Essays on the Political Economy of Government Fragmentation

Abstract

This PhD thesis presents empirical evidence about the effects of political fragmentation on some of the main political challenges society has faced to date in the 21st century. For governments to behave in their citizens’ best interests, they need to take responsibility for the actions they implement and offer satisfactory reasons for the policies they adopt. Therefore, it is crucial to guarantee that political fragmentation does not undermine their accountability. Specifically, this thesis has first analysed the effect of government fragmentation on political corruption by determining whether fragmented governments (non-majority) are more likely to find themselves embroiled in corruption scandals. Second, this thesis has examined the effect of political fragmentation (entry of one additional party in the legislature) on the implementation of fiscal consolidation. Finally, continuing with the study of fiscal consolidation, this thesis has analysed clarity of responsibility and the electoral effects of the implementation of fiscal adjustments in a multi-level governance setting.

The second chapter of this thesis has examined the relation between government fragmentation and political corruption in the period 1999-2007. A matching procedure restricts the sample to majorities and non-majorities that are otherwise identical in a set of political variables. After matching, these municipalities are also similar in terms of a broad set of socio-economic traits that might correlate with corruption. In short, the only difference between the municipalities being compared is the government type (majority vs. non-majority). The results indicate that, in close elections (+/– 1 seat), the presence of a fragmented government is not associated with a higher probability of corruption. This outcome sheds light on the political and media debate in 2014 when the national government specifically sought to promote the formation of majority governments to avoid corruption. Moreover, the analysis carried out in the second chapter actually detects that some fragmented governments are less likely to be corrupt than majority governments. Indeed, non-majority governments supported by a pivotal party – that is, parties able to enter into agreements with either ideological bloc – are less corrupt. This result is consistent with a narrative according to which coalition partners are more willing to denounce political corruption when they have other options when it comes to forming a pact. Thus, with regards to limiting corruption, policies should seek to promote the presence of more neutral political groups that can act as pivotal parties.

In an examination of the effects of political fragmentation on the way in which fiscal consolidation is implemented, the third chapter offers empirical evidence for a situation characterised by the presence of Fiscal Rules limiting deficits and new debt. This framework is becoming the standard setting for more and more local and regional governments in advanced democracies. By analysing the intra-term variation (2011-2014) of the main budgetary aggregates, the results show that political fragmentation has a relevant impact on fiscal consolidation and the resulting size of the budget. Increasing the political fragmentation of a legislature (in this chapter, the entry of one additional party) shifts the focus of fiscal consolidation from expenditure reductions to an increase in revenues. Thus, the resulting budget increases as the number of parties in the legislature expands. However, this effect is only significant when the overall fragmentation is not especially large. When legislatures already include more than four parties, the entry of one more party is not significant. Likewise, the fact of having to face financial difficulties also offsets the effect of increasing political fragmentation in a municipality. In times of economic problems, fiscal consolidation centres on expenditure cuts, irrespective of the level of political fragmentation. The results indicate that political fragmentation does not impact the effectiveness of fiscal consolidation, but that it does impact the approach adopted.

Continuing with this examination of fiscal consolidation, the fourth chapter of this thesis has examined the political accountability of fiscal adjustments by analysing their electoral cost in Spain’s system of multi-level governance. Political accountability in the case of fiscal adjustments may be weakened in multi-level governance systems as different tiers of government share fiscal responsibilities across the same population. These shared responsibilities may affect the clarity of responsibility and, hence, the electorate’s ability to attribute credit or blame to a government for its actions. Moreover, each level of government has the incentive to blame the adverse economic outcomes on the performance of upper levels of government in that same system. By measuring the evolution of the incumbents’ share of votes before and after the implementation of fiscal adjustments, the study provides causal evidence that voters punish the political party responsible for the application of fiscal adjustments (a tax increase in the cases studied here). The literature to date has been unable to provide a conclusive answer as to whether voters approve or disapprove of the application of fiscal adjustments and, so, this result represents a relevant contribution insofar as the setting considered overcomes some of the concerns of analyses of this kind, most notably problems of reverse causality and endogeneity.

In short, this thesis has taken a broad focus on possible concerns associated with political fragmented and multi-level governments. The studies show that fragmented governments or legislatures represent neither increased risks of corruption (compared to majority governments) nor for fiscal consolidation (even if implemented differently). Moreover, the results are in line with the argument that political fragmentation does not diminish accountability. Accountability holds firm in multi-level governments, because of the persistence of clarity of responsibility in such systems of governance, with each tier of government being held responsible for its own actions. As a consequence, the benefits of increasing political fragmentation – insofar as voters can choose a party whose ideas are closer to their own political preferences – or decentralisation – with local governments being in a better position to address local problems – are not undermined by an objective malfunction of institutions of this type.