“In the face of this lack of knowledge [about the consequences of the deficit], there was not much agreement on how important it was to reduce the deficit or how fast it needed to be done.” -Rubin (2003), summarizing her extensive interviews with legislators and other policymakers about the U.S. budget making process.

Disagreement, Delay, and Deficits Jessica Wallack Graduate School of International Relations and Pacific Studies University of California, San Diego

Why are fiscal (and other) reforms delayed? Distributional conflict … … but how does distributional conflict turn into delay? The accuracy, timeliness, and availability of social and economic data varies widely across countries. When publicly available data is less timely and less accurate, policymakers rely more on heterogeneous private data or personal experience to determine the appropriate policy. Greater reliance on private information leads to greater variance of beliefs about the world - more disagreement. Disagreement among policymakers about the objective economic situation delays resolution of distributional conflict.

Consequences of Inaccurate Information: Mean Effect vs. Variance Effect Mean Effect Inaccurate common information shifts average policymaker’s belief Opinions about cost of deficit The presence of common information reduces variation in beliefs… … however, less accurate common information reduces variation less. Variance Effect Opinions about cost of deficit

Findings Countries with accurate economic statistics reduce high deficits faster than countries with less accurate economic statistics. Executive-centered systems also reduce high deficits faster

Measuring Information Quality Ideal Measures: Reputation of data among policymakers in each country Objective size of error in data Feasible Measures: Variance of price level estimates (Penn World Tables) Information Index: First Principal Component of: Penn World Tables Variance (0.284) Ability to Monitor: external data reputation (0.535) World Bank Rating: coverage, frequency, timeliness (0.588)

Third Variables and Other Influences: Political and Governance Culprits Political Institutions (DPI) Executive-centered (0) / Parliamentary (2) # of veto players Degree of polarization among veto players Democracy (Polity IV Index) Level of Development (log GDP per capita) Transparency (ICRG, 0-6) Quality of Bureaucracy (ICRG, 0-6) Debt Burden (Lagged)

Spearman Correlations Information Quality, Political Institutions, Governance Mon. Capcy PWT Var. WB Rating Info Index Parl Polarization # Chx Democ Ln GDP Trans Monitoring Capacity 1.000 PWT Variance 0.279 0.307 0.182 Info Index 0.716 0.378 0.819 Parliamentary 0.415 0.080 0.184 0.167 0.342 0.334 0.405 0.280 0.286 # Checks 0.346 0.282 0.490 0.332 0.581 0.708 Democracy 0.460 0.299 0.347 0.292 0.587 0.603 0.746 1.00 Ln(GDPpc) 0.620 0.395 0.387 0.488 0.497 0.601 0.645 0.649 Transparency 0.564 0.290 0.271 0.487 0.518 0.473 0.602 0.650 Bur. Quality 0.657 0.275 0.198 0.277 0.550 0.479 0.572 0.557 0.699 0.757

Accuracy of Economic Statistics

Measuring Delay Deficits: A panel of “policy stance” observations. Various Measures: (1) Primary, (2) Central Government, (3) Consolidated CG, (4) Public Sector All measures scaled: + deficit, - surplus Error Correction Model: Estimates percent of above – (country) average deficit eliminated annually. Allows for Asymmetric Adjustment Controls for economic fluctuations.

Summary Statistics Observations Mean Standard Deviation Minimum Maximum Primary Deficit/GDP 2234 0.689 4.790 -23.800 46.272 Deficit/GDP 3239 3.214 5.224 -22.631 66.231 CCG Savings/GNDI 2750 -2.546 6.220 -38.316 46.307 Public Sector Deficit 804 4.171 4.889 -10.400 27.400 PWT Variance 5240 0.783 0.243 0.200 1.000 Monitor 4800 0.522 0.321 0.000 WB Rating 4960 0.466 0.231 0.875 Info Index 2960 2.604 4.932 Parliamentary 6760 0.769 0.835 2.000 Polarization 6720 0.339 0.569 # Checks 2.430 1.388 7.333 Ln(GDPpc) 5021 8.200 1.047 5.639 10.692 Transparency 4720 3.345 1.389 0.107 6.000 Bur. Qual. 3.206 1.505 0.893 Democ Index 5031 3.752 4.213 10 Democracy (>4, Polity Scale 0.432 0.495 1

Basic Error Correction Model with Asymmetric Adjustment Δdt = α +β1 (dj,t-1 – dj*) +β2 T*(dj,t-1 – dj*) +α1 Shocksj,t-1 +vjt β1 : Speed of deficit growth for relatively small deficits (-) β2 : Incremental effect on adjustment speed for relatively large deficits (+) β1 + β2 : Speed of deficit reduction for relatively large deficits (-)

Significant Asymmetry Primary Deficit/GDP Deficit/GDP Public Sector Deficit/GDP CCG Savings/ GNDI Distance from mean: b1 -0.474*** -0.380*** -0.370*** -0.261*** (0.078) (0.046) (0.069) (0.035) Distance from mean* Above mean: b2 0.209** 0.156** 0.076 0.065(*) (0.094) (0.075) (0.091) (0.040) Observations 1871 2732 756 2367 Countries 88 104 46 113 R2 0.18 0.146 0.133 0.078 Control Variables: Growth Changes. Robust standard errors in parentheses *** Significant at 1%; ** Significant at 5%; * Significant at 10%. (*) Significant at 15%.

Political and Information Effects: Fixed Effects with Interaction Terms Δdt = α +β1(dj,t-1 – dj*) +β2 Tj,t-1*(dj,t-1 – dj*) +β3 Infoj*(dj,t-1 – dj*) +β4 Infoj*Tj,t-1*(dj,t-1 – dj*) +β5k Poljk *(dj,t-1 – dj*) +β6k Poljk *Tj,t-1*(dj,t-1 – dj*) +α1Tj,t-1 + α2Tj,t-1*Infoj + α3kTj,t-1*Poljk + α4Shocksj,t-1 +μj+ɛjt Sum gives “Information Effect” on deficit reduction speed Sum gives “Political Effect” on deficit reduction speed

Slow Adjustment, Below-Average Information Quality Deficit Reduction Speed: -0.281 Information Rating: 0.6

Medium Adjustment, Below Average Information Quality Deficit Reduction Speed: - 0.417 Information Rating: 0.60

Faster Adjustment, Better Information Quality Deficit Reduction Speed: -0.596 Information Rating: 0.8

Medium Adjustment, Best Information Quality Deficit Reduction Speed: -0.468 Information Rating: 1

Fast Adjustment, Best Information Quality Deficit Reduction Speed: -1.070 Information Rating: 1.00

More accurate information associated with faster deficit reduction Findings More accurate information associated with faster deficit reduction Executive-Centered associated with faster deficit reduction than parliamentary government Polarization, checks & balances, governance: no statistically significant effect.

Effect of Information Accuracy on Deficit Reduction Speed: (b3 + b4 ) Info. Var./ + Control Var. Primary Deficit/GDP CG Deficit / GDP Public Sector Deficit/GDP CCG Dissavings/GNDI PWT Variance -0.031 -0.144 -0.091 -0.241*** + Parliament -0.124(*) -0.262* -0.010 -0.334*** + Polarization -0.251*** -0.311* 0.006 -0.364*** + # Checks -0.194*** -0.230* -0.365*** + Ln(GDPpc) 0.017 -0.068 -0.081 -0.395*** + Bur. Qual. -0.218** -0.212* 0.039 -0.442*** + Transparency -0.140* -0.193** 0.003 -0.394*** + Democracy -0.171** -0.238* -0.073 -0.378*** + Lagged Debt -0.362** -0.407*** -0.029 -0.294*** Extra percentage points of above-average deficit reduced in a given year from having maximum (1) information quality instead of minimum (0).

Effect of Information Accuracy on Deficit Reduction Speed (Information Index) Info. Var./ + Control Var Primary Deficit/GDP CG Deficit / GDP Public Sector Deficit/GDP CCG Dissavings/GNDI Info Index 0.086 0.013 -0.095(*) -0.038*** + Parliament 0.091(*) 0.011 -0.098(*) -0.040** + Polarization 0.119** 0.009 -0.108(*) -0.021 + # Checks 0.002 -0.099(*) -0.018 + Ln(GDPpc) 0.121(*) 0.006 -0.088 -0.042(*) + Bur. Qual. 0.092(*) -0.072* -0.091*** + Transparency 0.018 -0.064(*) -0.056** + Democracy 0.085 0.008 -0.111* -0.032(*) + Lagged Debt -0.003 0.050 -0.101(*) Extra percentage points of above-average deficit reduced in a given year from an increase of 1 standard deviation of information index.

Primary Deficit vs. Public Deficit (Low Information Quality)

Primary Deficit vs. Public Deficit (Higher Information Quality)

Effect of Political Institutions on Reduction Speed Pol Var/ Info. Var Prim Deficit/GDP CG Deficit/ GDP PS Deficit /GDP CCG Dissavings/GNDI Parliamentary PWT Var 0.119*** 0.003 0.112*** 0.066* Info Index 0.122*** 0.025 0.101 0.048 Polarization 0.071** 0.035 0.028 0.001 0.434 0.039 0.087 -0.142 Checks 0.033 -0.016(*) 0.063** 0.004 0.032 -0.041 Democracy 0.006 -0.037*** 0.022 -0.009 0.008 0.02 -0.007

Effect of Governance Quality on Reduction Speed Governance Var./ Info. Var Prim Deficit/GDP CG Deficit/ GDP PS Deficit /GDP CCG Dissavings/ GNDI Level of Development PWT Var 0.002 -0.065 0.003 0.048* Info Index -0.149(*) 0.017 -0.028 0.011 Bureaucratic Quality 0.064* -0.016 0.021 0.038(*) 0.088 0.121(*) -0.105 0.118*** Transparency -0.003 -0.023 0.031*** 0.013 -0.061 0.046(*) -0.167 0.064

Information and Economic Outcomes Demonstrated connection between information quality and speed of policy change Implication: better data improves policymaking as well as policy. credible economic and social data speeds reform important to provide policymakers with information they perceive as relevant and useful.

New Avenues for Research Why is more accurate economic information associated with faster reform? Testing “variance effect” more directly: Interaction with country institutions, specific reform settings Interaction with underlying disagreement Other questions to ask about data: Bias of data providers Timeliness What factors lead to investment in better publicly available information?

“In the face of this lack of knowledge [about the consequences of the deficit], there was not much agreement on how important it was to reduce the deficit or how fast it needed to be done.” -Rubin (2003), summarizing her extensive interviews with legislators and other policymakers about the U.S. budget making process.

Significant Asymmetry Benchmark: Sustainable Deficit Primary Deficit/GDP Deficit/GDP Public Sector Deficit/GDP CCG Savings/ GNDI Distance from mean: b1 -0.411*** -0.130(*) -0.103 -0.084* (0.089) (0.086) (0.096) (0.051) Distance from mean* Above mean: b2 0.135 -0.176 -0.101 0.059** (0.125) (0.135) (0.088) (0.026) Observations 739 1000 221 802 Countries 43 58 23 57 R2 0.245 0.16 0.072 0.074 Control Variables: Growth Changes. Robust standard errors in parentheses *** Significant at 1%; ** Significant at 5%; * Significant at 10%. (*) Significant at 15%.

Effect of Information Accuracy on Deficit Reduction Speed: (b3 + b4 ) Benchmark: “Sustainable” Deficit Info. Var./ + Control Var. Primary Deficit/GDP CG Deficit / GDP Public Sector Deficit/GDP CCG Dissavings/GNDI PWT Variance -0.095 -0.031*** -0.035 -0.055 + Parliament -0.083 -0.056*** 0.020 -0.050 + Polarization -0.186* -0.076*** -0.017 -0.067 + # Checks -0.116(*) -0.063*** 0.005 -0.045 + Ln(GDPpc) -0.225* -0.070*** 0.032 -0.163* + Bur. Qual. -0.108 -0.020(*) -0.001 + Transparency -0.040** -0.056 + Lagged Debt -0.101 -0.026* -0.020 -0.092 Extra percentage points of above-average deficit reduced in a given year from having maximum (1) information quality instead of minimum (0).

Deficit Reduction Speeds: Individual Country Estimates Deficit Measure # Countries Mean Std. Deviation Minimum Maximum Primary Deficit 88 -0.274 0.400 -2.186 0.929 CG Deficit 104 -0.358 0.313 -1.206 0.536 CCG Dissaving 113 -0.225 0.291 -1.268 0.574 Public Sector Deficit 46 -0.318 0.264 -1.068 0.141

Adjustment Speed and Information Quality (OLS on Country Estimates) Speed of PS Deficit Reduction Speed of CCG Dissavings Reduction PWT Variance -1.875 -1.463*** (1.693) (0.483) PWT Var (Sq) 1.340 1.080*** (1.112) (0.375) Constant 0.261 0.194 (0.616) (0.137) Max Adjustment Spd 0.700 0.677 # Observations 43 101 R-sq 0.015 0.062 Robust standard errors in parentheses.

Adjustment Speed and Information Quality (OLS on Country Estimates) Speed of PS Deficit Reduction Speed of CCG Dissavings Reduction Information Index -0.122 -0.044* (0.094) (0.255) Constant -0.266** -0.254*** (0.106) (0.039) # Observations 20 56 R-sq 0.116 0.026 Robust standard errors in parentheses.