Chaebol 48

British Journal of Political Science
http://journals.cambridge.org/JPS
Additional services for British Journal of Political Science:
Email alerts: Click here

Subscriptions: Click here
Commercial reprints: Click here
Terms of use : Click here
Targeting Public Spending in a New Democracy: Evidence

from South Korea
HYEOK YONG KWON
British Journal of Political Science / Volume 35 / Issue 02 / April 2005, pp 321 - 341
DOI: 10.1017/S0007123405000177, Published online: 21 February 2005
Link to this article: http://journals.cambridge.org/abstract_S0007123405000177
How to cite this article:

HYEOK YONG KWON (2005). Targeting Public Spending in a New Democracy: Evidence from
South Korea. British Journal of Political Science, 35, pp 321-341 doi:10.1017/
S0007123405000177
Request Permissions : Click here
Downloaded from http://journals.cambridge.org/JPS, IP address: 128.122.253.228 on 04 May 2015

B.J.Pol.S. 35, 321–341 Copyright  2005 Cambridge University Press
DOI: 10.1017/S0007123405000177 Printed in the United Kingdom
Targeting Public Spending in a New Democracy:

Evidence from South Korea
HYEOK YONG KWON*
Empirical studies of electoral competition and public policy in new democracies have been relatively
underdeveloped. This article investigates the election–policy outcome link in a ‘hard case’ setting: South Korea
in 1988–97. Contrary to expectations derived from the bureaucratic insulation or fiscal co-ordination argument,
this study suggests a systematic impact of electoral competition on levels and distributive patterns of public
spending. The analysis finds that levels of government expenditure increased according to the electoral
calendar. Also, national subsidies tended to be allocated to ‘swing’ provinces in which electoral contests are
competitive. The results of the analysis clearly show that fiscal policies in democratizing Korea are to a
significant extent determined by electoral politics.
1. I N T R O D U C T I O N
Do incumbents in new democracies manipulate public spending in accordance with

electoral incentives? In what way do incumbents target the distribution of public spending
to bring about desired political effects? Studies of the extent to which politicians
manipulate the economy for electoral purposes have produced contrasting results, both
theoretically and empirically. Theoretically, it is their contrasting assumptions about the
rationality of voters that divide the two branches of opportunistic political business cycle
theory. The traditional view assumes that voters are myopic and cannot see what motivates
politicians’ systematic manipulation of the economy,1 whereas rational political business
cycle theory suggests that voters are rational but not fully informed about the incumbent’s
‘competence’.2 Either way, both theories predict that politicians have incentives to
manipulate the economy before elections.
Empirical evidence of political business cycles has been mixed. Whereas Alesina et al.
find no systematic pattern of opportunistic manipulation of the economy across the OECD
countries, Kiefer finds evidence that supports traditional theories of political business
cycles in the OECD countries.3 Some studies of less developed countries have found
* Department of Political Science, Texas A&M University. Earlier versions of this article were presented at
the Comparative Political Economy of Developed and Less Developed Countries Workshop, Yale University,
2001, and at the Annual Meeting of the American Political Science Association, Boston, 2002. The author is
grateful to Robert Franzese, David C. Kang, Peter Katzenstein, Walter R. Mebane Jr, Jonas Pontusson, James
Vreeland and Christopher Way for their helpful comments and suggestions. Research for this article was in part
supported by the East Asia Program and the Einaudi Center for International Studies at Cornell University. All
errors are solely the author’s own responsibility.
1
William Nordhaus, ‘Political Business Cycle’, Review of Economic Studies, 42 (1975), 1969–90; Edward
R. Tufte, Political Control of the Economy (Princeton, N.J.: Princeton University Press, 1978).
2
Kenneth Rogoff and A. Sibert, ‘Elections and Macroeconomic Policy Cycles’, Review of Economic Studies,
55 (1988), 1–16; Kenneth Rogoff, ‘Equilibrium Political Budget Cycles’, American Economic Review, 80 (1990),
21–36; Torsten Persson and Guido Tabellini, Macroeconomic Policy, Credibility, and Politics (Chur, Switzerland:
Harwood Academic Publishers, 1990).
3
Alberto Alesina and Nouriel Roubini, with Gerald D. Cohen, Political Cycles and the Macroeconomy
(Cambridge, Mass.: The MIT Press, 1997); David Kiefer, ‘Activist Macroeconomic Policy, Election Effects, and
322 KWON
empirical evidence consistent with theories of opportunistic political business cycles.

Systematic increases of public spending in election years have been found in Latin
America,4 across developing countries or recently in the Russian transitional setting.5 Not
all empirical studies of less developed countries, however, have confirmed the prediction
of opportunistic manipulation of the economy. Remmer finds, using time-series analysis
of six Latin American countries, that some countries show the predicted pattern of
manipulation, while others do not.6 Grier and Grier’s study of the Mexican case finds no
evidence of pre-election booms.7
The literature on electoral competition and distributive patterns of public spending has
produced different theoretical propositions. Some scholars have suggested that incumbents
are better off allocating public finance to their core support groups.8 In contrast, others
argue that targeting to swing voter groups is better for the incumbent since they are more
likely than other groups to ‘swing’ if they receive targeted material benefits.9 However,
systematic empirical tests of the models have been rare. Notable exceptions include the
literature on pork-barrel politics in American politics and studies of allocation of special
distributive programmes in several countries. For instance, Mebane’s study has found that
distributive patterns of social welfare transfer payments to different constituents in the
United States are correlated with presidential and congressional elections.10 By examining
the National Solidarity programme in Mexico, Horcasitas and Weldon find that the
allocation of programme funds has been affected by pork-barrel electoral strategies.11 In
a theoretically informed study of the Peruvian case, Schady also finds evidence of a link
(F’note continued)
the Foundation of Expectations: Evidence from OECD Countries’, Economics and Politics, 12 (2000), 137–54.
For a review of electoral cycles and partisan cycles in economic policies, see Robert Franzese, ‘Electoral and
Partisan Cycles in Economic Policies and Outcomes’, Annual Review of Political Science, 5 (2002), 369–421.
4
Barry Ames, Political Survival: Politicians and Public Policy in Latin America (Berkeley: University of
California Press, 1987).
5
Ludger Schuknecht, ‘Political Business Cycles and Fiscal Policies in Developing Countries’, Kyklos, 49
(1996), 155–70; Ludger Schuknecht, ‘Fiscal Policy Cycles and Public Expenditure in Developing Countries’,
Public Choice, 102 (2000), 115–30; Daniel Treisman and V. Gimpelson, ‘Political Business Cycles and Russian
Elections, or the Manipulation of “Chudar” ’, British Journal of Political Science, 31 (2001), 225–46.
6
Karen L. Remmer, ‘Political Economy of Elections in Latin America’, American Political Science Review,
87 (1993), 393–407.
7
Robin M. Grier and Kevin B. Grier, ‘Political Cycles in Nontraditional Settings: Theory and Evidence from
the Case of Mexico’, Journal of Law and Economics, 43 (2000), 239–63.
8
Gary W. Cox and Matthew D. McCubbins, ‘Electoral Politics as a Redistributive Game’, Journal of Politics,
48 (1986), 370–89.
9
Assar Lindbeck and Jorgen W. Weibull, ‘Balanced Budget Redistribution as the Outcome of Political
Competition’, Public Choice, 52 (1987), 273–97; Avinash Dixit and John Londregan, ‘The Determinants of
Success of Special Interests in Redistributive Politics’, Journal of Politics, 58 (1996), 1132–55.
10
Walter R. Mebane Jr, ‘Fiscal Constraints and Electoral Manipulation in American Social Welfare’, American
Political Science Review, 88 (1994), 77–94. Also, see Robert M. Stein and Kenneth N. Bickers, ‘Congressional
Elections and the Pork Barrel’, Journal of Politics, 56 (1994), 377–99; Steven D. Levitt and James M. Snyder,
‘Political Parties and the Distribution of Federal Outlays’, American Journal of Political Science, 39 (1995),
958–80; Walter R. Mebane Jr and Gregory Wawro, ‘The Presidential Pork Barrel Politics’ (unpublished
manuscript, Department of Government, Cornell University, 2002).
11
Juan Molinar Horcasitas and Jeffrey A. Weldon, ‘Electoral Determinants and Consequences of National
Solidarity’, in Wayne A. Cornelius, Ann L. Craig and Jonathan Fox, eds, Transforming State–Society Relations
in Mexico: The National Solidarity Strategy (La Jolla: University of California, San Diego Press, 1994),
pp. 123–42.
Targeting Public Spending in a New Democracy 323
between electoral outcomes and the distribution of special programmes.12 A study of the
distribution of intergovernmental grants in Sweden finds similar evidence.13
Given the mixed evidence in the studies of electoral politics and public spending, this
article examines whether and in what way incumbents manipulated the levels and
distribution of public spending in accordance with elections in South Korea in 1988–97.14
The case of South Korea is interesting, for the purposes of this article, because the existing
literature on the political economy of East Asia suggests that Korea would be a ‘hard case’
in which to find electoral manipulation of the economy. Studies of the East Asian political
economy have attributed policy outcomes to the state capacity and bureaucratic
organizations.15 The conventional wisdom, especially the developmental state argument,
implies that politicians would face more constraints in engaging in manipulation of the
economy. Typically depicted almost as ‘social planners’, in Johnson’s words, ‘politicians
merely reign, whereas the bureaucrats actually rule’.16 In this article, the consequences of
electoral politics on public policy outcomes are investigated in the context of a new
democracy that has historically been characterized as a ‘developmental state’. In doing so,
we can investigate whether and how democratic transitions in East Asia (South Korea and
Taiwan) have fundamentally changed the structure and dynamics of the developmental
12
Norbert R. Schady, ‘The Political Economy of Expenditures by the Peruvian Social Fund (FONCODES),
1991–1995’, American Political Science Review, 94 (2000), 289–304.
13
Matz Dahlberg and Eva Johansson, ‘On the Vote-Purchasing Behavior of Incumbent Governments’,
American Political Science Review, 96 (2002), 27–40.
14
Theoretical reasons and data availability dictate the selection of the period of analysis, 1988–97. First,
theoretically, it is reasonable to think that semi- or non-competitive elections held under the authoritarian regimes
(1962–71, 1981–87) and competitive elections under the democratic regimes (since 1988) might have different
structures and dynamics. Although it is worth a systematic analysis, examining how the electoral effects play a
role in policy outcomes under the different regimes is another research question beyond the scope of this article.
The Yushin period (1972–79) under the Park Chung-Hee regime is out of consideration simply because there were
no meaningful elections except the electoral-college style convention (‘gymnasium election’). The 1987
presidential election was excluded from the analysis because there are reasons to believe that the founding election
might have revolved around fundamentally different issues. The period after the financial crisis in December 1997
is excluded because there are reasons to suspect that economic policies were affected by the IMF conditionality.
Secondly, setting these theoretical issues aside, the data for national subsidies at province-level are available only
after 1985. Accordingly, we ended up examining the period 1988–97.
15
Following Johnson’s influential book, scholars have explained the rapid economic growth in East Asia by
the effective role of the developmental state. This research programme challenged the neoclassical economic story
of rapid growth in the region. Recently, neo-institutionalist critiques of both the neoclassical story and the
developmental state story have emerged: see Chalmers Johnson, MITI and the Japanese Miracle: The Growth
of Industrial Policy, 1925–1975 (Stanford, Calif.: Stanford University Press, 1982); Chalmers Johnson, ‘Political
Institutions and Economic Performance: The Government–Business Relationship in Japan, South Korea, and
Taiwan’, in Frederic C. Deyo, ed., Political Economy of Newly Industrializing Asia (Ithaca, N.Y.: Cornell
University Press, 1987); Stephan Haggard, Pathways from the Periphery: The Politics of Growth in the Newly
Industrializing Countries (Ithaca, N.Y.: Cornell University Press, 1990); Robert Wade, Governing the Market
(Princeton, N.J.: Princeton University Press, 1990); Peter Evans, Embedded Autonomy: States and Industrial
Transformation (Princeton, N.J.: Princeton University Press, 1995); David C. Kang, ‘South Korean and Taiwanese
Development and the New Institutional Economics’, International Organization, 49 (1995), 555–87.
16
Johnson, MITI, p. 21. It should be noted that it is debatable whether the Korean developmental state that
led rapid economic growth in the 1960s and 1970s has been transformed since the mid-1980s. Engaging in this
debate is beyond the scope of this article. See, for example, Eun-Mee Kim, ‘Crisis of the Developmental State
in South Korea’, Asian Perspective, 23 (1999), 35–55; Il-Pyong Kim and Uk-Heon Hong, ‘The Republic of Korea:
The Taming of the Tiger’, International Social Science Journal, 52 (2000), 61–77. Also, see the symposium on
‘The Developmental State in Asia’, Governance, 7 (1997).
324 KWON
state. At least, evidence of electoral manipulation of the economy would suggest that the
bureaucracy in Korea has been contaminated by politicians’ strategic use of policy tools.
However, given the clientelistic character of electoral competition and party politics in
the East Asian countries, incumbents may have less need to manipulate economic policies
for electoral purposes and may rely more on personal or corporate campaign
contributions.17 In a similar vein, the developmental state literature suggests that
distributive patterns of public spending should be determined purely on socio-economic
grounds. However, as Pempel points out, the developmental state literature ‘remains
largely apolitical and socially disembodied’.18 Consequently, we know very little about
whether and in what way the political mechanism – especially electoral politics – plays
a role in public policy outcomes in East Asia, especially in new democracies like South
Korea and Taiwan.
The contributions this article makes are twofold. On the one hand, it engages in empirical
tests of theoretical propositions about political business cycles, electoral competition and
the distribution of public spending in a relatively unexplored context – East Asia. In so
doing, this analysis extends the geographic scope of studies of political economy and
electoral politics. On the other hand, it brings electoral politics into the existing literature
of political economy in East Asia. While the existing studies of East Asian political
economies have emphasized the role of the state and bureaucratic organizations in
managing the economy, issues of electoral politics have gleefully been ignored.19 In
contrast, this article explicitly focuses on the systematic link between elections and public
policy outcomes.
The analysis of aggregate election outcomes and macroeconomic indicators finds the
following results. First, the level of government expenditure increased in accordance with
the electoral calendar in the post-democratic transition period. Secondly, regional
distributive patterns of national subsidies were affected by electoral margins between the
two leading candidates in a province. More specifically, the governments tended to
distribute national subsidies to electorally competitive ‘swing’ regions. These findings
suggest that electoral politics have been a critical factor in public spending outcomes in
South Korea.
The article is organized as follows. In the next section I present a theoretical framework
of the political economy of public spending. Section 3 briefly describes electoral politics
in democratizing South Korea in 1988–97. Section 4 presents the description of the data
and variables, followed by empirical results of the analysis of pre-electoral manipulation
of public spending. Section 5 presents the data, variables and a statistical analysis of the
determinants of the distribution of public spending. The last section concludes.
17
David C. Kang, ‘Bad Loans to Good Friends: Money Politics and the Developmental State in Korea’,
International Organization, 56 (2002), 177–207.
18
T. J. Pempel, ‘The Developmental Regime in a Changing World Economy’, in Meredith Woo-Cumings, ed.,
The Developmental State (Ithaca, N.Y.: Cornell University Press, 1999), pp. 140–1.
19
Notable exceptions include: Kent E. Calder, Crisis and Compensation: Public Policy and Political Stability
in Japan (Princeton, N.J.: Princeton University Press, 1986); Mark J. Ramseyer and Frances M. Rosenbluth,
Japan’s Political Marketplace (Cambridge, Mass.: Harvard University Press, 1993); Gary W. Cox and Michael
Thies, ‘The Cost of Intraparty Competition: The Single Nontransferable Vote and Monetary Politics in Japan’,
Comparative Political Studies, 31 (1998), 267–92.
2. E L E C T I O N S A N D T H E P O L I T I C S O F P U B L I C S P E N D I N G
This section presents a theoretical framework and testable hypotheses about the electoral
cycles of the economy, on the one hand, and about the relationship between electoral
competition and distributive politics, on the other.
2.1. Electioneering the Economy

Although the traditional opportunistic model and the rational model of political business
cycles differ in their assumptions about voters and the information structure of the models,
for the purpose of this article, the two models predict similar empirical implications of
pre-electoral manipulation of the economy. The traditional opportunistic model of the
political business cycle suggests that office-seeking politicians have incentives to employ
expansionary policies before elections. In this opportunistic model, voters are assumed to
discount the past heavily, and hence the economic performance immediately before an
election affects voters’ decisions more than the economic performance in the more distant
past. Given the condition of exogenous election timing and the incumbent’s control of
policy instruments, the opportunistic model implies pre-election expansionary monetary
and fiscal policies.20
In contrast to the traditional opportunistic political business cycle models, rational
opportunistic cycle models stress the contrast between a forward-looking rational
incumbent and rational but less-than-fully informed electorate.21 A crucial assumption in
the rational political business cycle model is that the past economic performance of an
incumbent reveals something about her competence or ability, so that incumbents who
performed well in the past are expected to perform well in the future. Therefore, voters’
understanding of economic performance as an indicator of the incumbent’s ability is one
of the keys to understanding electoral cycles.
Rogoff and Sibert and Rogoff present models where more expansionary fiscal policy
signals that the incumbent policy maker is more competent.22 The incumbent policy
maker’s type is not observed. In this situation, voters face a standard inference problem
of predicting the unobservable type (whether competent or not) of the incumbent from the
observable policy. A government, in turn, uses policy to signal its type and separate itself
from the other type.23 Therefore, economic outcomes are often perceived to reflect the
incumbent’s competence. That is, a more competent incumbent creates a better
performance, ceteris paribus. Because the incumbent’s ‘competence’ lasts over time,
rational voters are more likely to re-elect an incumbent who creates better economic
outcomes just before elections.24
An incumbent can increase her perceived competence by improving national economic
outcomes, say, economic growth or low unemployment. Simultaneously, she can choose
to favour some voters over others through targeted transfers. The political business cycle
20
Nordhaus, ‘Political Business Cycle’.
21
Rogoff and Sibert, ‘Elections and Macroeconomic Policy Cycles’; Rogoff, ‘Equilibrium Political Budget
Cycles’; Persson and Tabellini, Macroeconomic Policy, Credibility, and Politics.
22
Rogoff and Sibert, ‘Elections and Macroeconomic Policy Cycles’; Rogoff, ‘Equilibrium Political Budget
Cycles’.
23
For a critique and elaboration of rational opportunistic cycle models, see Susanne Lohmann, ‘Rationalizing
the Political Business Cycle: A Workhorse Model’, Economics and Politics, 10 (1998), 1–17.
24
Torsten Persson and Guido Tabellini, Political Economics: Explaining Economic Policy (Cambridge, Mass.:
The MIT Press, 2000), 420–3.
326 KWON
literature, in effect, has shown that there are more robust results regarding policy
instruments like fiscal transfers than macroeconomic outcomes. At any rate, the key
prediction of both the theory of opportunistic political business cycles and the theory of
rational political business cycles is that an incumbent has an incentive to implement
expansionary fiscal policies before an election. This hypothesis is tested against the Korean
data in Section 4.
2.2. Electoral Competition and Distributive Politics

From Tufte’s work onward, studies have found strong results that show systematic patterns
of increasing transfers before elections.25 From the incumbent’s perspective, distributing
transfers towards specific regions or groups may be better than macroeconomic policy to
bring about desired political effects. The critical question for the incumbent, then, is where
to target transfers.
Consider the incumbent’s welfare function, which is determined by indicators of
socio-economic development (di) in each region i and the ‘affinity’ between voters and the
incumbent (ai).26 If the logic of electoral politics drives the incumbent’s decision about
resource allocation, then there is an electoral politics effect. If the incumbent’s welfare is
significantly derived from fulfilling her concern about evening up development across the
regions, then we can say that there exists a developmentalist effect.
It is reasonable to think that electoral outcomes affect the pattern of distribution of
government expenditure. Let pi denote the individual i’s probability of voting for an
incumbent. And suppose that this probability is a function of the individual i’s evaluation
of the incumbent’s competence (as described in the previous section) as well as the
‘affinity’ between the voter and incumbent. The ‘affinity’ term (ai) may be determined by
ideological distance or clientelistic connections. In the context of Korean politics, the ai
term captures the well-known regional voting pattern: voters in a particular region
disproportionately vote for a candidate who is from the same region. The question is in
what way ai affects the incumbent’s decision about the distribution of targeted transfers.
The existing literature suggests two different predictions. Cox and McCubbins’s model
suggests that the net value of the political elasticity of the targeted transfers is greater
among core electoral supporters.27 That is, the likelihood of voting for the incumbent is
greater when transfers are made to voters with large and positive values of ai. According
to their model, incumbents favour their core electoral support groups. Instead of targeting
transfers to voters whose affinity is less likely to be close to the incumbent, office-seeking
politicians always choose to strengthen the electoral base they have cultivated over time.
This type of policy choice reflects ‘machine politics’. In the Korean electoral politics
context, this prediction corresponds to the allocation of more resources to the long-term
electoral stronghold region for the governing parties in the pre-financial crisis period,
Kyungsang province.
In contrast, Lindbeck and Weibull and Dixit and Londregan argue that marginal or swing
groups matter most.28 Put differently, pi is increasing as politicians target transfers to swing
25
Tufte, Political Control of the Economy.
26
Schady, ‘The Political Economy of Expenditures’.
27
Cox and McCubbins, ‘Electoral Politics as a Redistributive Game’.
28
Lindbeck and Weibull, ‘Balanced Budget Redistribution as the Outcome of Political Competition’; Dixit and
Londregan, ‘The Determinants of Success of Special Interests in Redistributive Politics’.
voters whose value of ai is close to zero. The logic is that transfers to voters who strongly
support (oppose) the incumbent will not make a difference to their vote choices. Hence,
rational incumbents should distribute transfers to the groups or regions that are less
ideologically committed or with less cultivated clientelistic connections. The amount of
transfers a region receives from the central government is expected to be positively
correlated with a higher density of swing voters (more swing voters in the region). The
prediction of the allocation of resources to swing groups/regions implies, in the Korean
politics context, that incumbents have incentives to distribute disproportionately large
resources to the Seoul metropolitan area (including Inchon and Kyunggi) in which the
regional voting pattern is relatively weak, and hence electoral contests are very
competitive.
Clearly, it is unrealistic to assume that politicians can observe each voter’s value of
affinity, ai. Nonetheless, incumbents can use an approximation of the value of ai based on
the previous election results by districts or regions. Assuming that all voters in a region
are identical, the incumbent can approximate the distribution of voters’ preferences across
regions.29
The developmentalist effect refers to a case in which the incumbent’s welfare function
is in large part determined by her long-term vision of equal development across groups
or regions. A negative value of the parameter for di (indicators of the socio-economic
development level in each province) means more concern about even development across
regions, because resources must be distributed to poorer provinces to facilitate even
development across regions. In the context of Korean politics, if the developmentalist
effect prevails in allocating government resources to regions, we should expect that
national resources would flow into the poorer regions like Kangwon or Cholla provinces.
However, if the incumbent cares about her own re-election or that of the ruling party’s
candidate, then the ai term should have a significant association with the level of transfers
across regions. As mentioned above, however, the direction of the relationship is not
clear-cut, ex ante. In Section 5, I examine whether the electoral politics effect or
developmentalist effect prevails in the Korean incumbent’s decision about resource
allocation to provinces.
South Korea provides a good case by which we can test these competing theoretical
propositions. The Korean state has been characterized by highly insulated and effective
bureaucratic organizations. Moreover, since the democratic transition in 1987, elections
have been highly competitive. In terms of the electoral systems, South Korea has a simple
plurality rule for both presidential elections (national popular votes) and general elections
for the National Assembly (single-member district).30 Whereas the ‘bureaucratic
insulation’ side of the story may decrease the likelihood of observing the electoral
manipulation of the economy, very competitive elections under a simple plurality rule by
29
Schady, ‘The Political Economy of Expenditures’. Under some assumptions about the distribution functions
of voters’ preferences – i.e., symmetry and single-peakedness – there is a one-to-one mapping between the density
of swing voters and the closeness of the previous election.
30
Studies have shown that majoritarian elections concentrate electoral competition in some key marginal
districts, resulting in increased targeted redistribution towards a narrower constituency. Compared to the elections
in proportional representation (PR) systems, majoritarian elections entail more targeted spending (e.g., local public
consumption) and less non-targeted spending (e.g., unemployment insurance). See Allen Drazen, Political
Economy in Macroeconomics (Princeton, N.J.: Princeton University Press, 2000), chaps 8 and 9; G. M.
Milesi-Ferretti, R. Perotti and M. Rostagno, ‘Electoral Systems and the Composition of Public Spending’,
Quarterly Journal of Economics, 117 (2002), 609–57.
328 KWON
TABLE 1 Theoretical Expectations
Analysis Variable Expected effect Hypothesis
1. Pre-election Pre-election quarter(s) Political business cycles

Cycles
2. Targeting Pro-ruling party votes Cox–McCubbins
Transfers Electoral margin Lindbeck–Weibull
DixitLondregan
GRDP per capita Fiscal co-ordination
Provincial revenue Fiscal co-ordination
no means preclude ample incentives for the incumbent to manipulate economic policies
for her electoral advantage. Table 1 presents the theoretical expectations.
3. E L E C T O R A L P O L I T I C S I N D E M O C R A T I Z I N G K O R E A
All the presidential elections held in South Korea after the democratic transition in 1987
were competitive and no candidate has had an overwhelming victory.31 In a strong
presidential system where enormous political power is concentrated on the president,
presidential elections have a far greater stake. The democratic constitution drafted after
the transition prohibits the incumbent’s running for re-election (five-year term; single term
limit). Nonetheless, as the incarceration of two former presidents, Chun Doo Whan and
Roh Tae Woo, explicitly shows, the incumbent strongly recognizes that getting the ruling
party’s candidate elected is very crucial to ensure the ‘graceful retirement’ of the incumbent
himself. Both presidential elections and general elections for the National Assembly are
held under a simple plurality rule.32
Three characteristics of electoral politics in Korea can be pointed out. First, all the three
presidential elections recorded a close margin of victory and no winner had a majority of
the popular votes. Presidential elections have revolved around three leading candidates in
the period 1988–97. In the 1987 election, the vote share of the winner, Roh Tae Woo, was
merely 36.6 per cent. In the 1992 race, Kim Young-Sam achieved victory with 42 per cent
of the total vote. The 1997 election, held as a financial crisis struck, recorded only a 1.5
per cent margin between the two leading candidates, resulting in Kim Dae Jung’s victory
with a 39.7 per cent vote share. Secondly, both in the presidential elections and general
elections strong region-based bloc voting patterns have been repeated.33 Most political
parties get highly concentrated support from their home regions (in fact, the party leader’s
and/or the presidential candidate’s home region), while gathering meagre support from
other regions. For instance, in the 1997 presidential election the ruling Grand National
31
Presidential elections were held in December 1987, 1992 and 1997. General elections for the National
Assembly were held in March 1981, February 1985, April 1988, March 1992 and April 1996.
32
The general elections for the National Assembly chose legislators based on the first-past-the-post system in
single-member districts, with the exception of the 1981 election (multi-member districts). Although there is a
national party list to be chosen in proportion to each party’s share of the vote, it is hardly close to proportional
representation (PR) systems. Out of 299 seats, 253 seats are filled via the single-district, first-past-the-post system
and forty-six seats are distributed in proportion to the vote shares of each party which has won at least five seats
from the first-past-the-post system or 5 per cent of national votes.
33
Won-Taek Kang and Hoon Jaung, ‘The 1997 Presidential Election in South Korea’, Electoral Studies, 18
(1999), 599–608.
Party (GNP) obtained 61 per cent of the votes of its home region (Kyungsang province), while
gathering only 26 per cent of other regions’ votes. The opposition National Congress for New
Politics (NCNP), whose base was in the traditionally discriminated-against Cholla province,
carried 95 per cent of the region’s votes, whereas the party recorded 30 per cent of other
regions’ votes. This pattern has been persistent over time. Using Alford’s class voting index,
Jaung’s measure of the regional voting index in South Korea shows that political parties have
very low representativeness across regions.34 This regional bloc voting suggests that the
‘affinity’ between the incumbent and the voters is highly likely to be distributed across regions
in systematic fashion. While Kyungsang province was the base of the ruling elites up until
1997, Cholla province has long been discriminated against in terms of economic development,
industrialization and both political and social elite recruitment.35
Finally, divided government has become the norm of Korean politics rather than an
exception. This phenomenon in part reflects the voters’ motivation of ‘moderation’ of
policy outcomes.36 Divided government may constrain the incumbent’s manipulation of
the economy. However, there has been a vicious cycle in South Korea: general elections
produce divided government, but a minority ruling party becomes a strong majority by
various means (for example, party merger, opposition or independent legislators crossing
over to the ruling party, etc.). Consequently, there has been a strong majority ruling party
before each presidential election. This suggests that the executive has plenty of discretion
as to how to distribute government expenditure, not strictly checked by the legislature
before presidential elections. But, before the ruling party manages to become a majority
party, its legislative activities in the National Assembly are constrained by the moves of
opposition parties.
In a rapidly growing economy in the pre-financial crisis period, Korean incumbents have
tried to bolster their reputation by presiding over robust macroeconomic outcomes.
Macroeconomic indicators suggest that there have been patterns of increasing growth in
the money supply, the inflation rate and economic growth before elections.37 Moreover,
a comparative study of democratizing societies shows that in South Korea fiscal policy
changed in a more expansionist and pork-barrel direction amid charges that ‘the
government was seeking to influence the outcome of 1992 elections’.38 At the same time,
34
Following the Alford index, his measure was calculated as the percentage point difference between the share
of the vote of a party in its regional home base and its share of the vote outside the home base. See Hoon Jaung,
‘Electoral Politics and Political Parties’, in Larry Diamond and Doh C. Shin, eds, Institutional Reform and
Democratic Consolidation in Korea (Stanford, Calif.: Hoover Institution Press, 2000), pp. 51–2.
35
Several arguments have been presented to explain the regional bloc voting phenomenon. Those are: (1)
uneven regional development: that is, as people became increasingly sensitive to regional gaps, a political reaction
to regional disparities became manifest as regional bloc voting; (2) regional disparities in elite recruitment,
especially the disproportionate under-representation of Cholla provinces; (3) regional consciousness based on
regionality or locality may have been deliberately manipulated by political elites, turning it into inter-regional
resentments or regional favouritism. See Jang Jip Choi, ‘Political Cleavages in South Korea’, in Hagen Koo, ed.,
State and Society in Contemporary Korea (Ithaca, N.Y.: Cornell University Press, 1993), p. 45.
36
Alberto Alesina and Howard Rosenthal, Partisan Politics, Divided Government, and the Economy (New
York: Cambridge University Press, 1995); Walter R. Mebane Jr, ‘Coordination, Moderation, and Institutional
Balancing in American Presidential and House Elections’, American Political Science Review, 94 (2000), 37–57.
37
Kim’s study shows aggregate indicators of political business cycles in Korea. However, while he presents
some descriptive indicators, he does not engage in systematic analysis at all. See Kim Chae-Han, ‘Political
Business Cycles in Korea’, in Jongryn Mo and Chung-In Moon, eds, Democracy and the Korean Economy
(Stanford, Calif.: Hoover Institution Press, 1999).
38
Stephan Haggard and Robert R. Kaufman, The Political Economy of Democratic Transitions (Princeton, N.J.:
Princeton University Press, 1995), p. 238.
330 KWON
Korean electoral politics revolved closely around clientelistic benefits: namely, voters
expected local development as well as personal benefits from the candidate they supported.
Utilizing organizations (huwonhoi) similar to the koenkai system in Japan,39 politicians
have built up local organizational connections for electoral support in exchange for the
provision of local public expenditure and programmes. Voters in turn became used to
evaluating the candidate’s competence by what she had delivered to their locality. At the
national level, the same phenomenon was reflected by regional bloc voting. Voters had a
strong affinity with a candidate who had regional connections. Coupled with the repeatedly
close margin of election results, this regional voting phenomenon gives higher incentives
for the incumbent to use public spending in accordance with the need for electoral victory.40
From the voter’s side, Cho finds that regional bloc voting is positively related to (realized
or expected) material gains from uneven regional developments.41
To see whether we can observe a systematic pattern of manipulation of public spending
and allocation of resources in South Korea, we turn to empirical estimation.
4. T H E E F F E C T S O F E L E C T I O N T I M I N G O N G O V E R N M E N T E X P E N D I T U R E
4.1. Data and Variables

This section focuses on total central government expenditure. Following Ames, it is
intended to show that the whole budget, not just a few key programmes, responds to the
political needs of incumbents.42 To estimate the effects of the timing of elections on levels
of public expenditure, I use quarterly data of government expenditure in 1988–97. The
dependent variable Expenditure (as percentage of gross domestic product (GDP))
aggregates all types of expenditure, for instance, ministerial budgets, subsidies to local
governments, social welfare spending, etc. It should be noted that, compared to the
advanced OECD countries, the size of the Korean government is relatively small. An
OECD study shows that public expenditure in South Korea was only 15–20 per cent of
GDP during the period under analysis: about half the level in the United States and Japan
and a third of that in Germany.43 Exploratory data analysis revealed that the distribution
of government expenditure is positively skewed. To deal with the skewness of the data,
I use the natural logarithm of government expenditure (as percentage of GDP) as the
dependent variable.
I include Pre-election period dichotomous variables, coded 1 if in a pre-election period,
39
Gerald L. Curtis, Election Campaigning: Japanese Style (New York: Columbia University Press, 1971),
pp. 126–79.
40
The declaration of conscience by Han Jun-su, the ex-chief of Yongi county in South Chungchong province,
shows explicitly this incentive for the part of the incumbent. He disclosed that he had received money and
instruction from the minister of home affairs and the governor of the province to help the ruling party candidate
win in the March 1992 general election. For this episode, see Manwoo Lee, ‘An Analysis of South Korea’s
Political Process and Party Politics’, in James Cotton, ed., Politics and Policy in the New Korean State (New York:
St Martin’s Press, 1995), pp. 35–65.
41
Kisuk Cho, ‘Party-line Voting of Korean Voters’, Legislative Studies, 1 (1995), 156–83 [in Korean].
42
Ames, Political Survival, p. 9. It would be desirable to examine the electoral effect on the allocation of various
types of public expenditures. For instance, it is reasonable to think that public expenditure such as industrial
subsidies, project permissions, job creation and government consumption might be associated with the electoral
concerns of the incumbent. However, not only are some of the measures hard to quantify, but also the appropriate
data are not readily available at the provincial level.
43
Organization for Economic Cooperation and Development, OECD Economic Surveys: Korea (Paris: OECD,
1999).
0 otherwise. To take the time lag between the budget process and policy implementation
into account, I code N quarters prior to the election as pre-election periods. Following
Alesina et al., I choose N {1 ⬃ 8} quarters because it is not certain a priori how long
these effects are likely to last.44 Unlike special programmes and funds, public expenditure
is drafted and approved in advance (usually one year) at a regular session of the National
Assembly. Accordingly, it is reasonable to expect a certain time lag for the effects of
election timing. To examine the effects of the electoral calendar on levels of public
expenditure, I investigate its influence on both the presidential elections and general
elections for the National Assembly. Based on the theoretical expectations about
opportunistic manipulation of the economy before elections, we should expect higher
levels of government expenditure in the pre-election periods.
The literature on public expenditure has shown the primacy of social and economic
environment as a determinant of demands for government services. Especially, economic
development has been considered to create the need for expanding public expenditure and
the wealth to pay for that expansion.45 Economic development leads to increasing public
spending, not necessarily because growth increases societal needs but because growth
increases resources, giving the government the ability to respond to on-going problems.
Therefore, it is necessary to take into account the business cycle effect that induces
increases in spending during periods of economic booms. Accordingly, I include the
natural logarithm of Real GDP in the analysis. Korea depends heavily on export earnings.
Therefore, the balance of payments position is critical in terms of resource availability from
the incumbent’s standpoint. It seems reasonable to expect that public spending moves in
the same direction as balance of payments in an export-oriented economy. For this reason,
I include Balance of Payments. Also, to take into account the demand side of government
expenditure, I include Unemployment, measured as the first-order difference in the
unemployment rate from the same quarter in the previous year.
4.2. Estimation and Empirical Results

Is there a relationship between the level of government expenditure and elections? To test
the effects of election timing on government expenditure levels, I estimate the following
form of regression:
yt Election(N) kZk,t n t, (1)
where yt denotes the natural logarithm of government expenditure (as percentage of GDP)
in time t, Election(N) refers to a dichotomous variable for the pre-election periods (the
results are presented for N 2, 3, 4, 5 quarters).46 I have chosen a four-quarter lag structure
(n 4) of the independent variables in order to take into account the time lag between the
budget process and policy implementation. Z is a vector of exogenous variables that affect
government expenditure levels, which includes the natural logarithm of real GDP, balance
of payments, change in unemployment rate and quarterly trends; is the disturbance term
with expected value of mean 0 and variance 2. According to the theoretical expectation
44
Alesina et al. Political Cycles and Macroeconomy, pp. 67–110.
45
Ames, Political Survival, p. 19.
46
Because there are no a priori reasons to expect particular pre-election period effects, I tried different
pre-election period specification. Coefficients for other pre-election period specification were not statistically
significant.
332 KWON
TABLE 2 Election Timing and Public Spending (1988–97)
Variable 1 2 3 4
Election(2) 0.061**
(0.031)
Election(3) 0.059**
(0.028)
Election(4) 0.064**
(0.027)
Election(5) 0.064**
(0.030)
GDP(log) 0.079 0.058 0.053 0.061
(0.107) (0.111) (0.111) (0.109)
Balance of Payments 0.019** 0.020** 0.018** 0.016**
(0.008) (0.008) (0.008) (0.008)
Unemployment 0.042 0.036 0.033 0.026
(0.043) (0.040) (0.038) (0.037)
Quarter dummy Yes Yes Yes Yes
D–W (transformed) 1.976 1.973 1.980 1.980
SSR 0.284 0.274 0.275 0.282
Adjusted R2 0.79 0.81 0.81 0.81
N 40 40 40 40
Notes: Entries are point estimates using the Prais–Winsten estimator and robust standard errors
in parentheses. The dependent variable is public expenditure as percentage of GDP.
Election(N) refers to N-quarters before the election (including the election quarter). Period:
1988(Q1)–1997(Q4).
*p 0.10, **p 0.05, ***p 0.01.
of political business cycles, we should expect 0. If the government cares purely about
optimal fiscal policies, we should expect that is not significant, and levels of government
expenditures should be determined purely based on economic concerns. To take into
account the problem of serial correlation of error terms, I employ the Prais–Winsten
transformation procedure for the AR(1) process.47
Table 2 presents parameter estimates of the effects of election timing on levels of
government expenditure. All the four pre-election period specifications (Election 2 through
Election 5) report evidence that supports electoral manipulation of the economy. While
we do not have any theoretical reasons to observe variation in the effect of different
pre-election periods, the results show some evidence of electoral manipulation of public
spending. All else being equal, the results suggest that in the pre-election periods,
government expenditure increased by approximately 1.1 percentage points of GDP.48
47
The first-order autoregressive (AR(1)) process can be expressed by the following regression equation:
yt Xt ut, where ut ut 1 et and et is i.i.d. ⬃ N(0, 2). The Prais–Winsten estimator iteratively computes
an estimate of the correlation in the error terms and point estimates. For the Prais–Winsten procedure, see S. J.
Prais and C. B. Winsten, ‘Trend Estimators and Serial Correlation’, Cowles Commission Discussion Paper No.383
(Chicago, 1954). When I estimated the model with Cochrane–Orcutt procedure, the results were qualitatively
identical.
48
Following Bollen and Jackman, I conducted various regression diagnostics. For instance, a diagnosis of
This evidence of electoral manipulation of the economy can be put in a historical context.
Under the Chun Doo Whan authoritarian regime (1980–87), structurally corrupted-money
politics provided the incumbent with sufficient material resources for elections.49 Moreover,
the election itself functioned as more of a legitimizing instrument in a regime which took
office by a military coup and a massacre of civilians, rather than as a mechanism to choose
between candidates. Less competitive than elections held in the democratizing context, the
elections before 1987 guaranteed the incumbent party’s victory. However, to increase the
vote share of the ruling party, and hence show themselves as ‘legitimate’ leaders, the
ruling-party politicians relied on money politics – collecting ‘quasi-taxes’ from chaebol
companies, and using the funds for electoral purposes. In exchange for these quasi-taxes,
the incumbent promised favourable treatments to chaebol companies regarding industrial
policies and financial favours. As democratization proceeded in Korea after the transition
in 1987, however, money politics became a salient political issue, followed by campaigns
of various social movement groups like Kyungsilyon (Citizen’s Coalition for Economic
Justice). Increases in the incumbent’s incentives to manipulate public spending in
accordance with elections after 1987 can be put in this context. Although it is hardly correct
to say that the money politics between chaebol companies and the ruling party has been
ruled out in democratizing Korea, the democratization process rendered this mechanism
more visible and hence more easily open to criticism. Consequently, incumbents in the
democratizing context have had more incentives to rely on manipulation of the budget
(public spending) and more constraints on using ‘quasi-taxes’ for their electoral purposes.
The empirical results explicitly show that the Korean government boosted government
expenditure in accordance with the ruling party’s electoral concerns. While the results of
the analysis clearly show substantively significant effects of pre-electoral manipulation of
government expenditure, the consequences of election-induced public expenditure cycles
may be even greater. Consider, for instance, that one of the campaign promises of the
ruling-party candidate, Roh Tae Woo, in the 1987 presidential election was to build two
million houses in the Seoul metropolitan area. For better or worse, he by and large kept
his promise while in office by creating three new commuter cities filled with huge
apartment complexes near Seoul. Scholars have pointed out that the project in part caused
a bubble in the Korean economy by stimulating property speculation, not to mention the
increase in public expenditure.50 In 1988–90, the price of land increased by 27 per cent
(F’note continued)
DFBETAs showed that no observation was above the absolute value of 1, which was suggested as a high
(conservative) cut-off point. DFBETAs is a measure of how individual coefficients change when an observation
is omitted: DFBETAsi,j (bj bj(i))/(s2i (X X)i,j 1)1/2 where i refers to the measure obtained when the ith
observation is removed, and j is the jth component in the b vector; s2 variance estimates. High cutoff points of
one will identify observations that shift the regression coefficient at least one standard error. Though the fourth
quarters of 1989 and 1990 showed large positive studentized residuals across different specifications (ranging from
2.09 to 3.27), DFBETAs for these observations were not above the cut-off point. Hence, we can say that these
observations are ‘outliers’ but not ‘influential’ observations that could change the estimation results. See Kenneth
A. Bollen and Robert W. Jackman, ‘Regression Diagnostics: An Expository Treatment of Outliers and Influential
Cases’, in John Fox and J. Scott Long, eds, Modern Methods of Data Analysis (Newbury Park, Calif.: Sage
Publications, 1990).
49
Kang, ‘Bad Loans to Good Friends’.
50
The project (1989–91) contributed to economic growth. However, it seriously eroded the price stability of
the economy. Increases in construction employment (due to the project) accounted for 40 per cent of total
employment increases during this period. This employment expansion aggravated labour shortages in the
manufacturing sector and accelerated wage increases. For this, see Jun II Kim and Jongryn Mo, ‘Democratization
and Macroeconomic Policy’, in Jongryn Mo and Chung-In Moon, eds, Democracy and the Korean Economy
(Stanford, Calif.: Hoover Institution Press, 1999).
334 KWON
per annum. A consequence of this phenomenon was to make big conglomerates shy away
from investing their capital in production and instead spend their profits on acquiring land.
For instance, Samsung, one of the biggest conglomerates, whose total sales in 1990 were
almost identical to government expenditure, bought land at a total cost four times greater
than that of the company’s production investments.51 This episode shows how electoral
manipulation of the economy by the ruling party can cause a bubble in the economy and
shifts capital to activities that are not related to industrial production. While the proportion
of social welfare spending was relatively constant at less than 3 per cent of GDP, overall
expenditure levels increased during Roh’s term (1988–92). In particular, the share of social
services spending out of total government expenditure increased from 12.4 per cent in 1985
to 20 per cent in 1991. However, the increase in social service spending during 1988–91
was mostly due to an increase in housing and community development expenditure. It is
well known that the building of houses and bridges are typical pork-barrel projects. In
contrast, spending shares in health, social security and welfare remained almost unchanged
or increased only marginally during this period.
Furthermore, government tax revenue data provide remarkable evidence of electoral
manipulation of the economy in democratizing Korea. Unless a government runs deficit
spending indefinitely, we should expect a cyclical trend in taxation to balance the budget.
More specifically, we would expect that to the extent that government expenditure
increases in pre-election periods, the tax burden of the electorate should increase in
non-election years.52 Data for percentage increases in the tax burden as a share of GDP
support the expected cyclical pattern in taxation. During the period under analysis
(1988–97), in presidential election years the yearly change in the tax burden (as a
percentage of GDP) increased by 16.5 per cent (in 1992) and only 7.3 per cent (in 1997),
whereas in non-election years the tax burden increased at higher rates. Notably, in 1988
the tax burden increased by about 22 per cent, in 1990 by 27 per cent, and in 1994 by 20
per cent. The tax burden data show a cyclical pattern: in post-election years (first two to
three years after a presidential election) the tax burden increased and then it started to
decrease as the next presidential election approached. Clearly, this pattern provides
evidence of the taxation side of electoral manipulation of public finance in Korea.
Table 2 shows that the Balance of Payments has a negative effect on government
expenditure, moving in the opposite direction to it. The result also shows that Korean
government expenditure did not respond to the unemployment situation, suggesting that
the Korean government did not pursue counter-cyclical spending policies. This implies that
the Korean government’s decision over the expenditure level was not to create
counter-cyclical spending patterns but rather that its spending pattern would reinforce the
cycle. Real GDP did not reach any conventional level of statistical significance. As a
robustness check, I analysed the model with an alternative dependent variable, Expenditure
per capita (in million won), dividing quarterly total government expenditure by
population. Using a per capita measure of government expenditure is appropriate to draw
a sensible interpretation about the effects of general economic conditions and business
cycles (i.e., the effect of real GDP). All else being equal, the results suggest that in
pre-election periods (i.e., five quarters before an election), government expenditure per
capita increased by approximately 34,000 won (about a 16 per cent increase from the
51
Jang Jip Choi, ‘Transition to Democracy: A Comparison between South Korea and Taiwan’, in Jang Jip Choi,
A Theory of Korean Democracy (Seoul: Hankil-sa, 1993), pp. 344–60 [in Korean].
52
Mebane, ‘Fiscal Constraints and Electoral Manipulation’.
average quarterly per capita government expenditure).53 Also, the evidence suggests a
pro-cyclical spending pattern by Korean governments: that is, positive effects of real
GDP on public expenditure per capita.
The findings of this section suggest that Korean government expenditure was
significantly responsive to the ruling party’s electoral concerns.
5. D I S T R I B U T I O N O F N A T I O N A L S U B S I D I E S : W H E R E T O T A R G E T ?
5.1. Data and Variables

This section examines the effects of electoral competition on distributive patterns of
national subsidies to each province. For this analysis, the only available data are yearly.
Accordingly, the analysis of distributive patterns of national subsidies is based on the
yearly data for each province. This set-up produces a cross-sectional time-series dataset
consisting of N 13 provinces and T 10 years. The dependent variable is Subsidies,
which is distributed by the central government to each province. The budget of national
subsidies is drafted by the Office of Planning and Budget and then approved at a regular
session of the National Assembly, held in September–November of every year. The
distribution of national subsidies to each province is implemented by the Ministry of Home
Affairs, which is also in charge of election administration (in close connection with the
National Elections Commission). According to Jun, it is safe to assume that ‘distribution
of national subsidies (or related public expenditures) in Korea is greatly influenced by the
central government’s policy judgment since their distribution is not based upon any
specific formula’.54
To estimate the effects of electoral support on regional distributive patterns of national
subsidies, I include Pro-votes to capture the vote shares of the ruling party candidate in
each province. Following the theoretical reasoning mentioned earlier, I use the previous
election data to examine the effects of electoral support on distributive patterns. To capture
the influence of swing voting blocs, I include the variable Margin, measuring the difference
between the proportion of the votes received by the two leading candidates. The theoretical
expectation of the direction of the electoral impact is ambiguous, as mentioned above.
Namely, we should expect, on the one hand, that more national subsidies go to the regions
where the ruling party candidate firmly holds strong electoral support. On the other, we
should expect that more subsidies go to the regions where swing voters are concentrated.
To take into account socio-economic factors (the developmentalist effect) that might
affect regional distributive patterns of national subsidies, I include Revenue, measured by
total revenue minus national subsidies of each province. Also, to capture the levels of each
region’s economic development, the variable GRDP (Gross Regional Domestic Product)
per capita is included. I also include the Number of Farm Households and the natural
logarithm of Population of each province as controls for the demand side of resource
allocation.
Unfortunately, the unit of analysis (province-level) and data availability preclude an
analysis of the relationship between distributive patterns of subsidies and the general
53
The results of this supplementary analysis are available upon request.
54
Local government revenue is mainly composed of local tax revenue, local non-tax revenue, local shared tax
and national subsidies. The share of national subsidies in local government revenue has decreased over time: 16
per cent in 1987, 14 per cent in 1989 and 9 per cent in 1991. However, the absolute amount has increased. See
Sang Kyung Jun, ‘The Distribution of National Subsidies in Korea: A Comparison of the Park Chung-Hee, Chun
Doo Whan, and Roh Tae Woo Administrations’, Korean Social Science Journal, 23 (1997), p. 42.
336 KWON
election outcomes. To examine precisely the effects of general elections on patterns of

distribution of subsidies, we would need district-level data for both electoral outcomes and
distribution of subsidies. The latter is not available and it would be unreasonable to use
aggregate patterns to approximate the policy maker’s decision rules that are based upon
the dynamics of the general elections. Consequently, I confine the analysis to the impact
of the presidential election outcomes.
5.2. Estimation and Empirical Results

If the bureaucrats of the central government care about long-term, even development across
provinces, we should expect a high level of fiscal policy co-ordination between the central
government and provincial governments. That is, it is optimal to distribute national
subsidies disproportionately to poorer regions. By contrast, distributive patterns of national
subsidies could be distorted by the electoral concerns of politicians with a nearer time
horizon. Given the regional bloc-voting phenomenon in South Korea, it is reasonable to
suspect that the incumbent may have incentives to target the distribution of national
subsidies in accordance with the ‘political elasticity’ of each province.55
To determine systematically the influence of electoral support on distributive patterns
of national subsidies across provinces, I estimate the amount of national subsidies given
to each province as a function of electoral support for the ruling-party candidate or electoral
margin in the previous presidential election (electoral politics effect). To test competing
explanations, I include provincial economic development and revenue (the developmental-
ist effect). Specifically, I estimate the following regression model:
yi,t
yi,t 1 Pro-Votesi,t 1 Margini,t 1 kZi,k,t 1 i i,t, (2)
where yi,t refers to national subsidies to province i in year t, and Z to a vector of k exogenous
variables that affect the distribution of national subsidies, including total revenue (minus
national subsidies) of each province, GRDP per capita, the number of farm households,
and the logarithm of population. If the developmentalist effect exists, these variables should
have significant effects on distributive patterns of national subsidies. is the disturbance
term that is assumed to be distributed with mean 0 and variance 2i, and yi,t 1 is the lagged
dependent variable.
Pro-Votes and Margin are the main explanatory variables that capture the electoral
politics effect, representing competing theoretical expectations: the proportion of
pro-ruling party votes (according to Cox and McCubbins’s model, 0); absolute value
of electoral margin between the two leading candidates (according to the Lindbeck–
Weibull and Dixit–Londregan prediction, 0). I include province dummy variables to
capture unit-specific fixed effects, i. Since excluding the unit-specific fixed effects –
especially given the regional bloc-voting phenomenon and, more broadly, the role that
regional connections play in Korean politics – can cause an omitted variable bias, I choose
a fixed effects model rather than a random effects model based on prior knowledge of the
cases under analysis.56
55
It would be an interesting research question to examine the electoral consequences of targeted spending in
Korea. However, to investigate the effect of targeted spending on election outcomes at province level would require
a different specification of the causal dynamics, and hence I leave it for future research.
56
F-test confirmed that we can reject the null hypothesis of the same intercept for all provinces
(F-statistic 3.96, p 0.0001).
Estimation of Equation 2 is not straightforward because the lagged dependent variable

is correlated with the error term. Nickell shows that, especially when the number of time
periods is small, the fixed-effects estimator is biased and inconsistent in the presence of
a lagged dependent variable.57 To take into account this issue, I first-difference Equation
2 to deal with province-specific fixed effects and then use the two-year lagged dependent
variable as an instrument to address the correlation between the error term and one-year
lagged dependent variable generated by the initial transformation of Equation 2. For this
procedure, I employ the Arellano–Bond generalized method of moments estimator.58
I take into account the issue of potential endogeneity with the following two treatments.
First, all the socio-economic variables are one-year lagged. Secondly, the election outcome
data are the results of the previous election. Using the previous election results is important
because one could otherwise argue that levels of national subsidies to a province could
affect vote choices.
TABLE 3 Electoral Support and the Distribution of National Subsidies
Variable 1 2 3
Subsidies (t 1) 0.497*** 0.469*** 0.471***

(0.121) (0.120) (0.117)
Pro-votes 0.218 0.061
(0.257) (0.253)
Margin 0.341** 0.365**
(0.162) (0.176)
GRDP per capita 0.095*** 0.096*** 0.096***
(0.015) (0.014) (0.014)
Revenue 0.064* 0.061* 0.062*
(0.034) (0.033) (0.032)
Farm Households 0.005** 0.006*** 0.006**
(0.002) (0.002) (0.003)
Population (log) 0.552 0.497 0.501
(0.477) (0.455) (0.458)
Province 13 13 13
Year 8 8 8
Notes: Entries are point estimates using the Arellano–Bond generalized method of moments
(GMM) estimator and robust standard errors in parentheses. The first two years of observations
are lost due to the use of lagged instruments and first differencing.
*p 0.10, **p 0.05, ***p 0.01.
Table 3 presents parameter estimates of the effects of the political and economic
variables on the amount of national subsidies distributed to each province. It should be
noted that first-differencing and the use of lagged instruments result in the loss of the 1988
and 1989 data altogether. The results of the electoral impact show that Cox–McCubbins’
prediction of resource distribution to core supporter groups did not fare well with the
57
Stephen Nickell, ‘Biases in Dynamic Models with Fixed Effects’, Econometrica, 49 (1981), 1417–26.
58
For methodological issues of panel data models in political science, see Gregory Wawro, ‘Estimating
Dynamic Panel Data Models in Political Science’, Political Analysis, 10 (2002), 25–48. Also see M. Arellano and
S. Bond, ‘Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment
Equations’, Review of Economic Studies, 58(1991), 277–97. I estimated Equation 3 using ordinary least squares
(OLS) with panel-corrected standard errors (PCSEs), and the two-stage least square (2SLS) estimator, which did
not produce qualitatively different results. Available upon request.
338 KWON
Korean data. The coefficient for pro-ruling party vote shares did not reach statistical
significance. In contrast, the Lindbeck–Weibull/Dixit–Londregan prediction is consistent
with the empirical pattern of the allocation of national subsidies in Korea. The point
estimates of electoral margin shows a negative sign with statistical significance at the
p 0.05 level. The long-run effect of electoral margin on the distribution of subsidies can
be computed by /(1
): an increase in 1 per cent of vote margin between the ruling party
candidate and a main opposition candidate in a province amounts to the reduction of
national subsidies by 6.42 billion won. Clearly, national subsidies tended to be distributed
to swing provinces. The more competitive electorally a province is, the more likely it is
to receive more than the optimal level of subsidies from the central government. Since the
estimation model includes one-year lagged subsidies to account for an automatic scheme
of resource allocation and province-specific fixed effects to take into account time-
invariant unique factors of particular provinces that might induce inflows of national
subsidies, this significant effect of electoral competition on the distribution of subsidies
is quite remarkable.
To get a sense of the substantive effects of electoral competition, consider a
counterfactual situation in which elections in South Cholla province were as closely
contested as in Seoul. During the period 1988–97, the average electoral margin between
the ruling-party presidential candidate and the leading opposition candidate in South
Cholla was 83.2 per cent of votes, in favour of the then opposition candidate, Kim Dae
Jung. The figure for Seoul was only 1.5 per cent, making it one of the most contested
provinces in each election. What would have happened in terms of the allocation of national
subsidies, had South Cholla been an electorally contested region like Seoul? The effect
of this counterfactual situation is an extra 0.524 trillion won flowing into South Cholla
province annually. Based on the mean population size of South Cholla in the period
1988–97, the parameter estimates of the effect of electoral margin suggests that South
Cholla would have benefited by an extra 0.229 million won (approximately US$200) per
person annually, had the province been as electorally contested as Seoul.
The results of my analysis stand in contrast to the argument that there are incentives for
voters to engage in regional bloc voting because selecting the candidate who will favour
the voter’s hometown would deliver more resources – for example, national subsidies,
more job creation, more public spending – to the region.59 This type of argument depicts
regional voting as a form of distributive politics in Korea. In other words, aggregate voters
in a region act as if they are a special interest group in a game of dividing resources.
However, in terms of resource allocation, swing regions (such as Seoul metropolitan area)
are better off, all else being equal, than those regions that show an extreme form of regional
voting (both the ruling party’s stronghold Kyungsang and the opposition’s hometown
Cholla provinces). If resource allocation is considered as a game of distributive politics
between voters and the incumbent, the optimal strategy for voters is to make electoral
competition in their regions/districts highly uncertain.
The effects of socio-economic variables are mixed. Contrary to the expectation based
on the developmentalist effect explanation, the amount of national subsidies has a positive
association with the provincial economic development level. This result shows that the
central government has distributed subsidies to relatively well-developed provinces,
suggesting that the government did not follow the objective of allocation of national
subsidies to facilitate an even socio-economic development. However, distribution of
59
For instance, Kisuk Cho, Regional Voting and Rational Voters (Seoul: Nanam Publishers, 2000) [in Korean].
national subsidies has an inverse relationship to provincial revenue. This suggests that
national subsidies were allocated to the provincial governments that had less revenue
resources.
Another socio-economic factor – the Number of Farm Households – has a negative and
statistically significant effect on the distribution of national subsidies. This result implies
that incumbents have replaced electoral targets contingent upon changing socio-economic
environments. Studies of elections in South Korea have emphasized the characteristic
pattern of yochon-yado, which can be translated as ‘pro-ruling party votes from the rural
area, pro-opposition votes from the urban area’, in the 1960s until the abolition of elections
after the Yushin (Revitalization) in 1972.60 The incumbents in South Korea traditionally
cultivated their electoral base in the rural area. As urbanization and industrialization
proceeded and the political mobilization of regional cleavages intensified, this particular
voting pattern appears to have given way to regional bloc voting.61
To summarize the empirical results, the Korean data show that electoral competition has
affected distributive patterns of national subsidies to provinces. Ceteris paribus, regional
variation in levels of national subsidies is affected by the degree of electoral margin
between the two leading candidates in a province. The more electorally contested a
province is, the more likely it is to receive more than its optimal level of national subsidies
from the central government. Considerations of regional development and fiscal
co-ordination were found to have mixed results. While revenue levels have a negative
association with the amount of national subsidies (in line with the developmentalist
explanation), the central government distributed more national subsidies to richer
provinces (in contrast to the expectation of the developmentalist explanation).
6. C O N C L U S I O N
This article has shown that both the timing of elections and electoral competition affect
levels and distributive patterns of government expenditure in democratizing Korea. The
empirical analysis has found the following results. First, government expenditure
increased in the pre-election periods. This result supports theories of an opportunistic
political business cycle. Secondly, distributive patterns of national subsidies in South
Korea are to a certain extent a function of the closeness of electoral margin between the
ruling party’s presidential candidate and a main opposition party’s candidate. Electorally
contested ‘swing’ regions tended to be the beneficiaries of national subsidies rather than
others. The empirical pattern of regional distribution of national subsidies suggests how
intergovernmental resource allocation has been contaminated by the ruling party’s
electoral concern.
The findings of this article suggest that politics drove policy choices in a country that
has historically been characterized as a ‘developmental state’. At least in democratizing
60
Chun-Joo Yoon, ‘The Change in Voting Participation and Political Development’, in Kwang Woong Kim,
ed., Electoral Politics in Korea (Seoul: Nanam Publishing Co., 1990) [in Korean].
61
To assess the validity of the results reported in Table 3, I conducted a diagnostic test. The consistency of
the Arellano–Bond estimator requires that the disturbance terms, i,t, are not serially correlated. If this is the case
(no serial correlation), the first differenced residuals should display negative first-order serial correlation but not
second-order serial correlation. Our tests with the first differenced data reject the null hypothesis of no first-order
serial correlation (the range of p-value [0.016, 0.033]), but cannot reject the null hypothesis of no second-order
serial correlation (p-value [0.229, 0.708]). Our tests do not raise significant concerns about the crucial assumption
necessary for valid implementation of the consistent estimator reported in Table 3.
340 KWON
Korea, bureaucrats were not immune from political interference. Given the focus of this
article on the relationship between democratic electoral competition and public policy in
the post-transition period (1988–97), the findings of this article may be thought not to
disconfirm the literature on the developmental state, which is presumed to have been at
its height during the pre-democratization period. Nonetheless, the results suggest that there
may be electoral consequences for developmental-state policy making in East Asia. To the
extent that South Korea and Taiwan have become democratic systems, it is important to
take electoral politics into account to explain policy outcomes in these new democracies.62
The evidence presented in this article suggests that there exist ample electoral incentives
for incumbents to manipulate the economy, as opposed to the bureaucracy-led long-term
vision of policy making. To speculate, the empirical findings of this article may be thought
to provide a ‘revisionist’ view of the developmental state. That is, it is conceivable that
politics really was a significant factor that drove policies even in the period of rapid
economic growth guided by the developmental state. Policies such as industrial subsidies,
targeted trade policies and government and/or commercial bank loans to particular
companies characterized as the main features of the developmental state during the
1960s–1980s may have been associated with authoritarian incumbents’ political concerns,
rather than a result of ‘plan-rational’ bureaucratic decisions.63 The developmental state
was more politicized than the conventional wisdom holds.
Then, what are the policy consequences of electoral competition in democratizing
Korea? To the extent that democratic regimes respond to redistributive pressure from the
electorate, the government can pursue universalistic programmes like social services
and/or particularistic programmes that favour particular special interest groups. Inevitably,
the strategic choices of a government between various types of spending programmes
would conflict with developmental-state-type policy making. Thus, the introduction of
competitive electoral politics since the democratic transition may have been associated
with fundamental changes in the developmental state. As the empirical evidence of this
article suggests, policy choices driven by electoral logic are not compatible, by definition,
with the developmental state. At least, there seems less room for bureaucratic insulation
and more room for electoral manipulation of economic policies in the new democracy
context.
More broadly, is there a trade-off induced by the introduction of electoral competition
in new democracies? That is, is democratic electoral competition a venue for nothing but
electoral manipulation of the economy, or do democratic elections foster accountability
and serve as an informative candidate-selection mechanism? Since electoral manipulation
of the economy rests on asymmetric information between policy makers and voters, some
kind of mechanism to reveal information about the candidates’ ‘competence’ (such as
citizen groups’ campaign monitoring) may provide a solution to this trade-off. In
addressing this fundamental issue of democratic systems, careful comparative research
about the incumbents’ behavioural patterns in both developed and new democracies would
be a fruitful research project.
62
For a study of mass political behaviour in the post-democratization era in Korea, see Doh C. Shin, Mass
Politics and Culture in Democratizing Korea (New York: Cambridge University Press, 1999).
63
Kang, ‘Bad Loans to Good Friends’; David C. Kang, Crony Capitalism: Corruption and Development in
South Korea and the Philippines (New York: Cambridge University Press, 2002).
APPENDIX A: DESCRIPTION OF VARIABLES AND DATA SOURCES
Government Expenditures: Quarterly measure of government expenditures as percentage of GDP. Data are
from the National Statistical Office via on-line at http://www.nso.go.kr (accessed 11 August 2003).
GDP (log): Natural logarithm of real GDP (in trillion won). Data from the National Statistical Office.
Balance of Payments: Quarterly measure of balance of payments. Data from the National Statistical Office.
Unemployment: Percentage point change in quarterly unemployment rate from the same quarter in the
previous year. Data from the National Statistical Office.
Subsidies: Yearly national subsidies to each province in trillion won. Data from the National Statistical
Office.
GRDP per capita: Yearly Gross Regional Product per capita of each region in million won. Data from the
National Statistical Office.
Revenue: Yearly total revenue less national subsidies of each region, in trillion won. Data from the National
Statistical Office.
Number of Farm Households: Number of farm households (in thousands) of each region. Data from the
National Statistical Office.
Pro-Votes: Pro-ruling party candidate votes as a proportion of total votes in each region. Data from the
National Elections Committee via on-line at http://www.nec.go.kr (accessed 11 August 2003).
Margin: The absolute value of the proportion of votes for the two leading candidates in each region. Data
from the National Elections Commission.
APPENDIX B: SUMMARY STATISTICS
Analysis Variable N Mean Std Dev Min Max
1 Government Expenditures 40 2.917 0.185 2.582 3.321

GDP(log) 40 4.356 0.223 3.907 4.752
Balance of Payments 40 0.924 2.843 7.353 4.823
Change in Unemployment rate 40 0.098 0.356 1.300 0.600
2 Subsidies 130 0.437 0.334 0.033 1.512

GRDP per capita 130 6.784 1.862 4.074 13.172
Revenue 130 1.928 1.847 0.108 9.724
Farm Households 130 123.480 101.775 2.515 314.420
Population (log) 130 14.717 0.724 13.133 16.177
Pro-votes 130 0.412 0.195 0.042 0.733
Margin 130 0.318 0.269 0.009 0.868

Chaebol 48

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Chaebol 48

Uploaded by

Copyright:

Available Formats

British Journal of Political Science

Additional services for British Journal of Political Science:

Email alerts: Click here

Targeting Public Spending in a New Democracy: Evidence

HYEOK YONG KWON

Link to this article: http://journals.cambridge.org/abstract_S0007123405000177

How to cite this article:

Request Permissions : Click here

Downloaded from http://journals.cambridge.org/JPS, IP address: 128.122.253.228 on 04 May 2015

Targeting Public Spending in a New Democracy:

Do incumbents in new democracies manipulate public spending in accordance with

empirical evidence consistent with theories of opportunistic political business cycles.

2.1. Electioneering the Economy

2.2. Electoral Competition and Distributive Politics

TABLE 1 Theoretical Expectations

Analysis Variable Expected effect Hypothesis

1. Pre-election Pre-election quarter(s) Political business cycles

4.1. Data and Variables

4.2. Estimation and Empirical Results

yt Election(N) kZk,t n t, (1)

TABLE 2 Election Timing and Public Spending (1988–97)

5.1. Data and Variables

election outcomes. To examine precisely the effects of general elections on patterns of

5.2. Estimation and Empirical Results

Estimation of Equation 2 is not straightforward because the lagged dependent variable

TABLE 3 Electoral Support and the Distribution of National Subsidies

Subsidies (t 1) 0.497*** 0.469*** 0.471***

APPENDIX A: DESCRIPTION OF VARIABLES AND DATA SOURCES

APPENDIX B: SUMMARY STATISTICS

Analysis Variable N Mean Std Dev Min Max

1 Government Expenditures 40 2.917 0.185 2.582 3.321

2 Subsidies 130 0.437 0.334 0.033 1.512

You might also like

yt Election(N) kZk,t n t, (1)

Subsidies (t 1) 0.497* 0.469* 0.471***