The Economic Power of Veto Players The Connection between Fiscal Policies, and Political Systems

Abstract

The present paper explores the correlation between political systems, and fiscal policies, very much in the footsteps of the seminal work by Roubini and Sachs (1989), thus focusing on the relative dispersion or concentration of political power as the main political characteristic. The principal theoretical goal is to predict those changes in fiscal policy that may be induced by modifications in the partisan structure of political systems, as compared to cross-sectional differences between constitutional systems. Following the distinction between the cash-based, and the accrual based approach to public finance, the paper attempts to study the government’s fiscal stance as capital balances, besides treating the current flows. The theoretical model introduced in this paper attempts to define the possible appropriation of liquid assets in the public sector, starting from the basic fiscal equation. Empirical research presented consists of both a quantitative, econometric part, and qualitative case studies. The classification of political systems is based on the distinctions introduced in the Database of Political Systems, as published by the World Bank. Said distinctions regard the possible concentration of power in the hands of a president, and the degree of proportionality in the electoral regime; they form the constitutional frames of the political system. The degree of political polarization regarding economic policy is the main measure of partisan fragmentation. Quantitative research allowed concluding that political systems do differ as for the amount of liquid capital held by the public sector. Three broad clusters of countries were defined, regarding their political systems, and these clusters display a significant disparity as for the observable fiscal stance. Case studies sampled from those clusters lead to conclude that the amount of liquid assets held by the public sector changes in close correlation to political polarization. The main path open for future research is the question whether fiscal variables can indicate pre-emptively the emergence of political veto players, even before their official appearance in the partisan, or the constitutional structure.