Do Changes in Democracy Affect the Political Budget Cycle? Evidence from Mexico

Abstract

The previous empirical literature in opportunistic election cycles attempts to identify whether there is a significant impact of the election calendar on economic policy. The econometric analysis implemented in this paper goes a step further, seeking to test whether a country's time-varying degree of democracy affects the way in which economic policy is chosen as elections approach. A simple econometric model is estimated for the case of Mexico's fiscal policy between 1957 and 1997. The estimation reveals the government's strong systematic use of public spending in infrastructure and current transfers as a means to earn votes. Most importantly, we show that the magnitude of the election cycle has been exacerbated during the country's most democratic episodes.

Separation of powers and political budget cycles

“…This simplifies the notation considerably. 10 In an slight abuse of notation, λ E t+1 is used to denote both a (conditional on being reelected) strategy for E at t + 1 and a possible plan of action for the (potential) executive incumbentÊ(t). This simplification is also adopted below for L's strategies.…”

“…28 Even though fis- 26 The factors that have been stressed are electoral rules, forms of government, level of democracy, degree of electoral competitiveness, information and transparency, and voters' previous experience with electoral politics. See in particular Gonzalez (2000Gonzalez ( , 2002, Svensson (2002a, 2002b), Tabellini (2002, 2003) and Brender and Drazen (2003). 27 Lema, Saporiti and Streb (2004) empirically explore how checks and balances affect PBC in the budget deficit, using the degree of compliance with the law as a measure of effective checks and balances.…”

The Political Economy of Unsustainable Fiscal Deficits

“…In his model, the incumbent government promotes inflation-inducing policies to reduce unemployment while fiscal policies play no role. This is at odds with the empirical evidence presented by a number of authors including Rogoff (1990), Drazen (2000), Gonzalez (2002), and Cerda and Vergara (2008) that implies that fiscal policy is an important tool of preelectoral manipulation. The paper by Cerda and Vergara (2008) analyzes the effect of government subsidies on presidential elections in Chile and finds that the greater the coverage of subsidies, the greater the number of votes received by the incumbent.…”

Political Constraints and Public Support for Market Reform

“…In Mexico between 1989 and 1994, the national poverty-alleviation program spent 1.2 percent of GDP annually on transfers heavily skewed toward municipalities dominated by the governing Institutional Revolutionary Party (Diaz-Cayeros and Magaloni, 2003). Electorally driven transfers in Latin American countries had a limited impact on actual poverty reduction; more commonly, they merely worsened countries' fiscal stances and exacerbated business cycles (Schuknecht, 2000;Gonzalez, 2002;and Mejía Reyes, 2003).…”