators to accommodate different political   that make the sample moment conditions as true
                   systems  across  the  five  economies.   The rest of   as possible.

                   7 Currently, the DDTC team is working on a paper in tax related issues   president is elected by the winning party which become majority in the
                   to AEC.                                          parliament
                   8 Users of the database cited from Thorsten Beck, George Clarke, Alberto   10 We also conducted a collinearity test to check the relationship
                   Groff, Phillip Keefer, and Patrick Walsh, 2001.”New Tools in Comparative   between the two variables. Results will be provided among request.
                   Political Economy: The  Database of  Political  Institutions.” 15:1,  165-  11  We  have  also  tested the  model using structural  break since there
                   176 (September), World Bank Economic Review.     was a crisis between 1998-1999 in this region. However, the results are
                   9 Before the Asian crisis, Indonesia exercised a political system where   pretty similar.
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