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

DDTC Working Paper 0414 DDTC Working Paper 0414
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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
2
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.