How socioeconomic contexts complement contingent factors in examining government expenditure
Yonsei researcher Whasun Jho takes a deeper dive into how institutions and social capital affect economy and help us better understand future outcomes
How much should the government intervene in economic activities, and how do current organizational change and socioeconomic traditions in the public sector affect this determination?
Previous studies have focused on how contingent factors such as economy and partisanship can affect government involvement and expenditure, but in “Socioeconomic Contexts of Government Expenditure Across OECD Countries,” Yoo and Jho also consider socioeconomic traditions of a country—trust and state–business relations—to highlight the diverse business systems and subsequent varieties of capitalism that appear across countries.
Their hypotheses challenge and then confirm that changes in economic activities, such as the decrease of government expenditure, can be sustainable when balanced attention is paid to both contingent and contextual factors alongside broader trends, such as globalization and a preference for “small government.”
A new method of examination
Yoo and Jho examine the relationship between government size as measured by the ratio of expenditure to gross domestic product and the socioeconomic traditions of a specific country, the latter of which is defined by social norms that affect the institutional and organizational characteristics of a country.
Their study uses panel data from 1995 to 2008 for 29 Organization for Economic Co-Operation and Development (OECD) countries, and finds that the variation of each socioeconomic characteristic is constant and relatively stable. Sources of data include the OECD Statistics Portal, United Nations Conference on Trade and Development, and individual studies on political positioning and legal factors. The panel employed in this study comprises corrected standard errors estimation using STATA (version 11), and it presents the outcomes of fixed effects and feasible generalized least squares estimations.
By incorporating trust (i.e., the general inclination of people to have faith in fellow citizens) and state–business relations (SBR) into commonly observed factors such as government debt and trade, the authors examine why, for example, some countries maintain a large government in the face of overwhelming government debt and low levels of trust.
But what do trust and SBR have to do with government spending?
The level of trust within a country helps predict the size of government expenditure by determining the required level of government involvement in economic activities. In a country with high internal trust, for example, transactions between organizations will have low levels of friction and perceived risk. High trust, then, should result in small government because of the decreasing need for government intervention. In contrast, if a country shows low trust, there could be higher boundaries between organizations regardless of whether they operate in public or private sectors.
Each country’s SBR level, or the extent to which a country is familiar with government intervention in economic activity, was determined by the following seven componentsoftheIndex of Economic Freedom: freedom of business, trade, investment, and labor; fiscal freedom; monetary freedom; and property rights.
The study shows that tighter SBR increases government expenditure , whereas higher trust decreases it. For example, economies with high trust and loose SBR, such as the United Kingdom, are more inclined to rely on the private sectors.
Yoo and Jho found that, across their sample countries, the coefficient of 0.001 of trust indicated that the increase of trust by 10% resulted in the decrease of government expenditure by 1%, which, in an empirical analysis, is far from meaningless.
Other country-specific examples
Every country is different in terms of the practices that reflect individuals’ economic activities and the extent to which government intervention into these activities matters; hence, previous studies have shown inconclusive and distinct trajectories when exclusively focusing on contingent factors.
Yoo and Jho use various country-specific case studies to help us reconsider how to organize sustainable practices when implementing changes to economic activities, and remind us that changes in government expenditure reflect the socioeconomic traditions of a country.
The French government has consistently maintained large government expenditure and involvement (e.g., state-owned enterprises), despite low levels of trust within the country. This illustrates the positive relationship between tight SBR and government expenditure in an environment of low trust.
In German society, both trust and SBR have remained relatively high; however, the study’s data show that its government expenditure has steadily decreased since the mid-1990s. This illustrates the moderating effect of trust on the relationship between SBR and government expenditure.
Yoo and Jho show us how the organizational traditions of a country affect the extent to which they can be combined with new ideas and trends. This, however, inevitably means that each country has different system-level behavior and organizational heterogeneity. In addition, levels of trust can vary within a single country, verifying that there is no general form of organizational change, and that the outcomes—such as indications of government expenditure and involvement—cannot be understood apart from countries’ embedded socioeconomic traditions.
Professor M. Jae Moon
Professor Jeonghye Choi