On democracy, transparency and economic policy: Theory and evidence

This dissertation examines how the economic choices of election-motivated policymakers relate to democracy and transparency. The first chapter seeks to explain the strong emergence of Political Budget Cycles in “imperfect democracies” when compared to well-developed political systems. We explicitly analyze the link between election cycles in fiscal policy and the country's “index of democracy”, that is reflected in the cost that the voters bear when enforcing the political turnover after each election, and to the “index of transparency” that measures the magnitude of the economy's information asymmetry. We show that it is precisely the lack of democracy that may generate the incentives for the cycles to emerge.; The second chapter builds on former literature that tests whether there is a significant impact of the election calendar on economic policy. Our analysis goes a step further, seeking to identify whether a country's time-varying degree of democracy affects the way in which economic policy is chosen as elections approach. A simple econometric model is estimated for the case of Mexico's fiscal policy between 1957 and 1997. The estimation reveals the government's strong systematic use of public spending in infrastructure and current transfers as a mean to earn votes. Most importantly, we show that the magnitude of the election cycle has been exacerbated during the country's most democratic episodes.; The last chapter presents a simple model of political accountability and asymmetric information. We analyze the welfare implications of promoting transparency in developing countries. The study endogenizes the provision of credible public information about the state of the economy, and examines three different mechanisms by which higher information flows may be induced. We show that, as opposed to the conventional wisdom, politicians may prefer to reveal accurately the economic conditions they face, while citizens may be better-off under asymmetric information. Hence, policies seeking to induce information flows must be tailored to the specific country's characteristics; in particular, to the nature of the shocks hitting its economy, and to the level of development of its information structure.