Looking across the countries of the world, we observe a wide variation in the size of government and in the scope of its activities. The white bars in Graph 1 depict total central government expenditures for a number of democratic countries. The data are expressed as a share of GDP and averaged over 1988-92. Countries are grouped by development level—OECD membership, or not—and, among developing countries, by continent. Within groups they are ordered by IMF codes. Evidently, expenditures vary a great deal, both within and between groups.
Much of this variation reflects differences in socio-economic determinants of government expenditure. But large differences remain, even when we control for economic and social variables suggested by economic theory and found to have explanatory power in previous empirical studies. The black bars in the graph show the residuals from a regression of expenditures on (the log of) per capita income, (the log of) openness to international trade, the share of population above 65, and a measure of ethno-linguistic fractionalization. The controls account for a substantial share of the variation (about 60 per cent), and the differences across groups of countries more or less disappear. But striking differences within groups remain, and residuals of plus or minus 10% of GDP are not uncommon. The results are very similar if the set of controls is expanded to include other determinants of spending.
We observe a similar degree of variation in the scope of government. Graph 2 is constructed in the same way as Graph 1. But it illustrates the cross-country variation for a measure of spending on public goods, namely the sum of spending on transportation, education and order and safety. This variable also refers to central government, and it is expressed as a share of GDP on average between 1988-92. The controls used to generate the residuals are the same, except that fractionalization is replaced by a measure of centralization in total government spending. Again, the differences and the residual variation are striking.
How can we explain this variation? There are many possible, and complementary, answers to this question. In this lecture, we advocate building a positive theory of the size and scope of government on the basis of comparative politics. That is, we ask whether and how different political institutions affect the size and composition of government spending. In particular, we study two fundamental features of political institutions: the electoral rule, contrasting majoritarian and proportional electoral systems, and the regime type, contrasting presidential and parliamentary regimes.
Despite a large literature on the size of government, the specific question of how these political institutions influence public spending has been neglected until recently. Traditional public finance, with its normative approach, has not even posed the question.