15

A
n

E
m
p
i
r
i
c
a
l

A
n
a
l
y
s
i
s

o
f

t
h
e

B
u
d
g
e
t

D
e
f
i
c
i
t
An Empirical Analysis of the Budget Deficit
n
Ioan Talpo
Ph.D. Professor
Bogdan Dima
Ph.D. Associate Professor
Mihai Mutacu
Ph.D. Lecturer
Cosmin Enache
Ph.D. Lecturer
West University of Timioara
Abstract. Economic policies and, particularly, fiscal policies are not designed and implemented in an
empty space: the structural characteristics of the economic systems, the institutional architecture of
societies, the cultural paradigm and the power relations between different social groups define the
borders of these policies.
This paper tries to deal with these borders, to describe their nature and the implications of their
existence to the fiscal policies quality and impact at a theoretical level as well as at an empirical one.
The main results of the proposed analysis support the ideas that the mentioned variables matters both
for the social mandate entrusted by the society to the state and thus to the role and functions of the state
and for the economic growth as a support of the resources collected at distributed by the public authori-
ties.
Key words: budget deficit; structural characteristics; economic freedom; institutions; cultural paradigm;
political freedom.
n
1. Introduction
Economic policies and, particularly, fiscal policies are
not designed and implemented in an empty space: the
structural characteristics of the economic systems, the
institutional architecture of societies, the cultural paradigm
and the power relations between different social groups
define the borders of these policies.
This paper tries to deal with these borders, to describe
their nature and the implications of their existence to the
fiscal policies quality and impact.
The main hypothesis of the proposed analysis could be
summarized as follows:
REL Classification: 13F, 10B, 8K
16
T
h
e
o
r
e
t
i
c
a
l

a
n
d

A
p
p
l
i
e
d

E
c
o
n
o
m
i
c
s
H
1
: The public authorities are acting according to a
social mandate entrusted by the society inside the rules
of the game
(1)
;
H
2
: There are no differences between different social
groups in the formulation of this mandate or, alternatively,
the mandate is the result of a perfect social compromise;
H
3
: The public authorities are acting only in the limits of
the social mandate so there is no a hidden agenda of this
authorities and/or modification of their behaviour over an
electoral cycle. In other words, the public bureaucracy and
the society have the same objectives.
Within this general framework, the structural and
institutional variables, the cultural paradigm and the power
relations influence the level and the structure of the budget
deficit as follow:
n In a direct manner, via the formulation and
application of the social mandate which is entrusted
to the public authorities;
n In an indirect manner, via the impact on the economic
growth and thus on the level, frequencies and
structure of public incomes and on the level and
nature of public expenditures.
As Ottaviano, Pinelli and Maignan (2003, p. 30) noted:
Classical writers in economics, such as David Hume (1848),
Adam Smith (1776), John Stuart Mill (1847), realised and
discussed about the importance of institutions, such as
firms, families, contracts, markets, rules and regulations,
and social norms to economic development. Weber (1905)
identified the protestant ethics as one of the roots of the
surge of capitalism.
Important changes in the economic dynamics study
occurred with Romers (1986, pp. 1002-1037) and Lucas
(1988) contributions and especially with Norths (1990)
shift of attention to the institutions that shape the incentive
structure, which drives the economic evolutions.
Actually, there is a growing body of both theoretical
and empirical works that try to enlighten the connections
between development and quality of institutions (in
particular, the role of the property rights and the rule of
law), political regimes, social infrastructures, cultural
values, and others imponderables. For instance, Rodrik
(2000) discusses the types of institutions that allow the
markets to perform adequately; Ali and Crain (2002)
investigate the relationship between economic growth and
economic freedom; Inglehart (1997) describes the
cultural learning process and its impact on economic
developments; Rauch (1994) emphasizes the role of
bureaucracy and of the institutional environment in the
private economic decision.
Interesting contributions are provided by De Jong and
Semenov (2002, p. 16). Their point of view (There are
trade-offs between the various criteria, in particular,
between solidarity, on the one hand, and efficiency,
autonomy, promoting self-reliance and initiative, on the
other. Thus, the society should decide on the relative
importance of each of these values. This decision is
crucially influenced by deeply rooted cultural values and
has a crucial impact on the character of social welfare
systems) is largely similar to our own position exposed
here etc.
The aim of this paper is to build a conceptual framework
able to describe, in a holistic approach, the connections
between the quality of market institutions, economic
structures and mechanisms, socio-cultural models
(paradigms) and political freedom on the one side, and
the attributions assumed by the state on the other side. The
proposed analysis is based on the thesis that the classical
tools of economic policy are inefficient in a market
characterized by empty institutions, wrong mechanisms
of resources allocation, luck of autonomy for the civil society
and counter- productive cultural values.
Section 2 tries to set up the taxonomy of the structural
characteristics of the economic systems and to analyze in
this theoretical framework the impact of the shocks
associated with the ignition of economic growth and,
correlative, the state involvement in the economy like a
compensatory power.
Section 3 lists the institutions that can constitute a
support for a sustainable economic dynamic and tries to
explain why these institutions are important for the quality
of the public actions and for their impact.
Section 4 deals with the socio-cultural paradigm and, more
exactly, with the mental infrastructures of the economic
processes. These infrastructures are classified in terms of social
openness (i.e. the social capacity to react to changes induced
by a turbulent economic environment).
In Section 5 some empirical results are reported, which
could be used like a small proof for the theoretical output.
Finally, we present a set of critical aspects which are
able, in our vision, to endanger the consistency and
coherence of the proposed analysis.
2. Structural characteristics of the economic
systems: how growth could be initiated
The intrinsic structural features of the economic systems
represent a critical determinant for the amalgamation of
the resources and mechanisms (responsible for the
economic growth) in the subsequent economic processes.
17
A
n

E
m
p
i
r
i
c
a
l

A
n
a
l
y
s
i
s

o
f

t
h
e

B
u
d
g
e
t

D
e
f
i
c
i
t
We propose taxonomy of the economic systems using
three-sectorial model in three meta-types (A, B and
C) in order to create a real image of the way the structural
features influence the de facto configuration of the growth
process, and especially gives it a durable character. The
main elements of the economic systems taken into account
in this classification may be synthesized as follows:
I. For the real sector:
n the amount of real existing capital (physic and
informational) and also its return;
n the volume, structure and allocation mechanisms of
the available resources (material and informational
resources);
n the characteristics of the labour (availability and
effectiveness of labour offer, mobility, organizational
structures, mechanism of nominal wage determination);
n the relations between different component sectors
and segments, public and private sector, internal
and external economic subjects;
n real assets and markets classification;
n investments opportunities;
n the structure of the economic subjects incomes;
n informational asymmetry;
n the relations between microeconomic decision
centres (managerial bureaucracy
(2)
and the capital
owners).
II. For the public authority:
n the relations between fiscal authority and monetary
authority;
n the status of public bureaucracy (due to its ability
in blocking/influencing public decision);
n the fiscal system, its efficiency, the public resources
main destinations (dependent on the role the fiscal
authority assumes in the economic system) and also
the dimension of the fiscal and quasi-fiscal deficit.
III. For the monetary sector:
n the classification of the financial intermediaries;
n the main elements which characterize the banking
sector:
n the number of components;
n the level of competitive concentration;
n the proportion of the resources which are held in
the banking system from the total available
resources in economy or, in other words, the
intensity of banking sector participation in the
financial intermediation process;
n the ratio between the bank credits offer and the
potential demand for them the degree of the
credit availability;
n the mechanisms of interest rate formation;
n the relations between banking system and
non-banking economic subjects;
n the banks position opposite to the monetary
authority (taking into consideration its ruling
and supervising capacity over the commercial
banks activities;
n the right to intervene in those activities, and also
the importance of re-financing from the monetary
authority;
n the relations between the banking sector and the
capital market (banks may act just as an
intermediary or may also buy and sell financial
assets on their own behalf);
n the competition: banks operators versus capital
market operators (trying to attract as many
temporary available resources as they can);
n the position of the banks with public owners in
the banking system;
n the types of banks, classified using the nature
and the specialization degree of their activities;
n the system of laws which rules the banking sector
activity and its imperfections which can affect
the optimality of this sector;
n the types of financial monetary assets created
by the monetary authority and by the commercial
banks together with the non banking economic
subjects;
n the main elements which define the capital market:
n the number of operators;
n the intensity of the capital market participation
in the financial intermediation process;
n the concentration of the financial resources offer
level on this market;
n the main financial assets traded;
n the complexity of the intermediation process;
n the financial assets return and the stability of its
dynamics, determined by the fundamental
factors of the economic evolution;
n the investment risk on this market;
n trading mechanisms characterized by their
technical elements and efficiency;
n the characteristics of the system of laws which
rules the capital market;
n the operators position in the process of
intermediation, offering or demanding resources.
18
T
h
e
o
r
e
t
i
c
a
l

a
n
d

A
p
p
l
i
e
d

E
c
o
n
o
m
i
c
s
The characteristics of the economic systems
Table 1
A Economy B Economy C Economy
I. Real sector
1. Real capital
a. Volume Low Medium High
b. The level of technical infrastructure development Low Medium High
c. The dynamics of technical progress Low Medium High
2. Real capital return Low Medium High
3. Resources
a. Volume Low Medium High
b. Structure Inadequate Medium degree of adequacy High degree of adequacy
c. Allocation mechanisms Inefficient Presents some deficiencies Efficient
4. Labour
a. Volume Indeterminate Indeterminate Indeterminate
b. Professional skills Low Medium High
c. Mobility
c.1. Intra-sectorial mobility Low or medium Medium or high High
c.2. Inter-sectorial mobility Low Medium or high High
c.3. Geographic mobility Low Medium or high High
d. Labour offer Exogenous opposite with the
nominal wage level
Partial exogenous opposite with
the nominal wage level
Endogen opposite with the
nominal wage level
e. Nominal wage determination Using centralized negotiation
mechanisms
Using partial centralized
negotiation mechanisms
Using decentralized negotiation
mechanisms
f. Organizational labour structures Rigid behaviour and a strict
hierarchy; the objective function
includes the nominal wage level
and job keeping
Some behavioural flexibility and a
certain functional decentralization
degree; the objective function
includes also other variables
Pronounced behavioural flexibility
and a strong functional
decentralization degree; the
objective function valorising the
organization ensemble object-
tives where labour is involved
5. The real sector structure
a. Dominant sectors Hard industry and/or agriculture;
frequently monopole.
Textile, food industry and
services; possible monopole or
cooperative oligopoly
Services and informational
sub-sectors; perfect competition
or competitive oligopoly
b. Inter-sectorial relations Rigid and with high hierarchies Some certain flexibility and a
medium degree of hierarchies
Extremely flexible
c. Progress poles position Marginal In affirmation Dominant
6. Extern opening degree Low Medium High
7. Real assets classification Simple Medium level of complexity Complex
8. Real assets markets nature Producers markets Undetermined Consumers markets
9. The relations between public sub- sector and private
sub-sector



a. The participation in resources allocation Marginal for the private sector In equilibrium Marginal for the public sector
b. The position on different component markets Dominance of the public sector In equilibrium Dominance of the private sector
10. Informational asymmetry Pronounced Medium Absent
11. Investments opportunities Reduced Diverse Highly diversified
12. The main incomes of the economic subjects Wages Wages and capital incomes Wages and capital incomes
13. The decisional relations between managerial
bureaucracy and the capital owners
The decisions are taken by the
managerial bureaucracy; even in
strategic matters the decisional
power of the capital owners is
dissipated or lower than the other
There is a certain control
exercised by the capital owners
over the managerial activity; the
main decisions adopted by the
managerial bureaucracy are
tactical and operational decisions
There is a certain control
exercised by the capital owners
over the managerial activity; the
main decisions adopted by the
managerial bureaucracy are
tactical and operational decisions
II. The public authority
1. The bureaucratic machinery Developed Medium level of development Low level
2. The fiscal system
a. The fiscal incomes classification Primitive Medium level of complexity Developed
b. The prevalent destination of public expenditures Economic Economic and social Social
c. Efficient Low Medium High
d .The fiscal budgetary deficit Pronounced Medium Low
e. The quasi-fiscal budgetary deficit Pronounced Medium Low
3. The relations between executive authority and
central bank
Subordination of the central bank
to the executive authority
Possibilities of executive
authorities interference in the
central banks activities
Central banks independence
III. The monetary sector
1. The classification of financial intermediaries Mostly bank financial
intermediaries
Bank and no bank financial
intermediaries
High role of no bank financial
intermediaries
2. Banking sector
a. Number of components Undetermined Undetermined Undetermined
b The level of bank activity concentration. High Medium Low
c. The proportion of financial resources attracted High Medium Competitively dependent of the
resources attracted by the capital
market
d. The ratios between effective credits supply and
potential credits demand
The demand is durable higher
than the supply
A temporary exceeding demand
is possible
An equilibrium situation

19
A
n

E
m
p
i
r
i
c
a
l

A
n
a
l
y
s
i
s

o
f

t
h
e

B
u
d
g
e
t

D
e
f
i
c
i
t
The three economic systems do not correspond to an
analytical description of some real systems (from this point of
view the proposed analysis represents maybe more a nave
exercise than a theoretical selfconsistent approach).
But even if we take into consideration this aspect, and
presume a direct and strong correlation between the
intensity of the structural blockings which affect an
economic system functioning and its development level,
then we could associate, more or less conventional, three
situations of economic systems based on the unplanned
markets functioning, for each one of the three situations
(we must notice that in the economic real systems a rigorous
delimitation of the different structural imperfections does
not exist and that some of them can be found in all
contemporary economies).This taxonomy could allow us to
analyze the effects induced by the different types of real
and/or nominal shocks, shocks associated with the
economic growth process or with the increase in the
economic evolution dynamics.
An A economy dynamics is confronted with important
and persistent inflationist pressures, with an inefficient
resources allocation, an unfavourable output evolution and
a low level of labour occupation.
The financial resources insufficiency and the inefficient
allocation mechanisms represents a cause for a frequently
manifestation of moral hazard and adverse selection
situations. On the other hand, due to the reduced producing
performances, even if the resources could be sufficient,
their use in production is limited, incomplete and less
efficient.
The manifestation of certain real or nominal shocks which
act as a determinant for a decrease in economic activities
results make different economic subjects to try to substitute
different types of assets. Due to the incipient development
level of the financial market, low liquidity of the non-monetary
financial assets and their high risk, these kinds of assets are
not considered a direct substitute for a monetary asset. On
the other hand, the assets and liabilities structure is far
away from optimum because the level of the effective holds
by some certain financial and real assets is lower than the
desired one (this means that an exceeding demand not
necessary manifested exists).
Concluding, there is any non-monetary asset which
could be seen as a perfect money substitute, and the
liquidity spectrum has numerous discontinuity points (the
substitution elasticity is non-homogenous between
A Economy B Economy C Economy
e. Interest rate formation Mostly administrative Formation mechanism with
important competitive elements
Competitive mechanism
f. The relations with economic no bank subjects Domination or cooperation
(mostly in the relations between
banks and non-banking subjects
with public owners)
In equilibrium Orientated to the non-banking
subjects needs
g. The position opposite the monetary authority Dependence ( the banks are in
the Bank)
Increased autonomy of the
commercial banks
High degree of commercial banks
autonomy
h. The position opposite the capital market Dominance over the capital
market
Competitive Competitive
i. The position of public owned banks Dominant Elements of competition with
private banks
Competition with private banks
j .The risk level High Medium Low
k. Bank services classification Simple Medium level of complexity Complex
l. Banks Universal Universal and specialized Universal and specialized
m. Bank regulations Unstable and inefficient
regulations system
Regulations stable on ensemble
elements
Stable and efficient regulation
system
n. The monetary financial assets types Simple Medium level of complexity Complex
3. Capital market
a. Number of participants Low Medium High
b. The proportion of attracted financial resources Low Medium Competitively dependent of the
resources attracted by the
monetary market
c. The level of financial resources supply
concentration
High Medium Low
d. The traded financial assets Simple Medium level of complexity Complex
e. The complexity of the intermediation process Low Medium High
f. The ratios between effective capital and potential
capital demand
The demand is durable higher
than the supply
A temporary exceeding demand
is possible
An equilibrium situation
g. The financial assets return Low and fluctuating Medium with possible fluctuations High and stabile
h. The liquidity of financial no bank assets Low Medium High
i. Investments Pronounced Medium Low
j. Trading mechanisms Simple, with numerous
imperfections, with low efficiency
Medium level of complexity and
efficiency
Complex and efficient
k. Regulations on capital market Unstable and inefficient
regulations system
Regulations stable on ensemble
elements
Stable and efficient regulation
system
l. The position of public owned operators Dominant Elements of competition with
private operators
Competition with private
operators
20
T
h
e
o
r
e
t
i
c
a
l

a
n
d

A
p
p
l
i
e
d

E
c
o
n
o
m
i
c
s
different financial and real assets types due to the
functional imperfections and to the positional differences
of this assets markets). Economic subjects will try, as a
result, to compensate the decrease in their financial
resources through transforming a part of their real or
financial assets (which have an exceeding level and low
transformation costs).
The aggregation of individual substitution solutions will
cause a modification in the level of the demand and supply
for different types of assets
(3)
. The critical aspect is
represented by the fact that this demand and supply
adjustments does not involve all the times adjustments of
the relatives assets prices. Because of the imperfection
associated with these markets and of the frequency of
monopoly situations, numerous prices are rigid (more
precisely down inelastic) so the supply does not react
through price, at the new demand level. Even more a certitude
of a supply reaction through quantities does not exist. On
the one hand, the exceeding demand was not absorbed for
all the complementary and substitutable assets and, on the
other hand, the temporary character of the exceeding
demand makes the suppliers consider the current demand
fluctuation as a transitory one.
Another problem is the inertial character of current
consumes goods (the demand for goods which is not
considered away to preserve the value), which leads to a
reduced elasticity in front of the available current income
changes.
As a consequence, a decrease in available nominal and
real incomes (current and expected ones) causes a reduction
in the real effective realized level of the economy, which
drops below the desired level. The main way of creating
economies is investing the temporary available resources
in the banking system because the financial market is not
sufficient developed, the financial assets are not diversified
enough, the associated risk is extremely high. Under these
circumstances, the reduction in the economy level combined
with the modifications generated as a result of transformation
processes from real or financial assets in to money, due to the
decrease in current income level, will determine a reduction
of the financial resources attracted by the banking system.
If this situation is accompanied by some modification in
the general credits conditions (other than the one concerning
the interest rate) we will perceive a decrease in the credits
supply. Concluding, we can say that, at a low economy
and credits abundance level, the effective realized invest-
ments level will be situated below the estimated one (we
must notice that here we speak only about the new
investments, from the current period of time, so we do not
understand through this conclusion the existence of a
disinvestments phenomenon; we are dealing only with the
dropping off some new investments projects). As a result,
we will be confronted with a decrease in capital goods
demand, without a modification of their price, like it could
be seen in the final consume goods situation. The final
point is represented by a reduction in the real output level,
compared with its excepted level (not necessary with its
level from the last period). Due to the organizational
rigidities of the labour market and to the centralized
negotiation of the nominal wage, this decrease is not
accompanied by a readjustment in the nominal wage level
(similar with the other relative prices, the nominal wage is
down rigid).
We can also notice a stability in capital goods supply
characteristics including here the psychical and
informational capital real return. This happen because the
decrease in capital goods demand which is not accompanied
by a qualitative supply modification, on the one hand due
to the low level of technical infrastructure development and
on the other hand due to the absence of a competitive
pressure in capital goods field.
In the same time the mentioned decrease in the resources
available for banking system will cause a modification in
the interest rates level (both active and passive interest
rates). But the formation of the interest rates is not free, so
the commercial banks are not allowed to increase as they
wish its level which leads to a lower level of the interest rate
than the desired one. Under these circumstances the
reduction in the credit supply could be a durable one, similar
with the investments level decline.
Parallel with the impact exercised on the relative prices,
investments and outputs volume, the real and nominal shock
affects the financial resources demand:
n through the effects exercised on the current and ex-
pected incomes, and also on the real trading volume
realized by the economic subjects;
n through the de-correlations between the in and out
expenses and incomes flows and through the po-
tential estimation modification concerning the fre-
quency of an exceeding expenses level comparing
with the incomes level;
n through the reformulation of the wealth structure
optimization problem.
The modification appeared in the relative prices structure
as a result of the reformulation of the wealth structure
optimization problem, the perverse modification of some
relative prices due to the transfer of the budgetary hard
restriction from producers to final consumers, the impact of
the contra-cyclic economic politics or preventive inflation
determined by the economic subjects which benefits of the
21
A
n

E
m
p
i
r
i
c
a
l

A
n
a
l
y
s
i
s

o
f

t
h
e

B
u
d
g
e
t

D
e
f
i
c
i
t
informational advantages can transform the diverse shocks
which affect the A systems functioning in veritable
rocks against the economic growth. Their absorption
implies important social costs.
In a B economy the effect of real and nominal shocks
is much more diffuse. The typology of real and financial
assets and their return are significant higher than in the
A economy case. Also their risk is lower and some financial
asset could be perceived as a direct substitute for money.
If the level of liquid resources is lower than the planed
one, the economic subjects will try to compensate it also
through a decrease of that type of asset which is perceived
having similar characteristic as money has, not only
considering undifferentiated the imperfect liquid assets.
But the asset and liabilities structure is not optimal
because the effective level of some real and financial assets
is not the desired one (the amplitude of the structural
disequilibria is lower than in the first case). Reformulating
their optimization structure problems, the economic subjects
will take into account not only these structural disequilibria
but also the necessity of an arbitrage between the return
and the risk of different assets.
The re-adjustments appeared in the different assets
supply and demand causes modifications of their relative
prices (even if on some of the markets, the individual prices
continue to remain down rigid) and of the supplied
quantities (with the same observation about the rigid nature
of the supply for some assets).
Because the current consume of goods has in a B
economy a more pronounced elasticity in front of the
modifications in the current available income level,
comparing with a A economy, a decrease in the available
income level (or, more precisely, its positioning at a lower
level than the expected one) can cause a reduction of the
current consume (without an uniform character of this
decrease for all kinds of current consume goods).
As a consequence, the decrease of the available nominal
incomes (more exactly, principally of the nominal ones,
because the stability of some relative prices can cause a
lower reduction of the general prices level than the
reduction of the nominal income level; in this way the
nominal reduction is accompanied by a real one) causes a
compression of the effective economy. Its level is inferior
in against with the desired one, taking into account the
fact that the decreases in level of consume is lower than the
decrease in the income level.
In this case the economies are created not only using
the banking system (mostly by the economic subjects with
a low or medium level of incomes and a high risk aversion)
but also using financial markets. This fact will provoke in
the same time a diminishing of the resources attracted by
the banking sector and a decrease of the financial assets
demand, which will determine a prices decrease and an
interest rate increase.
Because of the presence of a numerous competitive
element in the mechanism of interest rate formation, the
decrease in the resources attracted by the banking system
will be followed by an increase of the active interest rate
and/or a decrease of the passive interest rate (even if, due
to the persistence of some administrative elements in interest
rate formation, some types of interest rates will remain
unchanged, which leads to a medium level of the interest
rate lower than the desired one; the measure of this difference
is much more less significant than in an A case economy
and anyway higher than the one from the former period).
The interest rates increases combined with a diminution
of the available financing resources will provoke a decrease
of the credits demand and supply, decrease that could be
amplified by the general credit condition modifications. In
this context, at a lower economy volume, an inferior credit
abundance index and a superior interest rate index, the
effective investments volume will be situated below the
planned one (we speak here about the new investments but
also about a disinvesting process). The decrease in the current
investments volume will be accompanied by a diminution
of the capital goods demand (similar with the final consume
goods) without a modification in the same degree of their
prices (in fact it is possible that some of this prices to be
down inelastic). On this causal chain we will also find a
real output decrease compared with the planned one (not
necessary compared to the former one). Because of the
decentralized components present in the wages mechanisms,
the labour demand has a higher level of elasticity comparing
with the nominal wage level. The intra and inter-sectorial
mobility of the labour demand, the more pronounced
character of the geographic mobility, make possible the
apparition of some re-adjustments of the labour market along
with the decrease in output level, even if this re-adjustments
will continue to have a partial character. Also, the decrease
of the capital goods demand could be accompanied by a
qualitative modification of the supply, due to the
manifestation of some competitive pressures in the sector.
In this way the capital goods supply characteristics
(including the real return of the informational and physic
capital) will suffer transformations, but these ones will not
have sufficient strength to determine modifications able to
compensate the impact which the decrease in investments
available resources causes on their volume.
The impact of the real and/or nominal shocks in a B
economy is similar with the one in an A economy
22
T
h
e
o
r
e
t
i
c
a
l

a
n
d

A
p
p
l
i
e
d

E
c
o
n
o
m
i
c
s
(through the effects exercised on the current and expected
incomes, and also on the real trading volume realized by
the economic subjects; through the de-correlations between
the in and out expenses and incomes flows and through
the potential estimation modification concerning the
frequency of an exceeding expenses level comparing with
the incomes level, through the reformulation of the wealth
structure optimization problem). The only things which
are different are the intensity of these effects, lower as
amplitude but with a less contradictory character, and
manifestation of the interest rate level modifications. But
globally, the nature of these effects will remain
undetermined. More than that, due to the remaining
informational asymmetry between different categories of
economic subjects and to a positional asymmetry, their
reaction opposite to the exogenous decrease of the money
supply induced by the economic system is still no-
homogenous, but phenomena as the transfer effect or the
preventive inflation will have a lower amplitude than in
an A economy.
C economies are characterized by a lack of structural
rigidity. The different imperfections which affect the market
functionality have a minimal intensity; the financial market
is mature and the competitive pressure, the efficient
resources allocation mechanisms, the rapid dynamics of
technical progresses make the exceeding demand to be
easily eliminated. The supply adaptation is dually realized
on all markets, through price but also through quantity.
The liquidity spectrum is uniform (with a single
discontinuity point) and the variety of the asset situated at
left of this point is complex (in other words, there are a
numerous types of financial assets which are perceived as
a direct money substitute due to their high liquidity level
and their low risk). In this conditions, the exogenous
decrease of the liquid available resources caused by the
compression of generating economic activity will be
compensated in the first place through a reduction of the
financial assets with similar characteristics with money and
just after, if this sort of assets are not sufficient enough,
through the reduction of other assets (this substitution
process is ruled by an arbitrage between risk and return).
The re-adjustments in the assets supply and demand
determine relative prices modifications but also quantity
supply modifications (but we must notice that the ratio
between the movements dynamics is ex-ante undetermined;
so, we will assume that the adjusting using quantities is
realized before the adjustment through prices, without
criticize this)
Because the goods current consume is perfect elastic
comparing with the changes in current income level, the
compression of this income generates a decrease of the
current consume which is uniform for all goods types. It
has lower amplitude than the income compression and leads
to a decrease in the effective economy. In this way, real
economy is inferior to the expected, desired one.
Taking into consideration the fact that in this case the
economies are created not only using the banking system
but also using financial markets, this will provoke in the
same time a diminishing of the resources attracted by the
banking sector and a decrease of the financial assets
demand, which will determine a prices decrease and an
interest rate increase.
Due to the freely and competitively interest rates
formation, they will grow (even in the banking system) until
they will attain the real level (which reflects the new ratio
between the financial resources supply and demand).
The increases of the interest rates, the compression of
the available financial resources (parallel with the
modification of the general credit condition) could cause a
reduction of the credit demand and supply. At a low
economy and abundance index volume corroborated with
a high interest rate level, the effective investments volume
will be situated at a lower level than the planned one (we
speak here about the new investments but also about a
disinvesting process).
The decrease in current investments volume will be
accompanied by a decrease of the capital goods demand
and by adjustments of their prices and quantities. We will
find also a real output decrease comparing with the planed
one. Because of the decentralized components present in
the wages mechanisms, the labour demand and supply are
perfectly elastic opposite to the real wage level, which
determine complete labour re-adjustments. The decrease
of capital goods demand (because of the supply
competition on the capital goods market) goes along with
its qualitative modification. In this way the characteristics
of the capital goods supply (including the informational
and physic return) will be modified. In this case these
changes are able to compensate the impact which the
reduction of the available investments resources causes
over its volume. Anyway, the investments volume has a
relevant elasticity comparing with these parameters
dynamics.
The real and nominal shocks cause a decrease of the
money demand through the effects induced by the
structural modification and through the interest rate (this
one has not always the same amplitude with the decrease
of money supply, due to the inertial character of the
anticipation made by economic subjects). Because the
informational and positional asymmetries are almost
23
A
n

E
m
p
i
r
i
c
a
l

A
n
a
l
y
s
i
s

o
f

t
h
e

B
u
d
g
e
t

D
e
f
i
c
i
t
absent the level of the transfer effect or preventive
inflation will be lowest.
Resuming:
S
1
: The budget deficit decrease as the economic systems
is closed to the model of C economies because:
S
01
: The involvement of the state in the functioning of
the economical systems decreases as these systems
translate their structures from the characteristics of to A
economies to the ones specifically to C economies.
S
02
: The ability of economic systems in absorbing real
and/or nominal shocks induced by the economic growth
processes increases as well as these systems pass structural
modifications which transforms them from A economies
to C economies.
3. Institutional characteristics of the economic
systems: how the social mandate is exercised and
how growth could be sustained
Any structural performances an economic system would
have, given the way resources are created, distributed and
redistributed using the global social utility function, could
not result only from the intrinsic market mechanisms. Due
to the specific preferences concerning the incomes volume
and structure, their allocation, risk aversion and also because
of the different capacities of the economic subjects, which
are more or less able to participate at the economic
processes, a set of rules of the game which allows social
mediation is definitely needed. If we accept this need, the
institutions could be considered the rules of the game in a
society (North, 1990, p. 3). They allow the human
activities to be structured in social, political and economic
mean. In the mean time, the institutional design of a society
is a critical parameter for the nature and quality of the
governance. As Evans (1995, pp. 10-12) has noticed:
States are not generic. They vary dramatically in their
internal structure and relations to society. Different kinds
of state structures create different capacities for action.
Structures define the range of roles that the state is capable
of playing. Outcomes depend both on whether the role fit
the context and on how well they are executed. [] The
trick is to establish a connection between developmental
impact and the structural characteristics of states their
internal organization and relation to society.
A critical distinction should be done between the
political institutions and civil institutions. The
institutions to the first category are the elements of the
political systems and represent the ensemble of public
(central and local) and semi-public (e.g. political parties)
authorities. The institutions to the second category are
generated by the civil society and represent private
associative forms
(4)
.
The impact of each type of institutions on the budget
deficit could be explained:
n by their influence on the states importance in the
distributional processes;
n by their influence on the private distributional
coalitions.
More exactly, if the influence of the politic institutions
is strong and, correlative, the civil societys institutions are
weak structured (the social life is dominated by the public
authorities and/or political organizations), the distribu-
tional processes are controlled by the state and the budget
deficit are higher that the ones which occurs in situations
in which the powers and the autonomy of the civil
institutions are significant. From this point of view, the
budget deficit is the prices of a higher relative importance
of the political life in respect to the private one.
But how important is in fact this cleavage between
the public/private institutions? Isnt it clearer to say
that all the institutions that are in fact distributional
coalitions exercised an impact on budget deficit? In our
opinion, these theses are not contradictory: the
distributional coalitions tend to reduce the capacity of
society to promote the structural and functional changes
and the operational speed of the resources reallocation
mechanisms and thus tend to reduce the economic growth.
In the same time, this impact is asymmetric for the political
and civil institutions: the importance of the public
allocation of resources decreases as the importance of the
private sphere involvement in the allocation processes
increase.
Also, a distinction between the formal institutions (rules,
norms, procedures) and the informal ones (unwritten
conduit code which makes the formal rule understandable,
supplements and sometimes even replaces them) is very
useful. Both institutions are creating a framework in which
there are inserted the economic systems, destined to
support and to correct the way the systems work.
Using the analysis proposed by Rodrik (2000) we
consider that this sort of support-institutions could be
classified as follows:
1) institutions for property rights;
2) regulatory institutions;
3) institutions for macroeconomic stabilization;
4) institutions for social insurance;
5) institutions for conflicts management.
1. Property rights an adequate property rights system
represents an essential incentive for the economic
innovation processes: the economic subjects are assuming
24
T
h
e
o
r
e
t
i
c
a
l

a
n
d

A
p
p
l
i
e
d

E
c
o
n
o
m
i
c
s
the risks associated to those processes only if they have
the control over the result.
Rodrik (2000, p. 5) said: Note that the key word is
control rather than ownership. Formal property rights
do not count for much is they do not confer control rights.
By the same token, sufficiently strong control rights may
do the trick even in the absence of formal property rights.
The de facto use of the control right is much more diffuse
than the use of the property right and depends not only of
the formal regulations but also of the behavioral typology
associated with the implementation and realization practices,
practices which are considered social acceptable.
It should be noticed that the property rights can not be
considered as absolute. There is a frontier which limits
the action sphere of each individual economic subject and
the societies are trying to impose different limits in frontier
areas where this sphere is intersected with the one
characteristic for other subjects. The societies limit the
property rights by subordinating them to the public
interest: the global social utility maximization is prevalent
comparing with the maximization of the individual utilities.
The exact definition of the public interest is different
from society to society, from period to period.
2. Regulatory institutions - behind the ideal model of
the perfect market, the real markets are characterized by
numerous types of imperfections. In practice the markets
fail due to the natural, technical or informational monopoly
situations, to some trading costs, which stop the innovation
and other non-monetary externalities internalization, and
not in the last place due to the informational asymmetry,
which generates moral hazard and adverse selection and
to the systemic and non-systemic shocks which affect their
normal functionality.
To compensate these markets failures, a complex
ensemble of institutions able to create a frame of rules and
prudential supervision for the real and financial assets
markets and to preserve the competitive character of these
markets is extremely necessary.
A critical aspect could be the interventions amplitude.
More precisely a balance in their modulation is
necessary: too low amplitude can induce the intervention
inefficiency. Per a contrario too pronounced amplitude
can generate perturbations of the natural market
mechanisms. Moreover, the dimension of the interventions
must suit with the structural specific characteristics and to
maintain a minimal character if the structural configuration
is good. If not, and we are in the presence of some profound
structural deficiencies and/or in a process of accelerate
economic growth, a public coordination of the private sector
activity could appear as desirable (the example of some
countries from South-East Asia, in 60 and 70 could be a
proof that justify this assumption).
Finally we must also notice the importance of a correct
schedule in time of this kind of interventions. The realized
connection between public and private sphere, social
efficient at the beginning, could become dysfunctional if
initial conditions are changing.
Summarizing, we can affirm that, similar with the
institution for property rights, the optimum institutional
arrangements involved by ruling and prudential supervising
of the markets is a variable of time and geographic areas.
3. Institutions for macroeconomic stabilization - the
auto-stabilization markets mechanisms do not have a
complete efficiency: the de-correlations between real
and financial asset flows can be a result of some external
shocks but moreover a result of the way different systems
components, and the whole system, is functioning.
The exceeding demand and supply could become
persistent; the financial infrastructure could have a limited
capacity of absorbing the real and nominal shocks, the
incomplete and asymmetrical information could lead to
incorrect consume economy or investment decisions. For
this reason, a fiscal and monetary authority able to conceive
and implement anti-cyclical politics with stabilization
purpose is a real necessity.
4. Institutions for social insurance - a continuous
structural-functional transformation process characterizes
the modern economic systems.
The environment where the daily economic processes
are realized, the mechanism, the written and unwritten rules
become profound instable. The labour, the technologies,
the financial resources, the organizational structures, the
ideas, the values and the inter-personal relationship
transgress more and more rapidly the physical and mental
borders. The impact of those transformations on the level
of economic growth depends of the risk aversion of all the
economic subjects involved. These risks cannot be managed
in a traditional fashion, characteristic for more stable
economic systems, where groups and collectivizes with small
dimensions and strong connections between members
dominate the social life.
The modern risk management mechanisms have a
combined nature. The public authority takes over and
socially distributes a part of the risks, which the individuals
must to face off. The individuals also develop alternative
protection systems, independently or in a partnership with
public social insurance systems. These actions have as a
result a mix between the individual firms practices and the
practices specific for the public authorities that have a large
area of extension.
25
A
n

E
m
p
i
r
i
c
a
l

A
n
a
l
y
s
i
s

o
f

t
h
e

B
u
d
g
e
t

D
e
f
i
c
i
t
One could notice that the public sector implication in
the social risks management is extended behind the
distribution of fiscal resources in the favor of different social
categories. This involvement frequently includes a
complex system of rules, norms and regulations meant for
the high-risk activities. This system covers a variety of
aspects starting from the lifetime employment practices
and continuing with consumer protection and environment
conservation.
The safety mechanisms contribute to the social
disparity diminishing and, in the same time, stimulate the
economic programs of the high-risk private subjects
which are capable to generate socio-economic innovation
and relative social advantages. The safety mechanisms
can also help diminishing the resistance in front of the
changes. This opposition is frequently manifested in the
economic systems characterized by rapid structural
transformations but using these insurance methods the
social consensus in favor of this kind of transformations is
obtained easier.
5. Institutions for conflict management - different
cleavages types transgress the modern societies. The
demarcation lines between the divers social groups and
categories does not result just from the primary distribution
and redistribution of the economic activities out-put, being
also equally determined by the cultural, ethnic and political
factors. Or, as Rodrik (2000, p. 12) said: Social conflict is
harmful both because it diverts resources from
economically productive activities and because it
discourages such activities by the uncertainty it generates.
A pronounced asymmetry of economic activities results
from the social coordination failure in obtaining and using
those results. This asymmetry implies social breakings
which have a larger associated cost than the one involved
by financing an ensemble of institutions able to manage
social conflicts.
Some examples of institutions could be: a legal system
which respects the social ethics, political institutions which
allow the representation of all interest groups, independent
professional structures, minority structures. .
One could notice that they have a leveling action.
On the one hand, they limit the positive result of the
economic game (through the social redistribution) and,
on the other hand, contribute to the loss limitation (through
multiple compensation forms). Consequently, the existence
of this kind of institutions increases the probability of fairness
and cooperation in the economic game, which lead to a
higher output than a non-cooperative one.
For a more accurate picture, it could be noticed that on
should pay a special attention to all the types of institutions,
which are acting like distributional coalitions
(5)
. The
critical point is that such institutions are able to influence
the allocation and reallocation mechanism; the higher their
power is, the lower the efficiency of these mechanisms is
and higher the transactional costs are which occur in the
current evolution of the economical systems. Also, any
increase in the number of the distributional coalitions leads
to an increase in the power and attributions of the public
authorities and, more generally, exercises a substantial
impact on the state architecture.
The institutions ensemble represents a markets
complement and an environment for the public actions.
These institutions are, in the last instance, corrections
mechanism of the intrinsic dysfunctions, which assures the
social coordination of the economic processes, at the
minimal level.
As a consequence:
I
0
: The higher the quality of private institutions is, the
lower is the budget deficit because:
I
01
: The higher the quality and importance of the formal
and informal social-cultural institutions of the civil society
is, the lower profile is the role of the state and thus the
budget deficit;
I
02
: The higher the quality of the complementary market
institutions is, the more durable the character of the
economic growth is and lower the social costs are.
4. The socio-cultural paradigm: how the social
mandate is formulated and what values
are assigned to the economic growth
By paradigm we understand the dominant mental
collective model which makes the distinction between a
society and the other. This paradigm represents a societal
integration factor that supplies commune values and
purposes for society members. Also, it represents the
subject of some learning and transferring inter-generation
processes, modifying itself lent, in long cycles. The
paradigm is the generator factor of the institutional frame
which characterizes the society configuration. The paradigm
and the institution generated by it significantly influence
the economic activity dynamics. It is sufficient to notice
that the economic subjects guide their decisions using a
set of characteristic values; that the economic politics are
influenced by this values in the interventions realized
through the processes of distribution and redistribution of
the economic activities resources and results (the
predominant position of the equality/inequality couple
significantly influences the public authorities involvement
in the redistribution process).
26
T
h
e
o
r
e
t
i
c
a
l

a
n
d

A
p
p
l
i
e
d

E
c
o
n
o
m
i
c
s
In the same time, the economic development influences
the institutions and also the paradigm. For example, the
significantly bureaucratized institutions that characterize
the industrial society has known a large decline in the
post-industrial society, characterized by a highly specialized
labour market, an important level of mobility and an
evolution to the qualitative aspect, due to the increase in
the per capita income level and its relatively equilibrate
distributions.
The dissolution of the real socialist system had also
happened inter alia in a point of maximum bureaucracy
inefficiency in the planed economy management.
It is absolutely necessary to notice that the way economic
dynamics influence the paradigm and its institutions
dynamics (if we take into account the different level of inertia
that characterizes the socio-cultural/economic dynamics) is
not clear enough. So, as we already have said before the
paradigm presents by definition an accentuated inertial
character more pronounced than the one that characterizes
economic dynamics. Despite all these, due to the assimilation
of the cultural values by a learning process, the existence of
some modifications (most probably, in normal conditions
initiated first at the institutions level and after at the
paradigms) in the same generation as a result of economic
context changes between the social start of one generation
and the social maturity of the other is perfectly possible.
More precisely, if we admit the scarcity hypothesis: the highest
subjective utility is attributed to the good with a manifested
exceeding demand than the satisfying of A good demand
(A good has a deficient supply at the beginning of the
cultural learning process) and the apparition of a exceeding
demand for B good during this process could cause a
movement from the values associated to the A goods to the
values associated to the B goods (for example from material
goods to spare time) (in the terminology used by Inglehart
(1997) this process is equivalent with a transformation from
materialism to post-materialism).
An important consequence of this approach consist in
the fact that it could be postulated the thesis that any shift in
the paradigm will induce a significant and durable change
in the parameters of the global social utility function.
Thus, the changes in paradigm will affect the role and
functions of the state not only in an indirect manner, via the
economic growth, but also direct, via the (re) formulation
of the mandate, which is entrusted to the state by the society.
In this case, if we take into account the H
1
H
3
hypothesis, we can postulate a direct connexion between
the configurations of the mental architecture of a society
and the states role.
Summarizing:
Institutions
- Formal
- Informal
Economic
dynamic
Socio-cultural
paradigm
The role of state
(budget deficit)
Figure 1. Relations between paradigm, institutions, economic
dynamic and the role of state
Figure 1 reflects the relations between paradigm,
institutions, economic dynamic and the role of state and is
highly similar with the one presented by Jong (2001, p. 41).
Despite of this fact, there are two fundamental distinctions:
(i) the use of paradigm term instead of the cultural
values term (justified in our opinion by the stronger
sense of mental model incorporated in the first one
comparing with the second one that suggest more shared
attitudes
(6)
; (ii) the consideration of a feedback relation
between institutions and paradigm (if an institutional
system is exogenous constitute it could influence in the
end the receptor- paradigm; the pro and contra-arguments
could be synthesized using the approaches specific to one
recurrent theme in dominant paradigm in Romania, the
one of forms without fond: the initial creation of some
forms maintained functional and efficient ends by
influencing the fond which did not generated them, just
receipted them).
It is interesting to remark the possibility of creating
equivalence between the paradigm components and the
factors used by Hofstede (2003)
(7)
to explain the cultural
differences (using some limitation in their sphere and
content). These factors are
(8)
:
n Power Distance (PD);
n Individualism (I);
n Masculinity (M);
n Uncertainty Avoidance (UAI).
PD deals with the degree of acceptance of the non-
equal power distribution in society. In the societies with a
higher level of PD, this distribution will have a more
pronounced character, with a positive correlation between
this factor and the concentration of the political power
(Hofstede, 2003, pp. 97-98, 106)
(9)
.
In societies characterized by a high UAI level, the refuse
of decisional incertitude will generate an increased recurs
27
A
n

E
m
p
i
r
i
c
a
l

A
n
a
l
y
s
i
s

o
f

t
h
e

B
u
d
g
e
t

D
e
f
i
c
i
t
to the public authorities for its dispersion and orientation
to a minimum level; as a consequence, the power and
competences sphere of these authorities will be larger and
more precisely established than in those societies with a
low UAI level, which will accentuate the individual
competences of the economic subjects and the limitation of
the public role to a small set of public utilities supply.
M does not imply the discrimination of the cultural values
on sexes, trying to reflect some fundamental values shared
by all society members. More precisely, it is considered that
the masculine societies are those where the dominant
values are connected with the social affirmation, the material
results and the decisional freedom. In this conditions the
performance is measured using the terms of reaching and
maintaining a reference social status and the material
achievements are considered more important than the
spiritual ones. In opposition, the feminine societies have
as dominant values: the equality, the solidarity and the
consensus, the social tension avoidance, the centralization
of the social-economic trades and the conservation or the
spiritual values, tided to the quality of life and to the
inter-human relationships.
Finally, we deal with the acceptance/rejections of the
individual responsibilities in front of the social reference
group (family, social category, nation).
Discussion of the relevance and the limits of these
concepts exceed this paper framework. We consider that
taking them into consideration and using them to
characterize three types of paradigm, characteristic for three
types of societies, could be useful:
n X society (closed society);
n Y society (semi-opened society);
n Z society (opened society).
More precisely:
The characteristic of the different paradigms
Table 2
acceptance of the unequal power distribution, as natural
status, the individualism and the social affirmation, the
performance and the material result, the incertitude
acceptance as a status which could generate action
opportunities.
It is interesting to remark that, from a dynamic perspective,
the different possible combinations between the mentioned
economies and paradigm place the socio-economic systems
in three relatively distinct zones opposite to a certain
equilibrium status (we understand by this the absence of
any social changes, in other words the tendency of actual
configuration perpetuation, in the economic structures area
and also in the institutions one; we do not attribute a
positive value to a status like this which represents just a
socio-economic frozen dynamics situation and/or the
absence of a motivation to realize major change of the
economic structures and institutions) (table 3):
n Area I (near the equilibrium);
n Area II (the intermediary area);
n Area III (far away from the equilibrium).
The socio-economic systems positioning under the
paradigm-structure couple impact
Table 3
X Y Z
PD Reduced Medium Pronounced
I Reduced Medium Pronounced
M Reduced Medium Pronounced
UAI Pronounced Medium Reduced
Society type
Economy type
"X" "Y" Z
A Area I Area II Area III
B Area II Area II Area II
C Area III Area II Area I
Closed societies are characterized by the tendency (at
least formal shown) of attenuation at the unequal power
distribution level, by a pronounced collectivism, by
promoting the feminine values (searching for consensus
and not for competition) and by a pronounced incertitude
and risk aversion.
In semi-opened societies all these parameters have
medium values; the opened societies valorize more the
Because of its characteristics, an A economy can serve
as a structural-functional base for a closed society. The
supports for a performance increase through a superior risks
and social inequality acceptance, which is normally
generated in the first stages of the economic growth, is
situated at a reduced level. As a consequence, the motivation
for the institutional modification able to generate a superior
economic performance will be insufficient for starting some
social innovation processes; the accent is pointed on the
status quo and social certitude maintaining, sacrificing the
economic system efficiency.
In contrast a C economy needs some social conditions
specific for the opened societies; if an institutional gap
exists it will cause an intense adjustment process, meant to
assure the concordance between the constitutive values of
the specific paradigm and the way economic mechanism
and structure function.
The crucial implication for our debate consists in the
fact that in the each type of the socio-economic systems
there is assigned a different role of state and thus the type
and the magnitude of its activities is different.
28
T
h
e
o
r
e
t
i
c
a
l

a
n
d

A
p
p
l
i
e
d

E
c
o
n
o
m
i
c
s
Synthetically, it could be formulated the thesis that more
far from equilibrium is a society, a more larger role is
attributed to the state and more important is the implication
of the public authorities in the normal distribution and
also in the redistributive process.
In consequence, it could be presumed that:
C
1PD
: The budget deficit is larger in the countries with
a higher PD because:
C
01PL
: The budget deficit is more important in the
countries were PD is more pronounced due to
the fact that the public authorities tend to act
more frequently in an authoritarian manner and
to involve in a larger spectrum of social and
economic issues;
C
11PD
: The economic dynamic is less accelerated and
auto-sustained in those countries where PD is
more pronounced as a result of an inefficient
institutional infrastructure;
C
2UAI
: The budget deficit is larger in the countries with
a higher UAI because:
C
02UAI
: The budget deficit is more important in the
countries were UAI is more pronounced due to
the fact that the appeal to the state intervention
in the management of the economic and social
risks is more frequently;
C
12UAI
: The economic dynamic is less accelerated and
insufficient auto-sustained in the countries with
pronounced UAI due to the tendency to select
economic programs with low associated risk
but also with a lower yield;
C
3M
: The budget deficit may be (even if this is not
obligatory) larger in the countries with a higher M as a
result of two different sets of effects:
C
03M
: The budget deficit is more pronounced in the
countries with a higher M due to the fact that
the claims for the establishments proof of
efficiency (especially in some particular
domains) are more frequently;
C
13M
: By the economic cleavages accentuation, the
economic dynamic may be (even if this is not
obligatory) less auto-sustained in countries
with a less pronounced M;
C
4I
: The budget deficit may be (even if this is not
obligatory) lower in the countries with a higher I as a
result of two complementary sets of effects:
C
04I
: In the countries with a more important I, the
autonomy of the civil society in the respect of
the state is more pronounced and thus the state
role and, consequently, the budget deficit is
more reduce;
C
14I
: In the countries with a high level of I, the
economic dynamic may be (even if this is not
obligatory) more accelerated.
5. Benchmarks results
5.1. Data and Descriptive Statistics
The structural and institutional aspects are, at least
partially, captured by using the Economic Freedom of the
World (EFW) index. This index measures the degree of
economic freedom present in five major areas:
n Size of Government: expenditures, taxes and
enterprises;
n Legal structure and security of property rights;
n Access to sound money;
n Freedom to exchange with foreigners;
n Regulation of credit, labour, and business.
The components of Area 1 indicate the extent of countrys
reliance on the freedom of individual economic subjects
choices and power of deregulated markets, by measuring
the intensity of the substitution effect between the private
resources allocation and the public expenditures, the extent
of using private rather than public enterprises to produce
goods and services and the level of taxes on economic
resources in the redistribution process.
Area 2 deals with the key ingredients of the legal system
which is compatible with the economic freedom such as
rule of law, security of property rights, an independent
judiciary, and an impartial court system.
The Area 3 treats the subject of the financial stability.
The components of this Area are correlated with the
consistency of monetary policy (and of monetary
authorities) with long-term price stability. They also measure
the easy use degree of other currencies via domestic and
foreign banks.
The elements of Area 4 are designed to reflect a wide
variety of restraints that affect international exchanges.
These include tariffs, quotas, hidden administrative restrains,
exchange rate and capital controls. In order to get a high
rating in this area, a country must have low tariffs, a large
external trade sector, efficient customs administration, a
freely convertible currency, and few controls on capital.
The Area 5 reflects the conditions of the domestic credit
market (the banks ownership, the commercial banks sector
competition, the credit extension, the avoidance of interest
rate controls and regulations), the characteristics of the
labour markets (minimum wages, dismissal regulations,
centralized wage setting, extensions of union contracts to
non-participating parties, unemployment benefits, and
conscription), and the regulation of business activities
29
A
n

E
m
p
i
r
i
c
a
l

A
n
a
l
y
s
i
s

o
f

t
h
e

B
u
d
g
e
t

D
e
f
i
c
i
t
(price controls, administrative conditions for new
businesses, government bureaucracy, import and export
permits, business licenses, tax assessments, etc.).
These areas cover some of the elements listed in Table 1
(especially large parts from I.4, I.6, I.9, II.1, II.2, III.1, III.2)
and describe the property rights and the architecture of the
regulatory institutions. Thus, the index could be used as an
acceptable proxy for the structural and institutional design
of the considered economies. In table it is shown the
descriptive statistics of the index. These statistics suggest
that there are not major breakdowns over the time in the
sample, and also reflects the important differences in the
degree of economic freedom between the countries
(10)
.
The data for the paradigms components are from
Hofstede (2003) and they cover a smaller sub-sample of
countries (27) (S.II) for the same period. Table describes
the corresponding statistics of the four factors considered
(11)
.
Despite the limited observations, all the three type of
societies are included in this sub-sample.
The role and importance of the civil society institutions
is indirectly estimated by using the Freedom in the World
data, which measures freedom by assessing two broad
categories: 1) political rights and 2) civil liberties. As is
defined by Freedom House (2003): Political rights enable
people to participate freely in the political process. This
includes the right to vote and compete for public office
and to elect representatives who have a decisive vote on
public policies. Also: Civil liberties include the freedom
to develop opinions, institutions, and personal autonomy
without interference from the state.
The Political Rights (PR) index consists in a
checklist of various aspects from areas like
(12)
:
n Electoral process;
n Political pluralism and participation;
n Functioning of government.
The Civil Liberties (CL) index deals with:
n Freedom of expression and belief;
n Associational and organizational rights;
n Rule of law;
n Personal autonomy and individual rights.
We just simply suppose that if the Political Rights are
less or equally defined and exercised that the Civil Liberties
then the civil institutions are more or equally important
that the political ones.
5.2. Results
The first step of the empirical test represents an attempt
to estimate the following equation:
it it t it
EFW bd + + = (1)
where bd
it
is the weight of budget deficit in GDP for country
i
and EFW
it
is the level of Economic Freedom of the World
index.
The core equation (1) encapsulates S
0
and I
0
both, and
cannot distinguish between the individual contributions of
the structural and institutional determinants of the dynamic
output. Thus, its relevance is limited by an analytical
weakness, so the results can count only for the global
impact of these determinants.
Before we discuss the results, it is useful to look at a
simple bi-variable relationship between budget deficit and
economic freedom.
Figure 2 shows the scatter plot for the sample SI
countries and suggests that there is a consistent positive
correlation between economic dynamic and the degree of
economic freedom. This positive correlation is confirmed
by the simple OLS regression of equation (1) reported in
Table 9. The sign of EFW is as expected and statistically
significant: countries with a larger economic freedom (with
less structural deficiencies and a better quality of
institutions) are likely to benefit from a positive dynamic of
output. The descriptive statistics of ordinary residuals are
shown in Table 10 and suggest that these residuals are
close to zero but are not entirely normally distributed.
Of course, for a number of reasons (reverse causality,
omitted variables bias etc.) the above relationship cannot
be considerate as an accurate one. But it could be seen as a
first proof for the thesis of the existence of a connection
between the economic freedom and budget deficit.
In order to complete the analysis for the institutional
factors, the second step consists in a check for the impact
of the political freedom on the budget deficit embedded in
the next equation:
it it it t it
CL PR bd + + + = (2)
where PR stands for the political rights and CL for the
civil liberties.
The results are shown in Table 11. There are some
peculiar aspects of these results. For instance, the absolute
level of the parameters suggests that the civil liberties
are more important for the budget deficit than the political
rights. In the same time, it is interesting to note the signs
of the parameters: an increase of the political rights (a
decrease of the level of PR) leads to an augmentation of
the budget deficit. In other words, if the political structures
are more diversified and stronger and the different public
and semi-public authorities have more balanced powers,
their capacities to influence the dimensions and structures
30
T
h
e
o
r
e
t
i
c
a
l

a
n
d

A
p
p
l
i
e
d

E
c
o
n
o
m
i
c
s
of the reallocation processes are much significant. Also, an
increase of the civil society autonomy in respect to the
public/political sphere (a decrease of the level of CL) will
induce a decrease of the budget deficit as a consequence of
the complementary reduction of state involvement in the
current social affairs.
The third step of our empirical approach consists in the
estimation for the countries in S.II of the next equation:
it i
i i i t it
UAI
M I PD gdp
+ +
+ + + + =
4
3 2 1
(3)
where PD
i
represents the Hofstede score of country
i
for
Power Distance, and I
i
, M
i
, UAI
i
are, respectively, the scores
for Individualism, Masculinity, and Uncertainty Avoidance.
The results are reported in Table 13. All the coefficients
are statistically significant and their signs are in accord to
C
0
hypothesis. The absolute level of the coefficients suggests
that all the cultural factors have almost the same importance
in explaining the evolution of the budget deficit, with the
interesting exception of PD which has a smaller impact.
Due to the dimensions of S.II, these results are only a
flash for a more extensive analyze. However, it should
be mentioed the fact that when EFWis also used like an
explanatory variable in Equation (3), it appears a
diminished statistical significance for all the coefficients,
situation which is probably a reflection of multi-co-
linearity. This could suggest that the cultural factors act
not only direct on budget deficit, influencing the behaviors
of public authorities and economic subjects, but also
indirect, via the quality of institutions.
Looking at the global picture, which occurs from the
proposed analysis, we can say that the theoretical framework
employed and the empirical results obtained leads to the
conclusions that structural and institutional aspect of the
economic systems, as well as the components of the socio-
cultural paradigms and the political and civil liberties
matters for size and evolution of budget deficit.
But there are a lot of caveats and one can argue that this
output is vague and almost a truism.
A) Theoretical limitations
1) Unclear definition of structural characteristics
of economic systems
The elements listed in Table 1 are a mix of some
components of the economic architecture and quasi-
institutional aspects amalgamated in an unclear picture.
Dropping -down one or other of this does not improve this
picture because there is not a coherent effort to clarify what
is structural and what is functional and, more, what are
the outputs derived from the intrinsic configuration of the
economies themselves and what are the outputs coming
from policies. In fact, Table 1 is not a definition, but
rather an intuitive appeal to an ambiguous concept.
2) Too elastic borders between the three types of
economic systems
Despite the description of the three types of economies,
it is difficult to distinguish between them, especially because
there is not a set of operational criteria able to allow a reaso-
nable identification. Again, there is any set of definitions
attached to this taxonomy, and so there is not a coherent
framework to place the entire analyses of the growth shocks
(13)
.
3) Ambiguous presumptions about the state
involvement in structural modification
The involvement of the state in the structural adjustment
of the economical systems is just presumed without any
explanation about the nature, the amplitude and the
consequences of such involvement. In others words, there
is nothing about how and at what price. And, more
important, why: it is not argue that such implication of
the state in the re-building process of a A or B type of
economy is necessary and also it is not explained the reasons
of the states to initiate and implement the necessary policies.
One should note that our position is, more or less, a positive
approach: we are trying to seek for an impact of the states
involving on markets functioning, without enquires whether
the state is able to improve these markets, or whether the
outcomes are socially desirables.
4) Blank connections supposed between institutions
and growth
The proposed analyses of the institutional impact does
not much clarify about how this impact is exercised. To
illustrate this, it is enough to look at the description of the
property rights institutions. The paper indicates that when
economic subjects believe their property rights are
protected, they adopt a set of decisions (in terms of
investments, consumptions, savings etc.), which finally bust
up the economy. But nothing is implied about the content
of this property rights, about their configuration, and, more
important, about how there are in practice exercised
(14)
.
Also, the paper insists on the importance of control but it
does not operates any distinctions between different control
mechanisms and it does not provides any explanations for
how these mechanisms could operate.
5) Institutions and policies: not any words about
last ones?
The policies are the expression of the institutional
actions. This means that the policies represents the
dynamic aspect of the institutional behaviors and also
that the actual configuration of the institutions is an
output of the past policies. If this thesis stands up, the
current observed impact of institutions on economic
31
A
n

E
m
p
i
r
i
c
a
l

A
n
a
l
y
s
i
s

o
f

t
h
e

B
u
d
g
e
t

D
e
f
i
c
i
t
growth incorporate in fact the results of current and past
policies and could be not distinguish from them. So, is
not clearly how much the emphasized importance of
institutions for the economic dynamic could be assigned
to the quality of these and how much this is in fact an
outcome of policies quality.
6) Asymmetric impact of political and civil institutions:
why and how?
The asymmetric impact of the political and civil
institutions in the redistribution processes is just simply
statue but there is no explanation attached to this
presumption and also there is not any description of its
precise nature: if both act as distributional coalitions, why
there should be differences between them, others that are
generated by the unequal dimensions and powers?
7) The long-run of the paradigm?
We insist in several places that, on short-term, the
paradigm is exogenous in respect of social and economic
variables (which means that the bottom arrow in Figure 1
could occur only on long run).
But the culture is not a genetic product; it is a social
one. The human person do not inheriting the culture like
genes. There is an assimilation of values process in a social
environment and we do not provide any arguments for the
fact that this process should ex ante treated as a long-
term one
(15)
. Much more, there is no argumentation for these
supposed long-run relationships between economic growth
and paradigm. In fact, does economic development end up
by changing the paradigm? And, if this is happened, how
could be the influences exercised explained?
Supplementary, if we are viewing the culture only like a
learning process, we should respond to a most complex
approach like the one formulate by the Black, Gregersen,
Mendenhal and Stroh (1999): they treat the culture as a
tree with its visible parts above the surface (tangible
aspects of a culture or artifacts) and with its invisible
parts below the surface (the values and assumptions).
Thus, culture is the set of artifacts, values and assumptions
shared by people (explicit aspects) as well as the set of
assumptions and values that influence and guide peoples
behavior and that is passed on from older to younger
generations (implicit aspects). We honestly recognize that
we are not prepared here to respond to such a position.
We only mention that the definition of culture, which is
used, is simply a working one, utile for the purposes of
the present analysis.
8) The insufficient number of cultural dimensions and
their relevance
The concept of paradigm is a complex one and
obviously it could not contain only some aspects like
individualism, power distance, masculinity or
uncertainty avoidance. Even if we are picking up only
these, we do not supply any reasons to consider them the
most relevant for the topic of economic growth or, at least,
we do not presents any discrimination mechanism in respect
of other values.
9) Culture and institutions: what kind of distinction?
We mention that we are taking into account in this paper
the formal and the informal institutions. But, first of all, we
list only the formal ones without any references to the
second category (which could not be treaty as simple as
unwritten set of social rules). Second, it could be noticed
that the institutional values cover a large part of the paradigm
(or, in other words, a large part of the paradigm is constituted
via the institutional interactions between the individual
members of a society). Institutions act as pool of cultural
models concentration. Par consequence, there is not a clearly
distinction between paradigm and institutions and also
there is not a clearly description of the reciprocals
relationships
(16)
.
10) Structures, institutions and economic freedom: are
these the same thing?
The use of EFW is designed to capture, at least
partially, the structural and institutional aspects of
economic development. We do not discuss a definition of
economic freedom
(17)
and also the quality of EFW like a
proxy for it. But we should point out the conceptual ambiguity
which distort this part of analyze: by simply observing the
fact that in a measure of economic freedom are elements
from the areas of structure and institutions we do not
legitimate the employment of this measure like a way to
describe these. The appeal to EFW should be seen as a simple
shortcut, without a strong theoretical foundation.
11) The core hypothesis: how critical is their restrictive
nature?
The H
1
H
3
hypotheses are the foundation of the
entire proposed analysis; it could easily be observed the
fact that they have a restrictive, almost heroic, nature.
One could rise the question if the limitations induce by
this nature does not completely distortion our results. We
do not want to defend these postulates because we are
conscious about their weakness. We just want to specify
the fact that these are necessary to be taking into account
in order to place the analysis in the context of the mandate
approach, in an as simple as possible manner: the state is
acting on the base of a social mandate and respond, in a
way or other, for its actions to the society. And this general
framework is, in our opinion, consistent: only the details
proposed by the H
1
H
3
hypotheses could be, from our
point of view, the object of critical enquires.
32
T
h
e
o
r
e
t
i
c
a
l

a
n
d

A
p
p
l
i
e
d

E
c
o
n
o
m
i
c
s
B) Empirical analysis weakness
There are a lot of limitations for the proposed empirical
analysis. Some of them are linked with:
n The stability of the models and the quality of the
results (for instance, in terms of properties of the
residuals variables);
n The possible existence of non-linear interactions
between the variables and the effects of such
interactions;
n The insufficient number of observation and the
absence of an explanation for the composition of
the samples etc.
C) The difficulties to operate with these results
Our results dos not provide an efficient guidance in
the implementation of the specifically policies for the
sustaining of fiscal stability. The major reason for this
consists in the absence of any suggestion about how the
structural changes could be initiated, institutional designs
projected and right values and mental models promoted.
So, based on these results, it is not possible to draw a map
of desirable policies and to control the effects of the current
public choices.
Despite all these caveats, we argue that the paper could
be seen as a small breakdown into an usual yet manner to
deal with the fiscal stability problems like they are isolated
for their structural, institutional and cultural aspects.
The relation between the State and the Mother Society
is almost always a love and hate story. But it should be
remembered that the State is a reflection of the qualities
and deficiencies of the Society. Not always an accurate
one, this reflection accompanies all the public actions and
designs their frontiers.
Notes
(1)
This means that the present theoretical framework is based on
the mandat theory . But one should notice that there is nothing
special supposed about the mandatory powers of the society
so that a standard model of a democratic society could be, for
the sake of the convenience, applied.
(2)
We preferred the use of this term instead of the term techno-
structure, but without associate it with some connotation of
value; the simple term of management does not reflect strong
enough the existence of a managerial hierarchy and the decisional
consequences which are derived from it, in a firm.
(3)
Real or financial assets which already exist.
(4)
These institutions covers a large spectrum of private interests
but only a limited numbers of them, like syndicates,
professional associations, lobby groups of producers and
consumers etc., really matters for the present topics.
(5)
It is almost useless to mention that, in this point, we have to
pay a heavy tribute to Olsons masterpiece The Rise and
Decline of Nations. In fact, the entire debate about the role of
the institutions in the economic development process was
trigged out for use after the lecture of this book.
(6)
An interesting definition for the culture as shared values is,
for instance, the definition given in Kroeber and Kluckhohn
(1952) (cited by Adler, 1986). According to this definition,
culture consists of patterns, explicit and implicit of and for
behaviours acquired and transmitted by symbols, constituting
the distinctive achievement of human groups, including their
embodiment in artifacts; the essential core of culture consists of
traditional (i.e., historically derived and selected) ideas and
especially their attached values; culture systems may, on the
one hand, be considered as products of action, on the other as
conditioning elements of future action.
Culture is:
n Something that is shared by all or almost all members of
some social group;
n Something that the older members of the group try to
pass on to the younger members; and
n Something (as in the case of morals, laws and customs) that
shapes behavior, or structures ones perception of the world.
Our vision is much closer to Hofstede (1991) who defines
culture as the collective programming of the mind which
distinguishes the members of one group or category of people
from another. Like him, we emphasizes that that culture is
learned, not inherited.
(7)
Realized in 1968-1973 starting from approximately 66 non-
socialist countries, this study collected information from more
than 117.000 forms, completed by the IBM employees in this
countries.
(8)
For this analyzes purposes, the main advantage in using these
factors is the quantification of the relevant elements which could
be used in an empirical approach of the mentioned thesis. The
33
A
n

E
m
p
i
r
i
c
a
l

A
n
a
l
y
s
i
s

o
f

t
h
e

B
u
d
g
e
t

D
e
f
i
c
i
t
factors interpretation realized here is larger that the one strictly
derived from this study.
(9)
DIP is formal definite as follows: the distance between a superior
B and a subordinate S in a hierarchies represent the difference
between, the measure B can determine S behavior and the measure
S can determinate B behavior (Hofstede, 1980, p. 22).
(10)
It should be noticed that the countries are ranked by the EFW
as follow: free (score: 1-1.99), mostly free (score: 2-2.99),
mostly unfree (score: 3-3.99) and repressed (score: 4-5).
(11)
The implicit hypothesis is: there are no paradigms changes
from the period of Hofstede analysis to the reference period for
this paper. In our opinion, this could be considered as a
reasonable hypothesis, taking into account the long term inertia
of the socio-cultural evolutions.
(12)
Each pair of political rights and civil liberties ratings is averaged
to determine an overall status of Free, Partly Free, or
Not Free. Those whose ratings average 1-2.5 are considered
Free, 3-5.5 Partly Free, and 5.5-7 Not Free.
(13)
There is nothing about the nature or causes of these shocks.
(14)
See, for instance, an excellent discussion in Rodrik et al (2002)
(15)
There are some mentions about the changing of the paradigm in a
generation life but is obviously that this is still a long-term.
(16)
For instance, there is no argumentation for the thesis that an
exogenous established institutional system could end up by
influencing the paradigm.
(17)
But we tend to see it like the capacity of the individuals to take
decisions relevant into an economic perspective without any
inferences from the public authorities.
References
Adler, Nancy (1986). International Dimensions of Organizational
Behavior, Kent Publishing Company
Ali, A.M., Economic Freedom, Democracy and Growth, Journal
of Private Enterprise, 1997, 13: 120.
Ali, A.M., Crain, W.M., Institutional Distortions, Economic
Freedom, and Growth, Cato Journal, Vol. 21, No. 3 (Winter),
2002
Barro, R. J., Economic Growth in a Cross Section of Countries,
Quarterly Journal of Economics, 1991, no. 106, 1991, p. 407
Barro, R. J., Determinants of Economic Growth: A Cross-Country
Empirical Study, National Bureau of Economic Research
Working Paper 5698, August, 1996
Black, J.S., Gregersen, H.B., Mendenhal, M.E., Stroh, Linda
K.(1999). Globalizing People through International
Assignments, Addison-Wesley
Bordo, M.D., The Lender of Last Resort: Some Historical
Insights, National Bureau of Economic Research Working
Paper 3011, June, 1989
Bordo, M.D. The Lender of Last Resort: Alternative Views and
Historical Experience, Federal Reserve Bank of Richmond,
Economic Review, 1990, pp. 18-29
Goodhart , C.A.E. (1985). The Evolution of Central Bank, London
School of Economics
Goodhart, C.A.E, Why Do Bank Need a Central Bank, Oxford
Economic Papers, no. 39, pp. 75-89
Hall, R.E., Jones, C.I., Levels of Economic Activity Across
Countries, American Economic Review, no. 87 (2), 1997,
p. 173
Hofstede, G. (2003). Cultures Consequences, Comparing Values,
Behaviors, Institutions, and Organizations Across Nations,
Sage Publications, Second Edition
Inglehart, R. (1997). Modernization and Postmodernization:
Cultural, Economic and Political Change in 43 Societies,
Princeton University Press, Princeton
De Jong, E. (2001). Why are price Stability and Statutory
Independence of Central Banks Negatively Correlated?: The
Role of Culture, Nijmegen School of Management, University
of Nijmegen, The Netherlands
De Jong, E., Semenov, R., Cross-Country Differences in Stock
Market Development: A Cultural View, EFA 2002 Berlin
Meetings Presented Paper, University of Groningen, Research
School Systems, Organization and Management, Research
Report 02E40, 2002
Kahn, C.M., Santos, J.A.C., Allocating Bank Regulatory Powers:
Lender of Last Resort, Deposit Insurance and Supervision,
AFA Meetings, Atlanta, 2001
Knack, S., Keefer, P., Institutions and Economic Performance:
Cross-Country Tests Using Alternative Institutional
Measures, Economics and Politics no. 7 (3), 1995,
p. 207
34
T
h
e
o
r
e
t
i
c
a
l

a
n
d

A
p
p
l
i
e
d

E
c
o
n
o
m
i
c
s
Algeria Mauritius
Argentina Moldova
Bahrain Mongolia
Belarus Nepal
Bolivia New Zealand
Bulgaria Nicaragua
Canada Oman
Chile Pakistan
Congo, Dem. Rep. Paraguay
Congo, Rep. Per
Costa Rica Philippines
Cote d'Ivoire Poland
Croatia Romania
Czech Republic Russian Federation
El Salvador Senegal
Estonia Singapore
Georgia Slovak Republic
Hungary Slovenia
India South Africa
Indonesia Sri Lanka
Israel Tajikistan
Jamaica Thailand
Jordan Turkey
Kazakhstan Uganda
Kyrgyz Republic Ukraine
Latvia United States
Lithuania Uruguay
Maldives Venezuela
The S.I Sample
Argentina Per
Bahrain Philippines
Canada Senegal
Chile Singapore
Costa Rica Slovenia
Cote d'Ivoire South Africa
Croatia Thailand
El Salvador Turkey
India Uganda
Indonesia United States
Israel Uruguay
Jamaica Venezuela
Jordan New Zealand
Pakistan
The S.II Sample
Descriptive Statistics for budget deficit
Table 4
Year Mean Median
Standard
Deviation
Minimum Maximum
2003 2.80 1.91 3.75 -3.44 19.65
2004 2.80 2.19 3.24 -7.25 13.02
2005 1.68 1.64 3.55 -10.16 11.45
2006 1.87 1.39 3.78 -5.75 19.60
Kroeber, A.L., Kluckhohn, C., Culture. A critical review of concepts
and definitions, Peabody Museum Papers, vol. 47, no. 1, 1952
Lucas R.E., On the Mechanics of Economic Development,
Journal of Monetary Economics no. 22, 1988, pp. 3-42
Meltzer, A.H. (1986). Financial Failures and Financial Policies,
in Kaufman G.G., Kormendi C. (ed.), Deregulating Financial
Services: Public Policies in Flux, Ballinger Publishing
Company, Cambridge
Meltzer A.H., Comments: What More Can the Bank of Japan
Do?, Bank of Japan, Monetary and Economic Studies,
December, 1999
North, D.C. (1990). Institutions, Institutional Change and Economic
Performance, New York, Cambridge University Press
North D.C., Economic Performance through Time, American
Economic Review, no. 84 (3), 1994, p. 359
Ottaviano, G.I.P., Pinelli D., Maignan Carole J., Economic
Growth, Innovation, Cultural Diversity: What are we all Talking
About? A Critical Survey of the State-of-the-art, FEEM Working
Paper No. 12, 2003
Rauch J.R., Bureaucracy, Infrastructure, and Economic Growth:
Evidence from U.S. Cities during the Progressive Era, National
Bureau of Economic Research Working Paper 4973, December,
1994
Rodrik, D., Institutions for High-Quality Growth: What They
Are and How to Acquire Them, National Bureau of Economic
Research Working Paper 7540, February, 2000
Rodrik, D., Subramanian, A., Trebbi, F., Institutions Rules: The
Primacy of Institutions over Geography and Integration in
Economic Development, National Bureau of Economic
Research Working Paper 9305, October, 2002
Romer, P., Increasing Returns and Long-Run Growth, Journal
of Political Economy no. 94 (5), 1986, p. 1002
Sachs, J.D., Warner, A.M., Fundamental Sources of Long-Run
Growth, American Economic Review no. 87 (2), 1997, p. 184
35
A
n

E
m
p
i
r
i
c
a
l

A
n
a
l
y
s
i
s

o
f

t
h
e

B
u
d
g
e
t

D
e
f
i
c
i
t
Descriptive Statistics for EFW
Table 5
Year Mean Median
Standard
Deviation
Minimum Maximum
2003 3.10 3.00 0.69 1.54 4.71
2004 3.08 2.99 0.69 1.54 4.59
2005 3.07 3.01 0.69 1.59 4.60
2006 3.03 3.01 0.71 1.66 4.61
Descriptive Statistics for PR
Table 6
Year Mean Median
Standard
Deviation
Minimum Maximum
2003 3.09 2.50 1.99 1.00 7.00
2004 3.11 2.50 2.02 1.00 7.00
2005 3.04 2.00 2.04 1.00 7.00
2006 2.96 2.00 1.96 1.00 6.00
Descriptive Statistics for CL
Table 7
Year Mean Median
Standard
Deviation
Minimum Maximum
2003 3.41 3.00 1.42 1.00 6.00
2004 3.4 3.00 1.45 1.00 6.00
2005 3.38 3.00 1.46 1.00 6.00
2006 3.38 3.00 1.42 1.00 6.00
Descriptive Statistics of the Cultural Factors
Table 8
Factors Mean Median
Standard
Deviation
Minimum Maximum
Power
Distance
62.14 64.00 19.12 13.00 94.00
Individualism 37.15 32.00 21.94 12.00 91.00
Masculinity 47.96 48.00 13.96 21.00 73.00
Uncertainty
Avoidance
62.48 64.00 22.78 8.00 100.00
Descriptive Statistics of Residuals
Table 10
Year Mean Median
Standard
Deviation
Minimum Maximum
2003 0.00 -0.88 3.65 -5.76 15.93
2004 0.00 -0.73 3.19 -9.18 10.38
2005 0.00 -0.15 3.52 -11.78 9.96
2006 0.00 -0.18 3.80 -8.15 17.78
The impact of economic freedom on budget deficit
Table 9
Dependent variable bd
it
Variable Coefficient Std. Error t-Statistic Prob.
C 0.296105 0.644037 0.459764 0.6461
EFWit 0.569155 0.206431 2.757120 0.0063
Fixed Effects (Period)
2003--C 0.742608
2004--C 0.753321
2005--C -0.360202
2006--C -0.146389
Effects Specification
Period fixed (dummy variables)
Weighted Statistics
R-squared 0.175356 Mean dependent variable 3.726304
Adjusted R-squared 0.160294 S.D. dependent variable 3.872390
S.E. of regression 3.548482 Sum squared residuals 2757.588
F-statistic 11.64230 Durbin-Watson stat 0.989880
Prob.(F-statistic) 0.000000
Un-weighted Statistics
R-squared 0.040161 Mean dependent variable 2.290491
Sum squared residuals 2770.114 Durbin-Watson stat 0.562456
Method: Pooled EGLS (Cross-section weights)
Sample: 2003 2006
Included observations: 4
Cross-sections included: 56
Total pool (balanced) observations: 224
Linear estimation after one-step weighting matrix
White diagonal standard errors & covariance (degree of freedom corrected)
Figure 2. Economic freedom versus budget deficit
-15
-10
-5
0
5
10
15
20
25
0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5
Economi c freedom
B
u
d
g
e
t

d
e
f
i
c
i
t
Method Statistic Prob.**
Cross-
sections
Observation
Null: Unit root (assumes common unit root process)
Levin, Lin & Chu t* -25.5658 0.0000 55 165
Breitung t-stat 0.66697 0.7476 55 110
Null: Unit root (assumes individual unit root process)
Im, Pesaran and Shin W-stat -5.E+155 0.0000 55 165
ADF Fisher Chi-square 179.791 0.0000 55 165
PP Fisher Chi-square 213.736 0.0000 55 165
Null: No unit root (assumes common unit root process)
Hadri Z-stat 10.6060 0.0000 55 220
** Probabilities for Fisher tests are computed using an asymptotic Chi-square
distribution.
All other tests assume asymptotic normality.
Exogenous variables: Individual effects
Automatic selection of maximum lags
Automatic selection of lags based on MAIC: 0
Newey-West bandwidth selection using Quadratic Spectral kernel
Balanced observations for each test
36
T
h
e
o
r
e
t
i
c
a
l

a
n
d

A
p
p
l
i
e
d

E
c
o
n
o
m
i
c
s
Year Mean Median
Standard
Deviation
Minimum Maximum
2003 0.00 -1.07 3.57 -6.80 16.54
2004 0.00 -0.72 3.14 -10.60 8.93
2005 0.00 0.18 3.57 -12.40 8.46
2006 0.00 -0.47 3.71 -8.63 16.48
Null: No unit root (assumes common unit root process)
Hadri Z-stat 5.23347 0.0000 26 78
** Probabilities for Fisher tests are computed using an asymptotic Chi-square
distribution.
All other tests assume asymptotic normality.
Exogenous variables: Individual effects
Automatic selection of maximum lags
Automatic selection of lags based on MAIC: -1
Newey-West bandwidth selection using Quadratic Spectral kernel
Balanced observations for each test
Descriptive Statistics of Residuals
Table 14
Year Mean Median
Standard
Deviation
Minimum Maximum
2003 0.00 -0.93 2.81 -3.74 6.23
2004 0.00 -0.68 3.44 -7.34 9.44
2005 0.00 -0.03 3.49 -9.46 8.66
2006 0.00 -0.80 3.66 -5.12 16.17
The impact of political freedom on budget deficit
Table 11
Variable Coefficient Std. Error t-Statistic Prob.
C 0.081434 0.359533 0.226500 0.8210
PR -0.745873 0.143151 -5.210405 0.0000
CL 1.245818 0.213828 5.826270 0.0000
Fixed Effects (Period)
2003--C 0.778474
2004--C 0.767046
2005--C -0.340026
2006--C -0.202053
Effects Specification
Period fixed (dummy variables)
Weighted Statistics
R-squared 0.268247 Mean dependent variable 3.776289
Adjusted R-squared 0.251463 S.D. dependent variable 4.061437
S.E. of regression 3.513874 Sum squared residuals 2691.714
F-statistic 15.98293 Durbin-Watson stat 1.056315
Prob.(F-statistic) 0.000000
Un-weighted Statistics
R-squared 0.064867 Mean dependent variable 2.290491
Sum squared residuals 2698.813 Durbin-Watson stat 0.610524
Dependent variable: bdit
Method: Pooled EGLS (Cross-section weights)
Sample: 2003 2006
Included observations: 4
Cross-sections included: 56
Total pool (balanced) observations: 224
Linear estimation after one-step weighting matrix
White diagonal standard errors & covariance (degree of freedom corrected)
Descriptive Statistics of Residuals
Table 12
Method Statistic Prob.**
Cross-
sections
Observation
Null: Unit root (assumes common unit root process)
Levin, Lin & Chu t* -482.131 0.0000 55 165
Breitung t-stat 0.14050 0.5559 55 110
Null: Unit root (assumes individual unit root process)
Im, Pesaran and Shin W-stat -2.E+156 0.0000 55 165
ADF - Fisher Chi-square 190.409 0.0000 55 165
PP - Fisher Chi-square 214.013 0.0000 55 165
Null: No unit root (assumes common unit root process)
Hadri Z-stat 10.7891 0.0000 55 220
** Probabilities for Fisher tests are computed using an asymptotic Chi-square
distribution.
All other tests assume asymptotic normality.
Exogenous variables: Individual effects
Automatic selection of maximum lags
Automatic selection of lags based on MAIC: 0
Newey-West bandwidth selection using Quadratic Spectral kernel
Balanced observations for each test
Variable Coefficient Std. Error t-Statistic Prob.
C -5.701896 1.027125 -5.551319 0.0000
Power Distance 0.012196 0.006224 1.959431 0.0528
Individualism -0.035444 0.007381 -4.801806 0.0000
Masculinity 0.092432 0.013339 6.929515 0.0000
Uncertainty Avoidance 0.058056 0.010716 5.417802 0.0000
Fixed Effects (Period)
2003--C 0.483584
2004--C 0.698770
2005--C -0.092712
2006--C 0.540251
Effects Specification
Period fixed (dummy variables)
Weighted Statistics
R-squared 0.345051 Mean dependent variable 3.380368
Adjusted R-squared 0.299204 S.D. dependent variable 3.947786
S.E. of regression 3.304832 Sum squared residuals 1092.192
F-statistic 7.526219 Durbin-Watson stat 1.156920
Prob.(F-statistic) 0.000000
Un-weighted Statistics
R-squared 0.173974 Mean dependent variable 2.207593
Sum squared residuals 1177.750 Durbin-Watson stat 0.512474
Method: Pooled EGLS (Cross-section weights)
Sample: 2003 2006
Included observations: 4
Cross-sections included: 27
Total pool (balanced) observations: 108
Linear estimation after one-step weighting matrix
White cross-section standard errors & covariance (degree of freedom
corrected)
The impact of cultural factors on budget deficit
Table 13
Dependent variable bd
it