Abstract
We study the role of institutional quality on the fiscal transparency of a country. We show that such a link does exist even when controlling for endogeneity. Our findings are robust to changes in specification and a host of transparency sub-measures. An advantage of our study is that we use new data on fiscal transparency for a cross-section of 82 countries, which are based on in-depth reports based on a standardized methodology and protocol. Furthermore, the fiscal measures were obtained with the collaboration of government authorities, which makes them particularly reliable.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
Notes
An illustrative example is Bellver and Kaufmann (2005), who construct a transparency index, which comprises an aggregate transparency index and show that there are transparency-related challenges in countries in each region and income categories. They find that transparency is associated with better socio-economic and human development indicators, as well as with higher competitiveness and lower corruption. Other examples are Jarmuzek (2006), Glennerster and Shin (2003), Gelos and Wei (2002) and Drabek and Payne (2001).
Jarmuzek et al. (2006) construct an index consisting of five clusters, including (1) medium-term budgeting and analysis, (2) accounting and data quality, (3) extra-budgetary fiscal operations, (4) intergovernmental relations, and (5) the role of auditing in the budgetary process and the importance of the Ministry of Finance over spending ministries. Guerrero and Hofbauer (2001) uses an index of budget transparency a\(\backslash \)developed by a group of civil and academic institutions for four Latin American countries focusing on: participation and elaboration of the budget, oversight, accountability and access to information. Gleich (2003) uses survey data for ten Eastern European countries and develops four indices that capture the stages of the budget process. Alt et al. (2006) codes survey responses for nine budget procedures and create a transparency index. Allan and Parry (2003) go through the ROSCs for most of the European Union (EU) accession candidate countries and focus on medium-term frameworks, accounting, reporting and oversight standards, off budget activities and fiscal risks, and intergovernmental fiscal relations.
Not all the ROSCs of every country contain all the information required, especially the oldest ones. Therefore, some countries might have a higher number of practices evaluated compared to others, but we believe that this issue does not substantially change our results because if we consider only the practices evaluated for every country our results are substantially unchanged.
Considering all four indices separately does not change our findings.
Additional information may be found in http://www.imforg/external/np/rosc/rosc.asp. Also, due to data limitations the sub-indices are calculated for different years depending on the country, ranging from 2000 (Cameroon and Papua New Guinea) to 2008 (Belgium and Namibia).
The unexplained variance for each indicator is as follows: Quality&Resp, 13 %; BudgPrep, 10.2 %; InfoAvail, 9.2 %.
A parallel analysis shows that these three indicators load into one factor or component and that components are random noise when the eigenvalues from the random data are larger than the eigenvalues from the PCA analysis. Also, some standard measures of correlation are inspected in order to analyze the relevance of reducing the fiscal transparency measures into one component. The squared multiple correlation between each variable and all other variables suggest that each component is well correlated with a linear combination of the other variables, while the Kaiser–Meyer–Olkin measure of sampling adequacy scores a high value indicating that the partial correlation between variables are not unique, thus, the correlations are related to the remaining variables outside each simple correlation.
All the regressions are calculated with heteroskedasticity robust standard errors. We also tested for robustness by including additional macro and demographic controls.
GovEff synthesize aspects such as the quality of the bureaucracy, the competence of civil servants, the independence of the civil servants from political pressures, and the credibility of the government.
RuLaw represents the extent to which citizens have confidence and abide by the rules of society such as the effectiveness and predictability of the judiciary, or the enforceability of contracts; cc refers to the perception of the degree of prevention of the exercise of public power for private gains.
The latter furnishes us proxies to measure the extent to which various relevant institutional aspects are in place for a given country: government stability, military in power, law and order, control of corruption and quality of the bureaucracy.
From the former database (POLITY IV), we borrowed the proxies POLITY2 and DEMOC, annual indices based on three categories that try to account for different aspects characteristics of a democracy: executive recruitment, responsiveness or independence of the executive authority and extent of political competition or opposition.
Alt et al. (2006) note a parallelism between transparency reforms and Hassen’ s delegation model (2004), where there are two parties competing for authority and the incumbent can choose to delegate policy choice to an independent institution, the judiciary.
A priori, the effect of government fractionalization on fiscal transparency is ambiguous. If the government is composed by many parties, each of them would like to use public goods to purse its own clientelistic interests, being sure that being accountable for, say, deficits, inefficiencies or bad performances is more difficult than in a one-party system, so reaching an agreement on reforms that open up the budget process to the public would be more difficult with many parties in power. Conversely, incumbents may prefer to have less discretion on public goods but limit other incumbents’ (with which they share office) misuse of them, thereby the fractionalized government could internally reach a compromise to manage resources in a transparent framework. Hypothetically, each ruling party might also be willing to let voters identify clearly who has done what in the government and open up the budget process to the electors. Alternatively, we could consider government fractionalization another measure of political competition, i.e. competition is so stiff that no party has the majority necessary to rule by itself and alliances are needed.
“Appendix 1” presents simple variable correlations. Not only are the signs consistent with the logic that better institutions yield higher levels of fiscal transparency, but also the degree of correlation is quite strong and in all cases it is statistically significant at 1 %.
Our macro-economic controls are expressed as the mean value of the decade 1990–2000, while FT indices refer at least to the year 2001 onwards.
There are other variables that might be worthwhile examining in regards to the issue of fiscal transparency. For instance, fiscal decentralization or whether there is a substantive difference in the transparency between highly centralized versus decentralized polities. Whereas we were unable to obtain good proxies of this variable, when using loose proxies (mainly from the World Development indicators) we find that highly centralized governments produce less fiscal information.
Table 6 Dependent variables: sub-indices of financial transparency Table 7 Robustness to changes in institutional measures Acemoglu et al. (2001) propose to exploit differences in European settlers’ mortality rates to estimate institutions, because in territories were Europeans faced high mortality rates they were not able to settle and they set up extractive institutions, while places where their mortality rates were comparatively lower experienced the promotion of sound institutional policies that persisted until now; although apparently flawless, the instrument “settler mortality” is not ideal for our purpose because it can be applied only to countries that used to be former European colonies, and we should drop almost a half of the observation in our sample—our results lose some significance but do not change considerably.
A third alternative is to employ religion as an instrument. Weber (1958), Putnam (1993), La Porta et al. (1999) argue that government performance is influenced by the percentage of population in each country belonging to different religious affiliations, showing that institutions of largely Protestant countries perform better than nations with a majority of people belonging to hierarchical religions like Roman Catholicism, Islam and Greek Orthodoxy. Alesina and Perotti (1996) have shown that religious fractionalization per se does might not influence economic and institutional development and it might be endogenous, but they reckon that different religious affiliations do matter in shaping institutions.
First stage regressions and Sargan test tell us that the exclusion restriction works well for our instrumental variable (statistical significance at 1 %).
References
Acemoglu D, Johnson S, Robinson JA (2001) The colonial origins of comparative development: an empirical investigation. Am Econ Rev 91:1369–1401
Aghion P, Alesina A, Trebbi F (2004) Endogenous political institutions. Q J Econ 119:707–767
Alesina A, Devleeschauwer A, Easterly W, Kurlat S (2003) Fractionalization. J Econ Growth 8(June):155–194
Alesina A, Perotti R (1996) Fiscal discipline and the budget process. Am Econ Rev 86:401–407
Allan W, Parry T (2003) Fiscal transparency in EU Accession Countries: progress and future challenges. IMF Working Paper WP/03/163. International Monetary Fund, Washington, DC, United States
Alt J, Lassen D, Rose S (2006) The Causes of fiscal transparency: evidence from the American States. Working Paper, University of Copenhagen
Alt JE, Lassen DD (2006) Transparency, political polarization, and political budget cycles in OECD countries. Am J Political Sci 50(3):530–550
Alt JE, Lowry RC (1994) Divided government, fiscal institutions, and deficits: evidence from the states. Am Political Sci Rev 88:811–828
Andreula N, Chong A, Guillen J (2012) Fiscal transparency and institutional quality. Working Paper, Inter-American Development Bank
Bellver A, Kaufmann D (2005) Transparenting transparency: initial empirics and policy applications. World Bank Policy Research Working Paper
Center for International Development and Conflict Management (CIDCM) (2004) Polity IV dataset. University of Maryland, College Park. www.cidcm.umd.edu/inscr/polity
Drabek Z, Payne W (2001) The impact of transparency on foreign direct investment. Staff Working Paper ERAD-99-02
Easterly W, Levine R (1997) Africa’s growth tragedy: policies and ethnic divisions. Q J Econ 112(4):1203–1250
Ferejohn J (1999) Accountability and authority: toward a theory of political accountability. In: Przeworski A, Manin B, Stokes S (eds) Democracy, accountability and representation. Cambridge University Press, Cambridge, pp 31–53
Gelos RG, Wei S-J (2002) Transparency and international investor behavior. IMF Working Paper 02/174
Gleich H (2003) Budget institutions and fiscal performance in Central and Eastern European Countries. European Central Bank Working Paper 215. European Central Bank, Frankfurt, Germany
Glennerster R, Shin Y (2003) Is transparency good for you and can the IMF help? IMF Working Paper 03/132
Guerrero JP, Hofbauer H (2001) Index of budget transparency in five Latin American Countries: Argentina, Brazil, Chile, Mexico and Peru. International Budget Project (Washington: Center on Budget and Policy Priorities). http://www.internationalbudget.org/resources/1-10-02ibp-pr.htm
Hallerberg M, von Hagen J (1999) Electoral institutions, cabinet negotiations, and budget deficits in the European Union. In: Porterba JM, von Hagen J (eds) Fiscal institutions and fiscal performance. The University of Chicago Press, Ltd., London
Hameed F (2005) Fiscal transparency and economic outcomes. IMF Working Paper WP/05/225. International Monetary Fund, Washington, DC, United States
Hanssen FA (2004) Is there a politically optimal degree of judicial independence? Am Econ Rev 94:712–729
Hollyer J, Rosendorff P, Vreeland J (2011) Democracy and transparency. J Politics 73(4):1191–1205
ICRG (2006) International Country Risk Guide Database. http://epub.prsgroup.com/products/international-country-risk-guide-icrg
International Monetary Fund (2003) Assessing and promoting fiscal transparency: a report on progress. Washington, DC
International Monetary Fund (2007) Revised code of good practises on fiscal transparency. http://www.imf.org/external/np/pp/2007/eng/051507c.pdf
Jaggers K, Moore T (1995) Tracking democracy’s third wave with the polity III data. J Peace Res 32:469–482
Jarmuzek M (2006) Does fiscal transparency matter? The evidence form transition economies. Center for Social and Economic Research, Warsaw. https://www.cerge-ei.cz/pdf/gdn/rrc/RRCV_77_paper_03.pdf
Jarmuzek M, Polgar EK, Matousek R, Hölscher J et al (2006) Fiscal transparency in transition economies. Center for Social and Economic Research, Warsaw
Kaufmann D, Kraay A, Zoido-Lobatón P (2005) Governance matters IV: governance indicators for 1996–2004. World Bank Policy Research Paper 3630. Washington, DC, United States
Kopits G, Craig J (1998) Transparency in government operations. IMF Occasional Paper 158. Washington, DC
La Porta R, Lopez-de-Silanes f, Shleifer a, Vishny RW (1998) Law and finance. J Political Econ 106(6):1113–1155
La Porta R, Lopez-de-Silanes F, Shleifer A, Vishny RW (1999) The quality of government. J Law Econ Organ 15(1):222–279
Lindbeck A, Weibull J (1987) Balanced-budget redistribution as the outcome of political competition. Public Choice 52:273–297
Milesi-Ferretti GM (2004) Good, bad or ugly? On the effects of fiscal rules with creative accounting. J Public Econ 88:377–394
Petrie M (2003) Promoting fiscal transparency: the complementary roles of the IMF, financial markets, and civil society. IMF Working Paper WP/03/199. International Monetary Fund, Washington, DC, United States
Putnam R, Robert L, Raffaella N (1993) Making democracy work: civic traditions in modern Italy. Princeton University Press, Princeton
Rencher AC (1992) Interpretation of canonical discriminant functions, canonical variates, and principal components. Am Stat 46(3):217–225
Taube G (2004) Fiscal transparency—overview and experience. In: Presentation at the first annual conference of the Caribbean Public Finance Association (CAPFA), November 23–24
Vyas S, Kumaranayake L (2006) Constructing socio-economic status indices: how to use principal components analysis. Health Policy Plan 21(6):459–468
Weber M (1958) The protestant ethic and the spirit of capitalism. Free Press, New York
World Bank (2007) World Development Indicators. CD-ROM. World Bank, Washington, DC, United States
Author information
Authors and Affiliations
Corresponding author
Additional information
We acknowledge comments, suggestions, and assistance from Gabriela Carbajal, Marina Duque, Jorge Guillen, Gonzalo Llosa, Camila Morales, Michelle Perez, and Vanessa Rios.
Rights and permissions
About this article
Cite this article
Andreula, N., Chong, A. Do good institutions improve fiscal transparency?. Econ Gov 17, 241–263 (2016). https://doi.org/10.1007/s10101-015-0175-8
Received:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s10101-015-0175-8