IDEAS home Printed from https://ideas.repec.org/p/wdi/papers/2010-1006.html
   My bibliography  Save this paper

Public Investment and Fiscal Performance in New EU Member States

Author

Listed:
  • Jan Hanousek
  • Evzen Kocenda

Abstract

In this paper we analyze the dynamics of public investment and public finance in new members of the European Union, and also how these sectors were affected by changes in economic freedom and corruption. When we assess the role of regulation and corruption on public investment, we find that improvements in economic freedom tend to be associated with decreases in public investment, while reductions in corruption produce effects going in both directions. Similarly, we show that increases in public investment are often linked with decreases as well as increases in corruption. In terms of public finance we detect mostly improvement in debt when there is less economic regulation, while results for a deficit are less conclusive. On the other hand, improvements in the corruption environment are mostly associated with decreases in the deficit as well as debt. As a general rule that follows from our results, steps aimed at reducing corruption and the degree of economic regulation should lead towards improvements in the fiscal position in most of the new EU countries.

Suggested Citation

  • Jan Hanousek & Evzen Kocenda, 2010. "Public Investment and Fiscal Performance in New EU Member States," William Davidson Institute Working Papers Series wp1006, William Davidson Institute at the University of Michigan.
  • Handle: RePEc:wdi:papers:2010-1006
    as

    Download full text from publisher

    File URL: http://deepblue.lib.umich.edu/bitstream/2027.42/133020/1/wp1006.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. David Croix & Clara Delavallade, 2009. "Growth, public investment and corruption with failing institutions," Economics of Governance, Springer, vol. 10(3), pages 187-219, July.
    2. John Y. Campbell & Pierre Perron, 1991. "Pitfalls and Opportunities: What Macroeconomists Should Know about Unit Roots," NBER Chapters, in: NBER Macroeconomics Annual 1991, Volume 6, pages 141-220, National Bureau of Economic Research, Inc.
    3. Lorenzo Pellegrini & Reyer Gerlagh, 2004. "Corruption's Effect on Growth and its Transmission Channels," Kyklos, Wiley Blackwell, vol. 57(3), pages 429-456, August.
    4. Fidrmuc, Jan & Tichit, Ariane, 2009. "Mind the break! Accounting for changing patterns of growth during transition," Economic Systems, Elsevier, vol. 33(2), pages 138-154, June.
    5. Ahmet Faruk AYSAN & Mustapha Kamel NABLI & Marie‐Ange VÉGANZONÈS‐VAROUDAKIS, 2007. "Governance Institutions And Private Investment: An Application To The Middle East And North Africa," The Developing Economies, Institute of Developing Economies, vol. 45(3), pages 339-377, September.
    6. Balázs Égert & Rebeca Jiménez-Rodríguez & Evžen Kočenda & Amalia Morales-Zumaquero, 2006. "Structural changes in Central and Eastern European economies: breaking news or breaking the ice?," Economic Change and Restructuring, Springer, vol. 39(1), pages 85-103, June.
    7. Benjamin Powell, 2003. "Economic Freedom and Growth: The Case of the Celtic Tiger," Cato Journal, Cato Journal, Cato Institute, vol. 22(3), pages 431-448, Winter.
    8. International Monetary Fund, 2009. "Republic of Kazakhstan: 2009 Article IV Consultation: Staff Report; Supplement; and Public Information Notice on the Executive Board Discussion," IMF Staff Country Reports 2009/300, International Monetary Fund.
    9. James D. Gwartney & Robert A. Lawson & Randall G. Holcombe, 1999. "Economic Freedom and the Environment for Economic Growth," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 155(4), pages 643-643, December.
    10. Jan HANOUSEK & Evžen KOČENDA, 2009. "Public investment and growth in New EU member states: an overview," Departmental Working Papers 2009-23, Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano.
    11. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2007. "Capital flows to central and Eastern Europe," Emerging Markets Review, Elsevier, vol. 8(2), pages 106-123, May.
    12. Clara Delavallade, 2006. "Corruption and distribution of public spending in developing countries," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 30(2), pages 222-239, June.
    13. International Monetary Fund, 2009. "Eastern Caribbean Currency Union: 2009 Discussion on Common Policies of Members Countries: Staff Report; and Public Information Notice on the Executive Board Discussion," IMF Staff Country Reports 2009/175, International Monetary Fund.
    14. Doucouliagos, Chris & Ulubasoglu, Mehmet Ali, 2006. "Economic freedom and economic growth: Does specification make a difference?," European Journal of Political Economy, Elsevier, vol. 22(1), pages 60-81, March.
    15. Merih Uctum & Thom Thurston & Remzi Uctum, 2006. "Public Debt, the Unit Root Hypothesis and Structural Breaks: A Multi‐Country Analysis," Economica, London School of Economics and Political Science, vol. 73(289), pages 129-156, February.
    16. Alexandru Minea & Patrick Villieu, 2009. "Borrowing to Finance Public Investment? The ‘Golden Rule of Public Finance’ Reconsidered in an Endogenous Growth Setting," Fiscal Studies, John Wiley & Sons, vol. 30(1), pages 103-133, March.
    17. International Monetary Fund, 2009. "Vanuatu: 2009 Article IV Consultation: Staff Report; Public Information Notice on the Executive Board Discussion; and Statement by the Alternate Executive Director for Vanuatu," IMF Staff Country Reports 2009/166, International Monetary Fund.
    18. Kocenda, Evzen & Kutan, Ali M. & Yigit, Taner M., 2008. "Fiscal convergence in the European Union," The North American Journal of Economics and Finance, Elsevier, vol. 19(3), pages 319-330, December.
    19. Rahim Quazi, 2007. "Economic Freedom and Foreign Direct Investment in East Asia," Journal of the Asia Pacific Economy, Taylor & Francis Journals, vol. 12(3), pages 329-344.
    20. International Monetary Fund, 2009. "Australia: 2009 Article IV Consultation: Staff Report; and Public Information Notice on the Executive Board Discussion;," IMF Staff Country Reports 2009/248, International Monetary Fund.
    21. International Monetary Fund, 2009. "Japan: 2009 Article IV Consultation: Staff Report; Staff Statement; and Public Information Notice on the Executive Board Discussion," IMF Staff Country Reports 2009/210, International Monetary Fund.
    22. Ahmet Faruk Aysan & M-A Veganzones-Varoudakis, 2007. "How Do Political and Governance Institutions Affect Private Investment Decisions? An Application to the Middle East and North Africa," Working Papers 2007/05, Bogazici University, Department of Economics.
    23. John W. Dawson, 2006. "Regulation, Investment, and Growth across Countries," Cato Journal, Cato Journal, Cato Institute, vol. 26(3), pages 489-509, Fall.
    24. Victor A. Ginsburgh, 1973. "A Further Note on the Derivation of Quarterly Figures Consistent with Annual Data," Journal of the Royal Statistical Society Series C, Royal Statistical Society, vol. 22(3), pages 368-374, November.
    25. World Bank, 2009. "Geography in Motion: World Development Report 2009 (excerpt)," Transnational Corporations Review, Ottawa United Learning Academy, vol. 1(3), pages 40-46, September.
    26. Vogelsang, Timothy J., 1997. "Wald-Type Tests for Detecting Breaks in the Trend Function of a Dynamic Time Series," Econometric Theory, Cambridge University Press, vol. 13(6), pages 818-848, December.
    27. Del Monte, Alfredo & Papagni, Erasmo, 2001. "Public expenditure, corruption, and economic growth: the case of Italy," European Journal of Political Economy, Elsevier, vol. 17(1), pages 1-16, March.
    28. Jac C. Heckelman, 2000. "Economic Freedom and Economic Growth: A Short-Run Causal Investigation," Journal of Applied Economics, Taylor & Francis Journals, vol. 3(1), pages 71-91, May.
    29. International Monetary Fund, 2009. "Cyprus: 2009 Article IV Consultation: Staff Report; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Cyprus," IMF Staff Country Reports 2009/255, International Monetary Fund.
    30. Ariane Tichit & Fidrmuc Jan, 2009. "Mind the Break! Accounting for Changing Patterns of Growth during Transition", Economic Systems," Post-Print hal-00437718, HAL.
    31. Mauro, Paolo, 1998. "Corruption and the composition of government expenditure," Journal of Public Economics, Elsevier, vol. 69(2), pages 263-279, June.
    32. International Monetary Fund, 2009. "Trinidad and Tobago: 2008 Article IV Consultation: Staff Report; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Trinidad and Tobago," IMF Staff Country Reports 2009/078, International Monetary Fund.
    33. Massimo Florio (ed.), 2011. "Public Investment, Growth and Fiscal Constraints," Books, Edward Elgar Publishing, number 14155.
    34. Ciocchini, Francisco & Durbin, Erik & Ng, David T. C., 2003. "Does corruption increase emerging market bond spreads?," Journal of Economics and Business, Elsevier, vol. 55(5-6), pages 503-528.
    35. Jesmin Rahman, 2008. "Current Account Developments in New Member States of the European Union: Equilibrium, Excess, and EU-Phoria," IMF Working Papers 2008/092, International Monetary Fund.
    36. International Monetary Fund, 2009. "Bhutan: 2009 Article IV Consultation-Staff Report; Staff Supplement; and Public Information Notice on the Executive Board Discussion," IMF Staff Country Reports 2009/334, International Monetary Fund.
    37. Carlsson, Fredrik & Lundstrom, Susanna, 2002. "Economic Freedom and Growth: Decomposing the Effects," Public Choice, Springer, vol. 112(3-4), pages 335-344, September.
    38. Kimlong Chheng, 2005. "How Do Economic Freedom and Investment Affect Economic Growth?," Macroeconomics 0509021, University Library of Munich, Germany.
    39. Erdal Atukeren, 2005. "Interactions Between Public and Private Investment: Evidence from Developing Countries," Kyklos, Wiley Blackwell, vol. 58(3), pages 307-330, July.
    40. M. Emranul Haque & Richard Kneller, 2008. "Public Investment and Growth: The Role of Corruption," Centre for Growth and Business Cycle Research Discussion Paper Series 98, Economics, The University of Manchester.
    41. Dan Stegarescu, 2005. "Public sector decentralisation: measurement concepts and recent international trends," Fiscal Studies, Institute for Fiscal Studies, vol. 26(3), pages 301-333, September.
    42. Kocenda, Evzen, 2005. "Beware of breaks in exchange rates: Evidence from European transition countries," Economic Systems, Elsevier, vol. 29(3), pages 307-324, September.
    43. Perron, Pierre, 1989. "The Great Crash, the Oil Price Shock, and the Unit Root Hypothesis," Econometrica, Econometric Society, vol. 57(6), pages 1361-1401, November.
    44. Tarhan, Simge, 2008. "Public Investment and Corruption in an Endogenous Growth Model," MPRA Paper 21319, University Library of Munich, Germany, revised 11 Mar 2010.
    45. Hughes Hallett, Andrew & Lewis, John, 2007. "Debt, deficits, and the accession of the new member States to the Euro," European Journal of Political Economy, Elsevier, vol. 23(2), pages 316-337, June.
    46. Mohsin Habib & Leon Zurawicki, 2002. "Corruption and Foreign Direct Investment," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 33(2), pages 291-307, June.
    47. Stephen Everhart & Jorge Martinez- Vazquez & Robert McNab, 2009. "Corruption, governance, investment and growth in emerging markets," Applied Economics, Taylor & Francis Journals, vol. 41(13), pages 1579-1594.
    48. Rajkumar, Andrew Sunil & Swaroop, Vinaya, 2008. "Public spending and outcomes: Does governance matter?," Journal of Development Economics, Elsevier, vol. 86(1), pages 96-111, April.
    49. Christopher Ellis & John Fender, 2006. "Corruption and Transparency in a Growth Model," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 13(2), pages 115-149, May.
    50. Philip Keefer & Stephen Knack, 2007. "Boondoggles, Rent-Seeking, and Political Checks and Balances: Public Investment under Unaccountable Governments," The Review of Economics and Statistics, MIT Press, vol. 89(3), pages 566-572, August.
    51. Bose, Niloy & Capasso, Salvatore & Murshid, Antu Panini, 2008. "Threshold Effects of Corruption: Theory and Evidence," World Development, Elsevier, vol. 36(7), pages 1173-1191, July.
    52. Halkos, George E. & Tzeremes, Nickolaos G., 2009. "Economic efficiency and growth in the EU enlargement," Journal of Policy Modeling, Elsevier, vol. 31(6), pages 847-862, November.
    53. Mr. Martin Cihak & Mr. Wim Fonteyne, 2009. "Five Years After: European Union Membership and Macro-Financial Stability in the New Member States," IMF Working Papers 2009/068, International Monetary Fund.
    54. Mariassunta Giannetti & Steven Ongena, 2009. "Financial Integration and Firm Performance: Evidence from Foreign Bank Entry in Emerging Markets," Review of Finance, European Finance Association, vol. 13(2), pages 181-223.
    55. Peter Havlik, 2005. "Structural Change, Productivity and Employment in the New EU Member States," wiiw Research Reports 313, The Vienna Institute for International Economic Studies, wiiw.
    56. Mr. Hamid R Davoodi & Mr. Vito Tanzi, 1997. "Corruption, Public Investment, and Growth," IMF Working Papers 1997/139, International Monetary Fund.
    57. Marie-Ange Véganzonès-Varoudakis & A. Aysan & M.K. Nabli, 2007. "Governance, Institutions, and Private Investment," Post-Print hal-00204786, HAL.
    58. Hillman, Arye L., 2004. "Corruption and public finance: an IMF perspective," European Journal of Political Economy, Elsevier, vol. 20(4), pages 1067-1077, November.
    59. International Monetary Fund, 2009. "Republic of Estonia: 2008 Article IV Consultation: Staff Report; Staff Statement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for the Republic ," IMF Staff Country Reports 2009/086, International Monetary Fund.
    60. Craig Depken & Courtney Lafountain, 2006. "Fiscal consequences of public corruption: Empirical evidence from state bond ratings," Public Choice, Springer, vol. 126(1), pages 75-85, January.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Zuzana Brixiova & Balázs Égert, 2012. "Labour Market Reforms and Outcomes in Estonia," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 54(1), pages 103-120, March.
    2. Nicholas Apergis & Dan Constantin Dănuleţiu, 2013. "Public deficit, public debt, corruption and economic freedom: some empirical evidence from Romania," Romanian Economic Journal, Department of International Business and Economics from the Academy of Economic Studies Bucharest, vol. 16(48), pages 3-22, June.
    3. Petr Zimčík, 2016. "Velikost veřejného sektoru a ekonomický růst [The Scope of Government and Economic Growth]," Politická ekonomie, Prague University of Economics and Business, vol. 2016(4), pages 439-450.
    4. Orlowski, Lucjan T., 2016. "Co-movements of non-Euro EU currencies with the Euro," International Review of Economics & Finance, Elsevier, vol. 45(C), pages 376-383.
    5. Kamil Galuscak & Lubomir Lizal, 2011. "The Impact of Capital Measurement Error Correction on Firm-Level Production Function Estimation," Working Papers 2011/09, Czech National Bank.
    6. Doytch, Nadia & Uctum, Merih, 2019. "Spillovers from foreign direct investment in services: Evidence at sub-sectoral level for the Asia-Pacific," Journal of Asian Economics, Elsevier, vol. 60(C), pages 33-44.
    7. Halkos, George E. & Tzeremes, Nickolaos G., 2014. "Public sector transparency and countries’ environmental performance: A nonparametric analysis," Resource and Energy Economics, Elsevier, vol. 38(C), pages 19-37.
    8. Philip Agyei Peprah & Yao Hongxing & Jean Baptiste Bernard Pea-Assounga, 2019. "Regional Foreign Direct Investment Potential in Selected African Countries," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 11(10), pages 66-76, October.
    9. Ayala, Astrid & Blazsek, Szabolcs, 2013. "Structural breaks in public finances in Central and Eastern European countries," Economic Systems, Elsevier, vol. 37(1), pages 45-60.
    10. repec:wdi:papers:2011-1027 is not listed on IDEAS
    11. RNuket Kirci Cevik & Sel Dibooglu & Ali M. Kutan, 2016. "Real and Financial Sector Studies in Central and Eastern Europe: A Review," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 66(1), pages 2-31, February.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Jan Hanousek & Evžen Kočenda, 2011. "Vazba korupce a hospodářské svobody na veřejné finance a investice nových členů EU [Corruption and Economic Freedom Links to Public Finance and Investment in New EU Members]," Politická ekonomie, Prague University of Economics and Business, vol. 2011(3), pages 310-328.
    2. Jan HANOUSEK & Evžen KOČENDA, 2009. "Public investment and growth in New EU member states: an overview," Departmental Working Papers 2009-23, Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano.
    3. Alex Haberis & Riccardo M. Masolo & Kate Reinold, 2019. "Deflation Probability and the Scope for Monetary Loosening in the United Kingdom," International Journal of Central Banking, International Journal of Central Banking, vol. 15(1), pages 233-277, March.
    4. Ratbek Dzhumashev, 2014. "The Two-Way Relationship Between Government Spending And Corruption And Its Effects On Economic Growth," Contemporary Economic Policy, Western Economic Association International, vol. 32(2), pages 403-419, April.
    5. Kodila Tedika, Oasis, 2012. "Consequences De La Corruption : Panorama Empirique [Consequences of Corruption : Empirical survey]," MPRA Paper 41482, University Library of Munich, Germany.
    6. Ahmed Taneem Muzaffar & Anis Chowdhury, 2014. "The IMF and the policy of low inflation: A review of Article IV consultations for selected Asian developing countries," The Economic and Labour Relations Review, , vol. 25(3), pages 435-454, September.
    7. Ayala, Astrid & Blazsek, Szabolcs, 2013. "Structural breaks in public finances in Central and Eastern European countries," Economic Systems, Elsevier, vol. 37(1), pages 45-60.
    8. Mohamed Dridi, 2014. "Corruption and Education: Empirical Evidence," International Journal of Economics and Financial Issues, Econjournals, vol. 4(3), pages 476-493.
    9. Eugen Dimant & Guglielmo Tosato, 2018. "Causes And Effects Of Corruption: What Has Past Decade'S Empirical Research Taught Us? A Survey," Journal of Economic Surveys, Wiley Blackwell, vol. 32(2), pages 335-356, April.
    10. Dridi, Mohamed, 2013. "Corruption and Economic Growth: The Transmission Channels," MPRA Paper 47873, University Library of Munich, Germany.
    11. Ugur, Mehmet & Dasgupta, Nandini, 2011. "Corruption and economic growth: A meta-analysis of the evidence on low-income countries and beyond," MPRA Paper 31226, University Library of Munich, Germany, revised 31 May 2011.
    12. Dzhumashev, Ratbek, 2009. "Is there a direct effect of corruption on growth?," MPRA Paper 18489, University Library of Munich, Germany.
    13. Alfredo Monte & Luca Pennacchio, 2020. "Corruption, Government Expenditure and Public Debt in OECD Countries," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 62(4), pages 739-771, December.
    14. Dzhumashev, Ratbek, 2014. "Corruption and growth: The role of governance, public spending, and economic development," Economic Modelling, Elsevier, vol. 37(C), pages 202-215.
    15. Simplice A Asongu, 2015. "A Good Turn Deserves Another: Political Stability, Corruption and Corruption-Control," Economics Bulletin, AccessEcon, vol. 35(4), pages 2037-2048.
    16. Grigoli, Francesco & Mills, Zachary, 2011. "Do high and volatile levels of public investment suggest misconduct ? the role of institutional quality," Policy Research Working Paper Series 5735, The World Bank.
    17. Asongu, Simplice A. & Kodila-Tedika, Oasis, 2013. "Crime and conflicts in Africa: consequences of corruption?," European Economic Letters, European Economics Letters Group, vol. 2(2), pages 50-55.
    18. Burcu ŞENALP, 2018. "Foreign Direct Investment, Economic Growth and Economic Freedom: A Literature Survey," Istanbul Journal of Economics-Istanbul Iktisat Dergisi, Istanbul University, Faculty of Economics, vol. 68(2), pages 301-336, December.
    19. Zied Akrout, 2020. "Corruption and Economic Growth In Tunisia: Direct or Indirect Effects?," International Journal of Economics and Financial Issues, Econjournals, vol. 10(6), pages 31-39.
    20. Astrid Ayala & Szabolcs Blazsek, 2012. "How has the financial crisis affected the fiscal convergence of Central and Eastern Europe to the Eurozone?," Applied Economics Letters, Taylor & Francis Journals, vol. 19(5), pages 471-476, March.

    More about this item

    Keywords

    public finance; public investment; economic freedom; corruption; EU convergence and integration; macroeconomic policy; fiscal reforms; new EU members;
    All these keywords.

    JEL classification:

    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wdi:papers:2010-1006. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: https://edirc.repec.org/data/wdumius.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: WDI (email available below). General contact details of provider: https://edirc.repec.org/data/wdumius.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.