Essays on the Political Economy of Public Finance

In this thesis, we examine the political economy of public finance. I provide a general introduction to the thesis in Chapter 1. In Chapter 2, I examine the determinants and interrelationship of different types of government expenditure using data on 73 countries for the period 1990-2016. The results show foreign aid receipts and urbanization have raised total expenditure, but external debt stocks have reduced total expenditure. Also, there is a substituting relationship between expenditures on social protection and pure public goods, and education and defence, but complementary relationship between all other categories of government expenditure. In Chapter 3, we provide an up-to-date empirical assessment of the relationship between economic globalisation and government spending for the ‘hyper-globalisation’ period of the 1990s and 2000s. The results suggest that hyper-globalisation has had divergent and conflicting effects on consumption spending: while the globalisation of trade has tended to raise spending, the globalisation of finance and foreign investment has tended to reduce it. However, the size of the effects is quite small, and there is no evidence that spending has risen by more in countries which are particularly prone to terms of trade shocks. In Chapter 4, I examine the mediating effect of democracy in explaining the relationship between decentralization and government size for the period 1970-2013. I proxy decentralization by fiscal decentralization, use total spending as our primary measure of government size, and adopt the V-Dem high-level democracy indices as measures of democracy. I use the fixed effects estimator with Driscoll-Kraay standard errors and the instrumental variable estimation technique. Our main finding is that fiscal decentralization and democracy in themselves are effective tools to ‘starve the beast’ as they lead to reduced government size, with the former suggesting support for the Leviathan hypothesis. I find evidence of the mediating effect of democracy in the relationship between decentralization and government size; a positive and statistically significant effect of the interaction term with the effect size largest for participatory democracy. We do not find a non-linear relationship between decentralization and government size. In Chapter 5, we examine how local governments’ political alignment with the central government affects subnational fiscal outcomes. We analyze data from Ghana, which has a decentralized political structure with substantial political and fiscal powers delegated to the district level, and high dependency on intergovernmental transfers. Using a regression discontinuity design for a new dataset for 1994-2014, we find that districts with an aligned Member of Parliament and District Chief Executive (DCE) receive more transfers and have higher expenditures. In a second step, we instrument transfers and estimate a flypaper effect for Ghanaian districts