Determinants of Public Spending Composition in OECD and MENA Countries: A Political Economy Approach

Introduction

This chapter examines the effects of economic, political economy and institutional factors on different public spending components for OECD (Organization of Economic Cooperation and Development) and MENA (Middle East and North Africa) countries during the period 1980-2008. The authors concentrate on six public spending components: agriculture, education, health, defense, social protection, and transportation – communication. The authors argue that the political decision making process about the public spending levels and composition are affected by not only macroeconomic factors but also by political and institutional factors. Two streams of political viewpoint are usually focused in the related literature. According to the opportunistic approach, in order to attract more electorate votes, win the elections, and be reelected into office the incumbent government’s members can engage into expansionary fiscal policy and increase public spending levels especially on more visible public spending components. On the other hand, if the incumbent government’s policy makers expect to lose the next elections and be replaced by a rival political party, then they may still pursue expansionary fiscal policy designs, this time to increase the public debt burden on their rival political party in the next term.

In this chapter the authors mainly concentrate on the partisan theory and partisan motivation approach. According to partisan theory welfare state and redistributive public finance management can be explained by partisan factors. Partisan theory is usually broken down into two research streams: Power resources theory and party difference theory. Power resources theory argues that the major responsibility of political parties is to reflect different socio – economic classes’ interests in their policy implementations and act upon those groups’ behalf (Guleryuz, 2013, Bradley et al., 2003, Hicks, 1999, Huber and Stephens, 2001, and Esping-Andersen and Korpi, 1985).

Party difference theory argues that political parties forming the government can affect public policy outcomes, so public policies are not determined by macroeconomic and institutional (exogenous) factors. Furthermore, left – wing and right – wing government parties follow different agendas, and so they pursue different policy objectives. The reasoning behind this statement is that political parties form their policy choices and strategies based on their social class-based constituencies’ objective economic interests. In this way they can actively use the public policy outcomes which they achieve for the appeal and consolidation of their core electoral base (Hibbs, 1977 and 1987, Schmidt, 1996, Castles, 1982, and Busemeyer, 2009). Therefore, different political parties have conflicts over distribution of economic resources, aggregate income and welfare. Related studies state that since right- wing parties represent capital owners and upper income groups they don’t support expansionary fiscal policies. Contrary to this, left – wing parties are supported by low income groups, so they pursue more redistributive public policy preferences (Huber and Stephens, 2001). This can also be exemplified in public education sector. Social democratic parties that are left – wing prefer to invest more in public education (human capital accumulation) to purposefully direct aggregate wealth towards less privileged groups and achieve a more egalitarian society. On the other hand, right- wing parties such as conservative parties prefer policies that will lead to free market outcomes and private sector solutions, and decrease the tax burden of their upper income class electoral base rather than pursuing higher public education spending which favor low income groups (Boix, 1998).

Some recent studies propose ‘the new partisan politics of public investment’ (Busemeyer, 2009, Iversen 2006a and 2006b). According to this view, political parties observe opinions and preferences of various socio – economic classes in different areas. Then, they essentially utilize public policies to attract and appeal to new voter groups, while simultaneously consolidating their core electoral base constituencies.