Presidential Term Limits and Fiscal Policy in Latin America Maria Elena Guadamuz PhD Student, UCLA
Motivation • M: • 1.) Responsible fiscal policy is one of the key features the “Washington Consensus” emphasized for better economic performance in Latin America. • 2.) Research on fiscal policy in the region has emphasized such things as: • Budget institutions • The electoral budget cycle • Party Institutionalization • The number and size of parties • Party discipline, and • Party distance or ideological polarization
Motivation • 3.) But surprisingly, there is little research focusing on the executive. • This is surprising because Latin American executives enjoy many prerogatives concerning policy making. • Thus, this study seeks to provide new insights into how institutions shape Executives’ behavior and their fiscal policy. • I have chosen term limits because it captures time horizon and the electoral cycle; reputation building incentives. • The many changes in term limits in Latin America reflects how important they are. For example: Argentina, Brazil, Colombia, Costa Rica, Nicaragua, and Venezuela.
U.S. and Cross-Country Studies • There are two important studies my project builds off of which have established a relationship between term limits and fiscal policy. • Besley and Case (1995). Study on U.S. Governors from 1950-1986. • 1st: Income taxes increase during final term period. • 2nd: State spending increases during final term period. • Johnson and Crain (2004). Study on the effect of term limits on fiscal performance: Evidence from democratic nations. • 1st One term limit countries have levels of government spending grow over time compared to two term limit countries or no term limits. • 2nd: Two term limit countries have greater levels of fiscal volatility but not to the expansion of government over time.
Premise Term limits affect Fiscal Policy • Why? • When executives face a binding term limit they do not have an incentive to reputation building since they are leaving office. • Thus, responsible fiscal policy is expected to occur when executives need to maintain a good reputation.
DATA • My study applies the general model presented by Johnson and Crain to Latin America between 1970-1999. • Dependent Variables: Fiscal Spending and Tax Revenues. Penn World Tables and IMF. • Independent Variable: Term Limit (1/0) • Covariates include: Democracy, Population Size, Population Density, Income per capita, trade openness, Government Expenditures per capita (1970), and Inflation.
OLS, panel corrected standard errors Binding term limits have an effect on fiscal policy. Principal finding: When an incumbent faces a binding term limit, government spending (as a % of GDP) by 2.5%, from 16.1% to 19.4%. When an incumbent faces a binding term, tax revenues decrease by -0.9% (from 19.1 to 18.2%). My results for government revenue differ from Johnson and Crain (2004), leading me to believe that the effects of uncontrolled spending can have more dramatic effects in the context of Latin America. Preliminary Results
Future Research • Potential Endogeneity. • I will consider the following methods to control for endogeneity? • Matching • Instrumental variables/ 2 stage least squares regression • For future research I plan on exploring the effects of term limits to market reform measures such as trade, privatization, financial reform, and tax. • Thank you • Questions?