Download Voters as Fiscal Liberals

Preliminary Draft
May 16, 2007
Voters as Fiscal Liberals
Mark P. Jones
Osvaldo Meloni
Mariano Tommasi
Rice University
[email protected]
Universidad Nacional de Tucumán,
Argentina
[email protected]
Universidad de San Andrés,
Argentina
[email protected]
Abstract
This paper presents new evidence on the effects of fiscal performance on the incumbent’s
party probability of reelection. We study all gubernatorial elections in Argentina from the
recovery of democracy in 1983. Unlike Peltzman (1992) findings for the U.S. and more
recent evidence for Israel and Colombia, we find that voters are not conservatives but
liberals. They reward fiscal profligacy. After controlling for political and socioeconomic
variables, we find that incumbent parties that increase real per capita public expenditures
augment their probabilities of retaining in power. We conjecture that the tax sharing
agreement and bailouts provide powerful incentives to voters to reward local politicians who
are effective at extracting resources from the federal government.
Keywords: elections, public expenditure, fiscal performance
JEL Classification Codes: D72, P16
Preliminary Draft
May 16, 2007
Voters as Fiscal Liberals
Mark P. Jones
Osvaldo Meloni
Mariano Tommasi
Rice University
[email protected]
Universidad Nacional de Tucumán,
Argentina
[email protected]
Universidad de San Andrés,
Argentina
[email protected]
“In our day we have seen great things accomplished by none
except men who have been reputed parsimonious, the other
have been driven from power.”
Niccolo Machiavelli
The Prince
Bantam Books, 1981. Page 58
I.
Introduction
In one of the most vivid paragraph of The Prince, Niccolo Machiavelli advice the prince to be
parsimonious in its expenditures to avoid been overthrown from power. Machiavelli’s
argument is simple: if the prince burdens his people to keep his reputation of generosity will
be termed as odious and will be exposed to danger at the slightest sign of trouble.
Extrapolating this recommendation to the democratic ground seems, at least, risky for the
prospects of reelection of the incumbent’s party. The common wisdom suggest authorities to
increase government spending, particularly in the proximity of elections, to improve their
chances (or their party chances) of reelection. Several theories explain why voters reward
fiscal profligacy; for instance, Buchanan’s theory of fiscal illusion sustains that constituencies
support politicians that promise new expenditure programs financed through higher taxes
and debt because they fail to perceive them or just underestimate them. Adverse selectiontype models like Rogoff and Sibert (1988) and moral hazard-type models as in Person and
Tabellini (2000) also predict that incumbents will undertake expansionary fiscal policy
although not necessarily will be rewarded by voters. While in the first type of models the
incumbent tries to signal her aptitudes for the government administration by providing more
public goods to an uninformed electorate; in the second paper the incumbent is able to show
1
increases in public expenses to gain the electorate favor and delaying or hiding transitorily
the correspondent augment in taxes or borrowing.
Despite these theories look convincing and also rooted in the common sense, the empirical
evidence is not so conclusive about constituencies recompensing public sector growth. On
the contrary, a number of country studies find that voters penalize incumbent’s loose fiscal
policy at the polls. Papers by Peltzman (1992) Alesina, Perotti and Tavares (1998), Brender
(2003) and Drazen and Eslava (2005) report decreasing incumbent’s share of votes as
government spending or fiscal deficits rise. Their result is attributed to voters’ preferences.
For unrevealed reasons, voters prefer frugal governments instead of wasteful ones.
Our paper presents new evidence on the effects of fiscal performance on the incumbent’s
party probability of reelection. We study all gubernatorial elections in Argentina from the
recovery of democracy in 1983. The case of Argentina is particularly interesting since its
central rule (that is, the constitution) resembles that of the US and other developed federal
republics, but second–order laws, like the tax-sharing system, that distributes tax revenues
among the federal government and the provinces, encourage political actors, particularly
governors, to engage in expenditure hiking to get the support of the electorate. The taxsharing system generates a common pool of resources that is distributed in a first stage
among the federal government and the provinces, and in a second stage among the 23
provinces. This mechanism produces high degree of vertical imbalance in most of the
provinces, which in turn weakens citizen’s incentives to control both, the level and
composition of provincial outlays. Governor’s incentives to carry out loose fiscal policies are
reinforced by the high probability of getting federal government bailouts in the face of
financial distress. As reported in Nicolini et al. (2002) the overwhelming evidence shows that
higher levels of government are likely to bailout lower levels of government, stimulating
rather than discouraging imprudent fiscal behavior. Clearly, financial flows from central to
sub-national governments soften the provincial budget constraints and exacerbate the
already high level of vertical imbalance. We can conjecture that voters facing less than the
full cost of domestic public goods are less likely to remove inefficient incumbent parties.
Furthermore, there is a chance that they will behave as fiscal liberals rather than fiscal
conservative ones.
The paper is organized as follows: In the next section we discuss the previous empirical
literature. Section III analyzes Argentine fiscal performance and fiscal incentives for both,
local incumbent parties and their electorate. Section IV is dedicated to data description and
the empirical specification while section V presents the results of the empirical tests. Finally,
section VI concludes.
2
II.
Evidence on voting behavior: Fiscal liberals vs. fiscal conservatives
Do voters prefer fiscal liberal incumbents? It is widely whispered that constituencies favor
high spending governments. Moreover, fiscal adjustments are believed to be unpopular,
particularly in Latin America, where the sole mention of the word might provoke strong
reactions against the government. Nonetheless, in a recent survey, Eslava (2006) concludes
that incumbents who adopted loose fiscal policies do not receive greater voter support than
fiscally conservative ones. Cross country studies as well as case studies for both, developed
and emergent economies, show either electorate proclivity to favor fiscal conservative
incumbents or resistance to support fiscal liberals.
When it comes to fiscal conservative voters, the obliged reference is Peltzman (1992) whose
study covering U.S. presidential, senatorial and gubernatorial elections for most of the
second half of the 20th century concludes that voters penalize federal and state spending
growth. The reason is straightforward: well-informed, self-interested voters oppose marginal
expansions of government budgets because federal and state fiscal systems are
progressive, and voters are wealthier than non-voters.
Another paper that deserves close attention is Brender’s case study of local elections in
Israel. Brender (2003) finds that fiscal performance of mayors, characterized by high current
deficits and large accumulation of debt significantly reduces their probability of reelection in
the 1998 voting. This result is attributed to the changes in the political environment, most of
them staring in 1994, like enforcement of audit and financial reporting requirements, tougher
imposition of hard budget constraints and the development of local media. Interestingly, the
1989 and 1993 elections give the opposite results although the estimated coefficients were
statistically not significant.
Cross-country studies also report evidence favoring fiscal prudent incumbents. Alesina,
Perotti and Tavares (1998) analyzed OECD countries fiscal behavior and find that voters did
not punish governments that implemented sound fiscal policies. Similarly, Brender and
Drazen (2005a) work with a sample of 74 countries over the period 1960-2003 and find no
evidence that fiscal deficits help incumbent’s reelection. For some group of countries deficits
lower the probability of reelection and for other have no statistically significant effect.
In an attempt to explore further the reaction of the electorate to the incumbent outlays
stimulus, Drazen and Eslava (2005) classify public expenditures into two groups, those that
are targeted to voters (mainly investment) and those that are not. They study municipalities
in Colombia for the 1987- 2002 period reporting that the share of votes received by the
incumbent party in Colombian local elections increases with investment expenditures but
3
only to the extent that they do so without running large election-year deficits. The authors
interpret this finding as supporting the voter’s fiscal conservatism hypothesis.
In general, these results are attributed to voter’s preference for tight fiscal policies and to the
transparency prevalent in developed and consolidated democracies, which prevent
incumbents to deceit voters. Hence, the places to look for voters support to incumbents’
fiscal profligacy are new democracies given their relative lack of transparency. In that sense,
Israel as well as Colombia should be considered established democracies. In the first case
democracy exist since the creation of the State of Israel, while Colombia has the longest
uninterrupted democracy in Latin America.
This comment is pertinent to interpret Akhmedov et al. (2002) results in their paper on
Russia’s young democracy for the years 1996 -2001. They find that incumbent governors
practicing opportunistic loose fiscal policies increase political popularity and chances of
reelection. The authors conclude that the maturity of democracy in Russia as well as
rationality and awareness of the electorate are key factors to determinate the scope for
opportunistic cycles. Similar conclusions are drawn by Goncalves Veiga and Veiga (2006)
from a panel of 275 Portuguese municipalities from 1979 to 2001. That is, mayors’
opportunism leads to more votes. Nonetheless, in contrast with Akhmedov et al., in the early
stages of democracy (elections from 1979 to 1989) opportunism has no effect on electoral
results while in the more recent ballots, (1993, 1997 and 2001) incumbents’ spending paid
off, contradicting also Brender and Drazen (2005a) findings.
The only paper that deals with Argentina’s recent democracy is Porto and Porto (2000) that
studies 125 municipalities belonging to the Province of Buenos Aires (the largest in
Argentina) They found that the probability of changing the incumbent party depends
negatively on the variation in capital expenditures which is interpreted as supporting
Peltzman’s results for the U.S.
III.
Fiscal performance and fiscal incentives in Argentine provinces1
In Argentina, national and sub national politics and policies are intertwined to a much larger
(and convoluted) extent than in other federal polities. The main links are electoral and fiscal.
Provinces undertake a large fraction of total spending; yet collect only a small fraction of
taxes. Provincial spending amounts to 50 percent of total consolidated public sector
1
This section borrows freely from Spiller and Tommasi (2007)
4
spending. This figure rises to close to 70 percent if we exclude the pension system and focus
on “more discretionary” spending. Furthermore, the type of spending in the hands of
provincial governments tends to be politically attractive (such as public employment and
social programs) because it is close to the interests of territorially based constituencies. Yet,
on average, provinces finance only 35 percent of that spending with their own revenues. The
rest of their spending is financed from a common pool of resources, according to the
“Federal Tax-Sharing Agreement.” In a large number of small provinces the proportion of
funds from this common pool constitutes over 80 percent of their funding. Local politicians,
then, enjoy a large share of the political benefit of spending and pay only a small fraction of
the political cost of taxation.
This fiscal structure at the provincial level is one reason why many professional politicians
are more interested in pursuing a career through appointments in the provincial government
(or even the party at the provincial level) than in the National Congress. But the powerful
provincial brokers—that is, the governors—depend heavily on the allocation of “central”
monies to their provinces to run both their political and their policy businesses. That is, they
need central money to deliver particularistic political goods, as well as to provide general
public goods in their province. There are several channels for funneling funds to the
provinces, the main ones being the geographic allocation of the national budget and the
Federal Tax-Sharing Agreement.
The game in which these allocations are determined is the source of many political and
policy distortions, at both the national and the provincial level. The game even affects the
quality of democracy at the local level. The Argentine voter at the provincial level has an
incentive to reward politicians who are effective at extracting resources from the center.
These are not necessarily the most competent or honest administrators. Given the political
mechanisms by which funds are allocated, this also adds uncertainty to provincial public
finances, since it is not easy to project future allocations.
The history and evolution of the Tax-Sharing Agreement is fraught with examples of
opportunistic manipulation, occasionally curtailed by fairly rigid and inefficient mechanisms
(Tommasi, 2006, and Iaryczower, Saiegh and Tommasi, 1999). Unilateral, bilateral, and
coalitional opportunism (by the national government, by a province, or by a set of provinces
that turns out to be pivotal for an important vote in Congress or for some other reason) has
been common in the allocation of central government monies to the provinces. The national
executive has enjoyed substantial discretion to allocate items in the federal budget
geographically (See Bercoff and Meloni, 2007). In an attempt to prevent adverse changes in
the future (for instance, a reduction in the amounts going to any specific province), political
5
actors have tended to impose greater rigidity on the Tax-Sharing Agreement, reducing the
government’s capacity to adjust fiscal policy to changed economic circumstances. One
example is the earmarking of taxes for specific programs with clear regional distributional
effects. This earmarking led to a rigid and convoluted system of federal tax collection and
distribution, which has been christened the “Argentine fiscal labyrinth.”
Recent attempts to simplify that labyrinth, which also reflect the inability to strike efficient
intertemporal agreements, led to the 1999 and 2000 “fiscal pacts” between the national and
provincial governments. Those pacts generated a rigid commitment to a minimum of
revenues from the center to the provinces, which turned out to be a very costly straightjacket
for the De la Rúa government during the lead-up to the 2001 crisis. Similarly, the lack of
cooperation from the provinces has been credited as the immediate cause of the country’s
move to default (see Eaton 2005, and Tommasi 2006).2
That episode of the Argentine federal fiscal drama, which led to one of the largest defaults in
modern world economic history, was a clear manifestation of one of the central points in our
argument. Provincial governors, who are crucial players in national politics and policymaking,
have only secondary interest in national public goods (such as macroeconomic stability), in
the quality of national policies, and (hence) in investing in institutions (a professional
Congress, a stronger civil service) that might improve the quality of policies. The primary
interest on the basis of which they grant or withdraw support to national governments and
their policies is the access to common-pool fiscal resources.
Other source of sub-national fiscal expansion is found in bailouts that introduce modifications
in the provinces’ budget constraints. Provincial governments could behave opportunistically if
they anticipate that federal authorities have ex-post incentives to deviate from implicit or
explicit ex-ante rules. In Argentina, this opportunistic behavior usually takes the form of
unsustainable fiscal behavior that increases the district’s exposure to a crisis in the event of
an exogenous shock. As shown by Nicolini et al. (2002) that analyzed salient episodes of
bailouts during the 90’s, small and poor jurisdictions rather than larger ones benefited from
federal money in times of financial distress.
Summarizing, when voters evaluate candidates running for governor, prodigal rather than
parsimonious incumbents rank high. The tax sharing agreement and bailouts provide
powerful incentives to voters to reward politicians who are effective at extracting resources
from the federal government.
2
The buildup of a very dangerous aggregate fiscal position in the late 1990s was also related to political gaming
between the national government and the provinces (Tommasi 2006).
6
IV.
Data Description and empirical specification
Our dependent variable, WINNER, is a binary variable with the value 1 if the incumbent party
wins the gubernatorial election and 0 if it is defeated. Absolute victory, not the change in the
percentage of the vote won, is employed as the dependent variable for three principal
reasons. First, the goal of candidates in gubernatorial elections is to win the election, not
necessarily to maximize the percentage of the vote received. In Argentina, for instance, it is
not uncommon for gubernatorial candidates who are confident of victory in the general
election to lend material and logistical support to an opposition candidate (where the same
funds can achieve more votes than if used in support of the governor's party) with the goal
that this candidate's coattails will provide his/her party with seats in the legislature, seats that
will be occupied by legislators who in turn will support the governor. At the same time,
governors who are confident of victory often do not expend all available resources on the
election campaign (preferring to conserve them for post-election bargaining purposes or
utilize them to gain the support of co-partisans). Sometimes, it pays (for incumbent
governors) to spend resources at splitting the opposition (or avoid the coalition of opposition
parties) rather than use them up in trying to improve or equate their previous results at the
polls. Second, inter-party alliances are very common in Argentina. Furthermore, rarely is the
alliance of parties that supported a candidate in one election identical to that in the election
immediately anterior or posterior to that election. As a consequence calculating vote shifts is
at times anything but straightforward. Third, all Argentine gubernatorial elections feature
more than two candidates, and many involve three or four viable candidates. As a
consequence the vote-based measure most commonly employed in the United States (share
of the two-party vote) is not easily transferred to this multi-party context. While in the United
States a vote increase for the Democratic candidate (compared to the previous election) is
virtually synonymous with a vote decrease for the Republican candidate, within a multi-party
context such logic does not hold.
Considering the total number of observations (112), the incumbent party that increases the
percentage of votes with regard to the previous election was reelected in 51 elections
(45.5%) and was defeated in 5 ballot vote (4.5%). That is, improving the performance of the
previous election does not guarantee the victory. Furthermore, a decline in the percentage of
votes does not mean to cede the administration to the opposition: in 39 out of 112 elections
(34.8%) the incumbent party diminished the percentage of votes but won the election. In the
remaining 17 ballots (15.2%), the incumbent party lost popular support and also lost the
gubernatorial election.
7
Since the return to democracy in 1983, Argentina had gubernatorial elections regularly in
most of its 24 districts (23 provinces plus the federal district) every four years: 1987, 1991,
1995, 1999 and 2003. The exceptions, which originate missing data in our panel, are the
districts of Corrientes, Tierra del Fuego and the City of Buenos Aires (Federal District). In the
case of the Province of Corrientes we only consider the elections of 1983, 1987 and 1991
since provincial authorities were intervened twice by the federal government in the period
1992-2001, amounting for four years of intervention3. The cases of Tierra del Fuego and the
Federal District are different: their people elected directly their governors for the first time in
1991 and 1996 respectively. Before those dates, the President of the Nation appointed the
governors4. Notice that we took the 1983 election as an starting point for our empirical
analysis, since before that date the military was in charge and there was no party allied with
the military regime so we cannot treat any party as the incumbent in that election.
Table 1. Incumbent Party Victories in the Argentine Districts
The Incumbent party of the following districts won:
Party
Peronist
UCR/Alianza
Provincial
Number of
Districts
5 out of 5
elections
4 out of 5
elections
3 out of 5
elections
2 out of 5
elections
Formosa, Jujuy,
La Rioja, La
Pampa, San Luis,
Santa Fe,
Santiago del
Estero
Buenos Aires (4),
Catamarca (1),
Córdoba (1), Chaco (1),
Entre Ríos (2),
Mendoza (2), Misiones
(4)
Salta, Tucumán
Chubut San
Juan (1)
Federal District*,
Río Negro
Catamarca (3),
Córdoba (3), Chaco (2),
Entre Ríos (1),
Mendoza (1)
Neuquén
11
7
2
1 of 5
elections***
Corrientes**,
San Juan (1)
Tierra del
Fuego***
3
1
Notes: number of elections won by the respective incumbent party in parenthesis
* Before 1996 the Chief of Government of the Federal District used to be appointed by the President of the
Nation, so only two elections are considered (besides the initial point, 1996): 2000 and 2003.
** Due to federal interventions we only consider two elections, 1987 and 1991, with 1983 as an starting point.
*** Tierra del Fuego acquired the status of province in 1991, so only three elections are taken into account, 1995,
1999 and 2003 (with 1991 as starting point)
The importance of the incumbency in the Argentine provinces is reflected in the fact that the
incumbent party won 80% of the 112 gubernatorial elections analyzed. Moreover, in 11 out of
24 districts, the incumbent party always won the gubernatorial elections. The Peronist party
remains undefeated in 8 provinces while the UCR and the provincial party Movimiento
3
In the period considered, the provinces of Tucumán and Santiago del Estero were also federal intervened. In
both cases the intervention lasted a few months so the electoral calendar was not altered.
4
Tierra del Fuego had the status of National Territory, dependent of the Federal government, until 1991.
8
Popular Neuquino always won the elections in the provinces of Río Negro and Neuquén
respectively. The case of the Federal District deserves some comment: the incumbent party
managed to remain unbeaten appealing to alliances with incumbent Presidents de la Rúa
(UCR party) and Kirchner (Peronist party). Table 1 shows the record of victories of the
incumbent parties in the provinces.
Interestingly, incumbent governors that run for reelection obtained the victory in 91% of the
cases. It is worth remarking that some provinces have constitutional provisions that ban
immediate reelection. Nonetheless, during the 90s some provinces reformed the constitution
to allow incumbent governor reelection.
Our key explanatory variable, the growth rate of the real per capita public expenditure moves
procyclically: for the majority of provinces expansions are characterized by large increases in
public expenditure and recessions by huge declines in that variable. As noted earlier,
besides political incentives (for instance, incumbent party reelection), the combination of tax
sharing system (“coparticipación federal de impuestos”) and procyclical revenues plus the
chance of borrowing overseas fuel public expenditures during expansions. In turn, this
increase in public expenditure contributes to further augment the rate of growth of the GDP.
On the contrary, reversals in international capital flows, decline in provincial revenue
collection and fall in transfers from the national government are the main forces behind the
diminishing expenditures.
The behavior of the provincial real per capita public expenditure in each gubernatorial period
shows high dispersion which might indicate autonomous conduct of governors, although we
still can trace out some impact of the overall country performance (see Table 2). During the
80’s the argentine economy enjoyed a modest expansion after the stabilization plan called
Austral, in 1985, which may explain the high rates of growth of public expenditures (more
than 20%) in eleven provinces in the period 1983-1986. Conversely, in the years 1987-90,
featuring hyperinflation and recession in the country, twenty-one provinces had diminishing
per capita public expenditure, with eighteen of them retreating more than 20%. Only the
province of Jujuy managed to expand public expenditures under those circumstances.
During the 90´s the business cycle favored expansion of the public expenditure. Well after
the implementation of the currency board, known as Convertibility Plan, in 1991, the
economy stabilized and began a rapid growth. Not surprisingly, in the period 1991-94 sixteen
districts had growth rates of the per capita public outlays that rose above 30%. Surprisingly,
among the few districts that increased real per capita public expenditure less than 20% was
La Rioja, the home province of former president Carlos Menem. It is expected that small
9
districts be more incline to fiscal profligacy since they are more favored by the “secondary
coparticipation” from the common pool of resources. Likewise, it can be anticipated a more
prudent behavior in larger provinces because they “internalize” more the federal tax costs of
their spending. Nonetheless, it must also be taken into account the national executive
pressures to governors from the same party (as La Rioja) to have fiscal discipline in order to
make them internalize some of these costs.
Table 2. Number of Provinces with growth rate of Real per capita public expenditures
in a given interval
Real per capita public
Expenditure Interval
Gubernatorial period
1983-1986
1987-1990
1991-1994
1995-1998
1999-2002
More than -20%
0
18
0
0
23
From -11 to –19.9%
0
3
0
1
0
From –10.9 to 0%
0
0
0
7
0
From 0.1 to 10%
3
0
1
7
0
From 10.1 to 20%
8
1
3
5
0
From 20.1 to 30%
3
0
2
1
0
More than 30%
8
0
16
2
0
Total provinces
22*
22*
22**
23***
23***
Notes:
* Federal District and Tierra del Fuego were excluded
** Federal District and Corrientes were excluded
*** Corrientes is excluded.
After the short 1995 crisis, known as “Tequila”, the national GDP expanded again, which
generated renewed impulse in the public expenditure of the majority of provinces in 1995-98.
In opposition, the 2001/02 crisis, one of the most deleterious in the country’s history, was the
responsible of the huge adjustment in the public outlays of all provinces, which showed
negative growth rates in the gubernatorial period 2000-2003. Moreover, in 14 districts real
per capita public expenditures declined more than 40%5.
Data
The dataset used in this study comes from several sources. Real expenditures as well as
real revenues at constant 2003 prices were drawn from the Secretaría de Hacienda,
Ministerio de Economía de la Nación. Population data and provincial GDP at constant prices
were estimated by the Universidad Nacional de La Plata, based on official census. The crime
rate figures were collected from the Dirección Nacional de Política Criminal, Ministerio de
Justicia y Derechos Humanos. The unemployment data were taken from the INDEC (the
5
Table 1A in the Appendix shows the coefficient of variation of per capita Spending for each province in 19832003.
10
Argentinean Bureau of Statistics). Political and electoral data comes from Dirección Nacional
Electoral. A detailed description of the data sources appears in the Appendix.
Empirical specification
Our basic estimating equation is:
WINNERit = α0 + α1 POLITICALit + α2 SOCIOECONOMICit + α3 EXPENDITUREit + εit
We test for the effect of the growth rate of real per capita public expenditures on the
incumbent party’s probability of winning the gubernatorial election t in province i. We control
for traditional socioeconomic influences, such as provincial GDP per capita and
unemployment. We expect an increase in the incumbent party’s probability of victory as
provincial GDP per capita goes up and unemployment decreases. Another socioeconomic
control is the rate of growth of property crime, associated negatively with the dependent
variable. In the last decade or so, the growing unemployment and crime have become
central topics for Argentineans, ranking at the top in the mass-media coverage.
We also control for the business cycle and the inflation rate. We conjecture that a growing
national economy improves the probability of victory of all provincial incumbent parties
affiliated to the same party of the President. There are at least two channels through which a
good economic performance of the country favors, in electoral terms, the provincial party
affiliated at the president’s party even though we assume that voters distinguish between the
responsibilities of the federal and provincial government. The most obvious are discretionary
transfers from the federal government to its allied provinces. Argentina’s revenue collection
features high procyclicality, which gives extra funds to the federal government that can be
discretionary distributed among allied incumbents at the provinces. Voters expect the
President to help provinces administered by allied governors not only with federal funds but
also influencing on private investments or through regulations, particularly international trade
policies. On the other hand, voters might be prone to support provincial incumbent party
affiliated to the same party of the President, as a way to sustain a successful (in terms of
GDP growth) national economic policy. Conversely, we speculate that high inflation rates
negatively affect the electoral performance of provincial incumbent parties that respond to
the President. To capture these effects, we construct two variables named CYCLE and
INFLATION, that interact a dummy variable that takes the value 1 if the incumbent party is
affiliated to the same party of the president and 0 otherwise, with the growth rate of the
national GDP and the inflation rate, respectively.
11
Notice that neither the inflation rate nor the national GDP growth rate vary across the
provinces governed by the same party as the President’s, but the variables CYCLE and
INFLATION do vary across provinces. It is also worth remarking that CYCLE and the growth
rate of provincial GDP per capita are included to control for different effects on the
incumbent’s probability of victory. While the former attempts to capture the impact of the
business cycle, as mentioned above; the last is a proxy for the rate of growth of personal
income in a given jurisdiction. Moreover, the Pearson coefficient of correlation between both
variables is not so high: 0.376.
The impact of political variables is measured by four variables: the normal share of votes of
the incumbent party in a given province (PARTY), a dummy variable that is intended to
reveal the extra effort that receives a party when the incumbent governor runs for the
reelection (REELECTION), the margin of victory in the last gubernatorial election (MARGIN)
and another dummy variable that tries to capture the influence of simultaneous elections for
President and Governors (NATLCOAT).
The “normal” share of votes of the incumbent party reflects various concepts such as political
inertia, ideological affiliation and party loyalties. We approximate this idea by the share of
votes in the congressional election held two years before the gubernatorial elections that is,
1985, 1989, 1993, 1997 and 2001 for most provinces. Congressional elections usually
captures the party vote since candidates generally have low name recognition, so ballots are
cast along party lines rather than personal prestige. We assume that the chance of victory of
the incumbent party increases the more rooted the party loyalty. In the same line of
reasoning, the incumbent party augments its probability of triumph, the larger the margin of
victory in the past gubernatorial election. Large margins might indicate strong incumbents as
well as disorganized oppositions.
REELECTION assumes that incumbent governors running for reelection devote more effort
and resources to remain in office than the ones constitutional impeded to dispute a new
period or voluntary excluded6.
On the other hand, we expect the simultaneity of gubernatorial and presidential elections to
be positively correlated with our dependent variable, not only because it biases the public
discussion towards national topics of interest to the President, in detriment of provincial
affairs, but also because it helps to exploit some economies of scale in the use of campaign
resources. Before the constitutional reform of 1994, gubernatorial and presidential elections
6
Before 1983, all provinces had constitutional arrangements banning incumbent governors to run for an
immediate reelection. Since then there were various provinces amending their constitutions to allow for governor’s
reelection. See Appendix.
12
coincided every twelve years as the President lasted six years in office and governors four
years, but after the reform, the president period was shortened to four years, so, from 1995,
both, presidential and gubernatorial elections are held the same year for the majority of
provinces. Despite that, some provinces’ constitutions authorize governors to carry out the
voting a few months before or after the Presidential election, avoiding simultaneity.
Table 3. Definition of variables used in the regressions
Abbreviation
Description
WINNERit
Dummy variable that takes the value 1 if the incumbent party wins the gubernatorial
election t in the province I, and 0 otherwise.
REELECTIONit
Dummy variable that takes the value 1 if incumbent governor runs for reelection in the
province i at the gubernatorial election t, and 0 otherwise.
MARGINit
Difference between the percentage of votes obtained by the incumbent party and the
main rival in the province i at the gubernatorial election t.
SAMEit
Dummy variable that takes the value 1 when the incumbent governor is affiliated to the
same party as the President and 0 otherwise. The case of the province of Catamarca
was coded 1 despite it was intervened by the federal government, but the governor
appointed by the Executive to intervene the province was very closed (politically) to the
incumbent party.
PARTYit
Percentage of votes obtained by the incumbent party in the representatives election
carried out two years before the gubernatorial election t in province i.
NATLCOATit
Dummy variable that takes the value 1 when gubernatorial elections are held the same
date as presidential elections and the incumbent party is PJ (1995, 2003) or
UCR/FREPASO (1999); -1 when gubernatorial elections are held the same date as
presidential elections and the incumbent party is different from PJ or UCR/FREPASO,
and 0 otherwise
EXPENDITUREit
Growth rate of the real total expenditures per capita for province i between the end and
the beginning of the gubernatorial term.
GDPPCit
Growth rate of the real provincial GDP per capita for province i in the last year of the
gubernatorial term that finishes in election t.
UNEMPLOYMENTit:
Rate of unemployment (level) in the year of the election t in province I
CRIMEit
growth rate of the property crime rate (offenses per 10,000 inhabitants) for province i in
the last year of the gubernatorial term that ended in election t.
INFLATIONit
Stands for the interaction between the variable Same and the annual inflation rate in the
year of the election.
CYCLEit
results from multiplying the variable Same by GDP growth rate of the country in the
Election Year.
13
Table 4 presents some descriptive statistics for the full sample, 1983-2003. The annual
average per capita expenditure is $ 2355 (argentine currency). There is, however, high
variation in public outlays, which is reflected in the standard deviation of $ 1428. The
province of Tierra del Fuego in the period 1995-1998 spent, on average, $ 7942 per
inhabitant, per year, which is the maximum of the sample while Buenos Aires in 1983-1986
reached the minimum with $ 712.7 per inhabitant per year. The rate of growth of real per
capita public expenditures for the gubernatorial period also presents elevated volatility, with
huge increases of as much as 76.5% registered by the province of Mendoza from 1991 to
1994 and tremendous falls like the one suffered by the province of La Rioja from 1999 to
2002 that reduced its public expenditures more than 50%. La Rioja finances only 10% of
their spending with their own revenues. From 1989 to 1999 the federal government directed
copious funds to the President’s home province, which allowed extravagant expenditures in
La Rioja. As the Menem’s star extinguished the federal money diminished and so the
provincial outlays.
Table 4. Descriptive Statistics
Variable
Dummies
Winner
Reelection
National coat
Rates of Growth
GDP pc (%)
Cycle (%)
Inflation (%)
Crime (%)
Expenditure (%)
Levels
Margin (%)
Party (%)
Unemployment (%)
Expenditure Level
Obs
Mean
Std. Dev.
Min
Max
112
112
112
.8036
.4018
.0446
.3991
.4925
.4326
0
0
-1
1
1
1
112
112
112
112
112
1.1534
1.9096
36.3298
.8264
-.2513
7.5639
4.6685
65.5473
22.1265
32.9551
-13.29
-3.4
-1.2
-69.22
-53.9
46.37
8.9
171.7
124.31
76.5
112
112
112
112
14.6911
43.0293
9.8253
2355.534
12.9305
10.8758
4.5944
1428.753
-3.2
14.8
2.55
712.7
65.9
67.6
20.8
7942.1
Note: All statistics are calculated on gubernatorial period. Table 1A in the Appendix shows summary statistics
computed on the yearly basis. Fiscal Statistics for panel data observations for 24 districts are expressed in 2003
pesos. Crime rate is defined as number of offenses per 10,000 inhabitants.
14
V.
Results
Probit equations were estimated for a panel including five consecutive gubernatorial
elections (1987, 1991, 1995, 1999 and 2003) and 24 districts7. Results for our basic
specifications are presented in Table 5. The first column shows only control variables, just to
have a benchmark, while the ones numbered (2) to (5) incorporate also our key explanatory
variable, the rate of growth of the real per capita public expenditure. In the last four
regressions, control variables have the expected sign and they are statistically significant at
usual levels except for Margin and National Coat in regression (2). As expected, high
unemployment rates and rising property crime rates in the proximities of the gubernatorial
elections definitively hurts incumbent party chances to win the election. On the contrary,
good economic conditions measured by the rate of growth of the country GDP and also by
the provincial GDP per capita help incumbent parties affiliated to the President’s party to get
reelected. While the significance of the inflation rate and the country GDP behavior might be
interpreted as voters ignorance of the governor’s responsibilities, it can also be viewed as a
refusal to vote incumbent parties that support federal governments that implement wrong
economic policies leading to recessions and inflation.
These results indicate that Argentineans voters have “short memory” when casting the ballot
for governors, that is, socioeconomic conditions prevailing in the year previous to
gubernatorial elections, both at national and provincial level, are relevant to explain the
probability of victory of the incumbent party. On the contrary, socioeconomic conditions
computed along the full gubernatorial period do not have statistical significance.
The growth rate of real per capita public expenditure is always significant and its inclusion
definitively improves the fit. Of the regressions in Table 5, the third column is the one that fits
the data best and is the one upon which we will base our conclusions. Regressions including
the variable Reelection was not included because they resulted statistically non- significant8.
National Coattail also resulted non-significant at usual confidence level. This result can be
termed as expected or at least not surprising given the peculiarities of Argentine politics
described in section II. Is National Coattail still irrelevant if we take out the peculiar 2003
case (the fact that they were three different peronist candidates that time, plus the peculiar
regional logic of that vote)? We run a new set of regressions excluding the year 2003 and our
results remain unaltered9.
7
We also estimated by the Logit procedure with negligible difference in the results.
The average expenditure level was also included as explanatory variable but results were not satisfactory.
9
See Appendix
8
15
Table 5. Explaining the Incumbent’s probability of Victory in gubernatorial elections.
Full Sample estimates.
Variables
Control
Variables
(1)
Expenditures
National Coat
(2)
(3)
(4)
(5)
0.0244
(2.42)**
0.0244
(2.56)***
0.0221
(2.35)**
0.0221
(2.27)**
0.6656
(1.58)
0.7145
(1.39)
0.0630
(2.96)***
0.0537
(2.34)**
0.0519
(2.40)**
Margin
0.0248
(1.26)
0.0327
(1.56)
0.0321
(1.66)*
GDP per capita
0.0350
(1.18)
0.0630
(1.92)*
Unemployment (electoral year)
-0.0927
(-1.86)*
Crime rate
Cycle
Party
0.7342
(1.49)
0.0579
(2.69)***
0.0589
(2.60)***
0.0639
(2.01)**
0.0657
(1.95)**
0.0656
(1.92)*
-0.1183
(-2.00)**
-0.1077
(-2.04)**
-0.1145
(-2.02)**
-0.1253
(-2.04)**
-0.0122
(-1.26)
-0.0280
(-1.97)**
-0.0263
(-1.91)*
-0.0227
(-1.71)*
-0.0247
(-1.82)*
0.1578
(2.09)**
0.2794
(2.56)**
0.2639
(2.62)***
0.2473
(2.49)**
0.2559
(2.50)**
Inflation
-0.0202
(-3.37)***
-0.0263
(-3.17)***
-002456
(-3.29)***
-0.0250
(-3.36)***
-0.0264
(-3.30)***
Constant
-0.4029
(-0.44)
0.2974
(0.28)
0.1632
(0.17)
0.4616
(0.46)
0.6179
(0.58)
Observations
112
112
112
112
112
Districts
24
24
24
24
24
Observations per group MIN
2
2
2
2
2
Observations per group MAX
5
5
5
5
5
Observations per group AVG
Log Likelihood
Note:
4.7
4.7
4.7
4.7
4.7
-39.7160
-35.9946
-37.0964
-38.5995
-37.3523
* significant at the 10% level; ** Significant at the 5% level; *** Significant at the 1% level.
z statistics in parenthesis
As a robustness check, we run regressions limiting the sample to those provinces with at
least five periods of data, and the results are pretty similar. We also run logit fixed effects
regressions, what diminishes the number of observations considerably, but still the rate of
growth of per capita public expenditures is significant at usual statistical levels10.
10
See Appendix
16
VI.
Conclusions
Voters reward fiscal profligacy. This is the main result of our paper. After controlling for
political and socioeconomic variables, we find that incumbent parties that increase real per
capita public expenditures augment their probabilities of remaining in power. Of course, the
key is not explaining why politicians want to raise public outlays but why voters do not punish
profligacy in Argentina as in the U.S. Israel and Colombia. In other words, what is the
fundamental difference between US voters portrayed in Peltzman’s paper and the
Argentinean voters as appear in this paper? Apparently, none. Both respond to incentives.
Both may even dislike prodigal politicians. The real difference is in the set of incentives they
face. The argentine voter at the provincial level has incentives to reward politicians who are
effective at extracting resources from the federal government. Voters, particular in small and
poor districts, and to a lesser extent in large provinces, know that they are not going to pay
the full cost of their local authorities’ imprudent fiscal behavior. The tax sharing agreement
and the high probability of bailouts (decreasing in the size of the province) are powerful
incentives to both, politicians to spend and to voters to reward big spenders. For example,
voters know that their governor engages in unsustainable fiscal behavior that increases the
district’s exposure to a crisis in the event of an exogenous shock. Nonetheless, they may
agree to reelect them. Why? At best, if the shock does not occur, they will enjoy from more
public goods. At worst, if the shocks generate financial distress, voters know that they will not
pay the full cost of the fiscal adventure. It is highly probable that the federal government will
bailout the province, paying part (or even the total) of the costs. Rather than reflecting voters
preferences, our results mirror the set of incentives faced by voters.
17
References
Akhmedov, A. Ravichez, A. and Zhuravskaya, E. (2002) Opportunistic Political Cycles: test in a young
democracy setting. Working Paper
Alesina, A., Perotti, R. and Tavares, J. (1998) The political economy of fiscal adjustments. Brookings
Papers on Economic Activity, 1.
Bercoff J. and Meloni, O. (2007) Federal budget allocation in an emergent democracy. Evidence from
Argentina. Mimeo.
Brender A. (2003) The effects of fiscal performance on Local Government Election Results in Israel:
1989-1998. Journal of Public Economics, Vol. 87, pp. 2187-2205.
Brender, A. and Drazen, A. (2005a) How do Budget Deficits and Economic Growth Affect Reelection
prospects? Evidence from a Large Cross-Section of Countries. NBER Working Paper. No. 11862
Brender, A. and Drazen, A. (2005b) Political budget cycles in new versus established democracies.
Journal of Monetary Economy.
Drazen, A. and Eslava, M. (2005) Electoral manipulation via expenditure composition: theory. NBER
Working paper 11085. Cambridge, MA National Bureau of economic Research.
Eslava (2005) Political budget cycle or voters as fiscal conservatives? Evidence from Colombia
Documento CEDE 2005-12 Febrero
Eslava, M. (2006) The Political Economy of Fiscal Policy: Survey. Inter American Development Bank.
October.
Goncalves Veiga, L. and Veiga, F. (2006) Does Opportunity Pay Off? NIPE Working Paper 5.
Jones, Mark, Sanguinetti, Pablo y Tommasi, Mariano (1997) Politics, Institutions, and Fiscal
Performance in the Argentine Provinces. Universidad Torcuato Di Tella. Mimeo.
Nicolini, J., Posadas, J., Sanguinetti, J, Sanguinetti, P., Tommasi, M. (2002) Decentralization, Fiscal
Discipline in Sub-National Governments and the Bailout Problem: the case of Argentina. InterAmerican Development Bank, Working Paper R-467.
Peltzman, Sam (1987) Economic conditions and Gubernatorial Elections. American Economic Review
Papers and Proceedings (May): 293-297.
Peltzman, Sam (1992). Voters as fiscal conservatives. Quarterly Journal of Economics. Vol. 107 No. 2
(May): 327-361.
Persson, T. and Tabellini, G. (2000) Political Economics: Explaining Economic Policy. MIT Press,
Cambridge MA
Porto. Alberto y Porto Natalia (2000) Fiscal Decentralization and Voters’ Choices as Control. Journal
of Applied Economics. Vol. III No. 1: 135-167.
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Studies, Vol.55, 1-16
18
Appendix
Table 1 A. Real Public Expenditures per capita per district: 1983-2003 (ranked
according to the coefficient of variation)
Average
Standard
Deviation
Coefficient
of variation
Maximum
Minimum
Buenos Aires
998.99
297.82
0.30
1515.10
591.99
CABA
1509.28
403.24
0.27
2128.00
842.38
Mendoza
1402.38
349.13
0.25
1929.75
786.93
Córdoba
1254.66
301.42
0.24
1762.67
724.47
Tierra del Fuego
7437.15
1725.47
0.23
11565.17
4441.90
Salta
1603.34
367.94
0.23
2598.23
845.82
Misiones
1380.80
306.26
0.22
1967.01
755.39
Entre Ríos
1618.75
357.38
0.22
2218.33
1084.47
San Juan
1956.02
419.49
0.21
2768.86
1223.35
La Rioja
3585.26
734.52
0.20
4648.57
2209.52
San Luis
2162.40
436.73
0.20
3369.16
1477.27
La Pampa
2820.27
563.86
0.20
3973.23
1877.72
Santiago del Estero
1472.02
288.37
0.20
1948.45
991.80
Chaco
1631.82
310.15
0.19
2221.25
1197.06
Río Negro
2348.04
423.76
0.18
3365.94
1525.94
Tucumán
1293.49
220.49
0.17
1632.49
902.39
Catamarca
2684.06
453.56
0.17
3316.24
1838.48
Formosa
2561.25
430.99
0.17
3106.26
1537.43
Corrientes
1384.02
232.82
0.17
1680.03
888.93
Santa Fe
1323.98
222.07
0.17
1792.60
983.90
Jujuy
1972.60
324.49
0.16
2360.56
1273.06
Neuquén
3908.14
600.54
0.15
5059.25
3028.64
Chubut
2519.72
381.63
0.15
3168.14
1711.71
Santa Cruz
6142.95
929.77
0.15
7478.51
4516.39
District
Note: expenditures expressed in pesos of 2004
19
Table 2 A. Logit fixed effects regressions
. xtlogit w
texppclevel
cyclesr infsrsp , nolog fe
party natlcoat texppclr gdppcsr uelecyear crimesr
note: multiple positive outcomes within groups encountered.
note: 12 groups (54 obs) dropped due to all positive or
all negative outcomes.
Conditional fixed-effects logistic regression
Group variable (i): id
Log likelihood
= -10.255259
Number of obs
Number of groups
=
=
58
12
Obs per group: min =
avg =
max =
3
4.8
5
LR chi2(9)
Prob > chi2
=
=
26.80
0.0015
-----------------------------------------------------------------------------w |
Coef.
Std. Err.
z
P>|z|
[95% Conf. Interval]
-------------+---------------------------------------------------------------Expend level |
.0047729
.0024444
1.95
0.051
-.0000181
.0095638
Party |
.0637086
.0761244
0.84
0.403
-.0854925
.2129096
Natlcoat |
2.46022
1.786598
1.38
0.168
-1.041448
5.961888
Expenditure |
.0784332
.0319744
2.45
0.014
.0157646
.1411019
GDP pc |
.1061816
.0993179
1.07
0.285
-.0884778
.3008411
Unemployment | -.2907438
.2567074
-1.13
0.257
-.793881
.2123933
Crime | -.0815519
.0375982
-2.17
0.030
-.1552431
-.0078607
Cycle |
1.11257
.4286294
2.60
0.009
.2724715
1.952668
Inflation |
-.070228
.0276193
-2.54
0.011
-.1243609
-.0160952
------------------------------------------------------------------------------
Expend level is the average real per capita total expenditures for province i during the gubernatorial term that
ends in election t.
20
Table 3 A. Governor’s Reelection
Period
Immediate reelection
banned
Immediate reelection (one
period)
No limits to
governor’s reelection
Total
From
1960 to
1983
All
-
-
22
From
1984 to
1993
16
4
Córdoba, Formosa, Río Negro,
Tierra del Fuego
3
Catamarca, La Rioja, San
Luis
23
12
Buenos Aires, Córdoba, Chaco,
Chubut, Formosa, La Pampa,
Neuquén, Río Negro, Salta, Santa
Cruz, Tierra del Fuego
4
Catamarca, La Rioja, San
Luis, Santa Cruz
23
From
1994 to
2003
8
21