Examining the Evolution of Cross-National Fiscal Transparency

Abstract

Over the past two decades, global institutions, including the International Monetary Fund and the Organization for Economic Co-Operation and Development, have linked fiscal transparency to better governance, improved economic performance, and increased civic participation in government decision making. As a result, scholars and practitioners have attempted to systematically study the factors associated with a country’s fiscal transparency. At the international level, extant research employs cross-sectional analysis, which limits an understanding of how fiscal transparency evolves over time. We address this limitation by offering a cross-national longitudinal analysis of the factors associated with fiscal transparency as measured by the open budget index. Our study spans the years 2006 to 2012, using data on political, fiscal, information access, and economic conditions among 59 countries from nearly every part of the world. Using a first-difference panel regression and robust standard errors clustered by country, we found a positive association between economic recessions and fiscal transparency, indicating that fiscal crises may serve as opportunities for furthering transparency efforts. In addition, our study extends empirical documentation on the positive relationship between fiscal imbalance and fiscal transparency from the United States to the international arena, and provides support for a positive association between development aid and fiscal transparency. We also offer evidence for a negative association between democracy and fiscal transparency, which builds upon an emerging area of research suggesting selective release of government information by democratically elected officials.

Keywords

international fiscal transparency accountability public administration

Introduction

Government decision making about raising and spending public resources maintains considerable influence over citizens, but it “has historically been shrouded in secrecy—the purview of heads of state, finance ministers, and central bankers, along with a few select officials in executive agencies” (Khagram, de Renzio, & Fung, 2013, p. 1). As a result, citizens often have a limited ability to access public finance information and influence fiscal policy (Khagram et al., 2013; Rios, Bastida, & Benito, 2016). Fiscal transparency can address the challenges that citizens face in obtaining information by improving fiscal accountability (Justice, Melitski, & Smith, 2006) and civic participation in government decision making (Justice & Tarimo, 2012; Porumbescu, 2015; Rios et al., 2016).

The idea of making government information public first appeared in 350 B.C. in Aristotle’s Politics (Shah, 2007), but systematic efforts to develop a fiscal transparency framework did not arise until the Asian financial crisis of the late 1990s (de Renzio & Masud, 2011). After this crisis revealed the risks of opaque financial management and reporting standards, the International Monetary Fund (IMF) published its Code of Good Practices for Fiscal Transparency in 1998 (Lane, 1999). A few years later, the Organization for Economic Co-Operation and Development (OECD; 2002) released its own standards, known as the Best Practices for Budget Transparency.

Along with these standards, protocols for evaluating a country’s progress toward fiscal transparency have also been developed. For example, since 1999, the IMF has used its Report on Observance of Standards and Codes (ROSC) to assess the fiscal transparency of member countries. More recently, the nonprofit International Budget Partnership (IBP) published the open budget index (OBI) to provide governments with another tool for measuring their fiscal transparency level, beginning in 2006 (Rios et al., 2016). Despite these advances in assessing fiscal transparency, the IMF (2012) recently noted that “in the wake of the recent economic and financial crisis, there is a need to reassess international efforts to promote fiscal transparency” (p. 4).

As global institutions have promoted fiscal transparency as a means of improving fiscal performance, accountability, and civic participation in government decision making, “surely the next thing to ask is how to obtain it” (Wehner & de Renzio, 2013, p. 96). Surprisingly, not many empirical studies have explored factors that associate with cross-national fiscal transparency (Rios et al., 2016; Wehner & de Renzio, 2013). Furthermore, a systematic review of the literature¹ indicated that extant research has employed the OBI in cross-sectional studies of fiscal transparency. Therefore, panel data analysis is particularly necessary to gain further understanding of international fiscal transparency and how it evolves over time (Khagram et al., 2013; Wehner & de Renzio, 2013).

This study addresses the IMF’s (2012) call for additional research and complements existing literature by providing cross-national panel data analysis of fiscal transparency through the global fiscal crisis. In particular, we develop a model that tests the association between political, fiscal, information, and economic conditions and fiscal transparency from 2006 to 2012. The OBI, which overcomes the limitations of other transparency indices (Rios et al., 2016), serves as the dependent variable of interest. The model is estimated by using a first-difference panel regression with data from 59 countries across the world.

Our study advances the fiscal transparency literature on five fronts. First, following suggestions by Khagram et al. (2013) and Wehner and de Renzio (2013), we offer longitudinal analysis of fiscal transparency, and examine how it evolves over time. Second, our study addresses the IMF’s (2012) call for further research on fiscal transparency in the years following the fiscal crisis, and shows that since 2006 65% of countries in our sample have improved their fiscal transparency. Third, our study contributes additional evidence for the positive relationship between fiscal imbalance and transparency, which was initially noted by Alt, Lassen, and Rose (2006) in their examination of U.S. states. Fourth, we found development aid positively associated with fiscal transparency, a finding for which prior literature has offered limited evidence. Fifth, findings indicate that the relationship between democracy and fiscal transparency should be reconsidered. Overall, they suggest that democratic governments tend to carefully select the amount of information they release to the public, consistent with arguments from Kono (2006) and Hollyer, Rosendorff, and Vreeland (2011).

The “Theoretical Framework” section discusses fiscal transparency research and serves as a foundation for the development of testable hypotheses. The “Research Method” section details the research methodology, including the estimation strategy and model. The “Findings” section presents the study findings, followed by a discussion of anticipated future directions in research and transparency policy.

Theoretical Framework

Information and Fiscal Transparency

Transparency is a critical function of a regime (Florini, 2002; Mitchell, 1998). According to Mitchell (1998), transparency is a systematic process that requires “inputs” (information about the regime) to produce “‘outputs’ related to aggregating, processing, evaluating, publicizing, and responding to this information” (p. 110). As a result, without inputs the regime or government is unable to monitor its own performance (Mitchell, 1998), and citizens cannot detect opportunistic political behavior and evaluate their representatives (Alt et al., 2006; Benito & Bastida, 2007, 2009). When information access is limited, elections decrease in meaning and markets become unpredictable (Florini, 2002; Hameed, 2005). Therefore, it is beneficial when governments use fiscal transparency to inform the public about the policy-making process (Alt et al., 2006). Increased fiscal transparency adds trust, credibility, and greater stability to the political process and reduces noise in financial markets (Arbatli & Escolano, 2015; Posen, 2002).

Fiscal transparency originates from political theory and institutional economics (Hood, 2001). In political theory, it is established through “fixed, published, and predictable rules” that ensure verifiable government decision making (Hood, 2001, p. 701). Specifically, information enables the public to monitor government and steer decision making to benefit social welfare (Svensson, 2006). Sweden was the first country to adopt a Freedom of Information Act in 1766 (Manninen, 2006), and more than 100 other countries have adopted similar laws and policies as of 2016 (Right to Information Rating, 2016).

Within the field of institutional economics, fiscal transparency could address the problems of adverse selection and moral hazard in the principal–agent relationship. In particular, fiscal transparency could enable citizens (principals) to detect whether elected officials and government bureaucrats (agents) are acting out of self-interest when formulating policy rather than serving the common good (Gailmard, 2014). In this way, fiscal transparency could lead to better selection of representatives (Carlitz, 2013) and potentially reduce “the power gap between officials and the public” (Matheson & Kwon, 2003, p. 21).

Despite the importance of fiscal transparency as a factor in political theory and institutional economics, it remained a vague concept without a recognized definition until the 1990s (Petrie, 2013). In fact, it was not until 1998 that Kopits and Craig gave fiscal transparency its three dimensions. The first dimension requires that governments provide reliable information about their fiscal policy objectives. According to the second dimension, governments should also release detailed data and accurate documents about their fiscal activities. The third dimension consists of behavioral aspects, such as rules and regulations that enhance the flow of government information (Kopits & Craig, 1998). Specifically, fiscal transparency requires

openness toward the public at large about government structure and functions, fiscal policy intentions, public sector accounts, and projections. It involves ready access to reliable, comprehensive, timely, understandable, and internationally comparable information on government activities . . . so that the electorate and financial markets can accurately assess the government’s financial position and the true costs and benefits of government activities, including their present and future economic and social implications. (Kopits & Craig, 1998, p. 1)

Whereas Kopits and Craig viewed availability, accuracy, and reliability of information as important prerequisites of transparency, Heald (2003) focused on how information is communicated contingent upon its context and target audience. Releasing raw data and statistics of government fiscal performance is different from producing reports, which present, analyze, and explain such information (Heald, 2013). For example, information aimed at the public requires a more simplistic presentation than information communicated to finance analysts, budget officers, and accountants (Heald, 2003; Justice, McNutt, & Smith, 2014). Therefore, transparency could be nominal but not effective. In fact, nominal transparency reflects that a government complies with transparency policies and best practices, but does not provide accessible and understandable information. According to Heald (2006), “for transparency to be effective, there must be receptors capable of processing, digesting, and using information” (p. 35). However, even when constituents have information literacy,² governments may obfuscate transparency through constructed obstacles such as releasing large volumes of data to overwhelm the users (Heald, 2012, 2013, 2015).

These conceptions of fiscal transparency have also guided the development of the two most widely known fiscal transparency measurements (Justice, et al., 2014). The IMF Code of Good Practices on Fiscal Transparency provides governments with guidelines on clarity of roles and responsibilities, an open budget process, public availability of information, and assurances of integrity (IMF, 2007). Similarly, OECD’s (2002) Best Practices for Budget Transparency specify reporting standards for budget, financial, and nonfinancial documents that ensure quality, integrity, control, and accountability in disclosing government information so as to facilitate legislative scrutiny and public knowledge regarding the budgetary process (OECD, 2002).

Unlike the OECD, the IMF systematically assesses its member countries as to their state of fiscal transparency but has failed to produce a composite indicator capable of cross-national comparisons (Wehner & de Renzio, 2013). Since 1999, the ROSC has served as the IMF’s primary tool for evaluating the implementation of its transparency guidelines. Interestingly, a ROSC is initiated only upon a country’s own petition, and results cannot be published without the country’s consent. After peaking in 2002, when 21 countries were evaluated, the number of ROSCs has dropped significantly. Since 2011, there has only been one evaluation (IMF, 2012).

The Open Budget Survey (OBS), conducted since 2006 by the IBP, is the most comprehensive effort to assess cross-national fiscal transparency (Wehner & de Renzio, 2013). This survey instrument is unique in that the information is derived from empirical research rather than being self-reported. All answers to questionnaire receive anonymous double peer review by experts on the particular country’s budget system and processes. The OBS contains over 100 questions that assess institutional fiscal oversight, civic participation in the budget process, and the availability, timeliness, and comprehensiveness of budget and fiscal information. Based on these questions, an index ranging from 0 to 100, known as the OBI, is generated.

Some researchers have questioned the use of indexes when measuring fiscal transparency. For example, Heald (2012) argued, “indexes incorporate the presumptions of index creators” (p. 36). The OBI’s design features address limitations other indexes face (Rios et al., 2016). First, most of the survey questions used to establish the OBI focus on assessing the practice of fiscal transparency and not simply what the legislation requires. Furthermore, many of these questions have been inspired upon fiscal transparency standards as developed by the IMF and the OECD (IBP, 2012a). Second, the OBI assessments require no consent from the OBS participating countries. The research process behind the generation of the OBI, unlike other assessment efforts (e.g., ROSC), includes peer reviews by independent country experts to ensure that governments cannot manipulate the reported information. Third, the countries participating in the survey, although not randomly selected, represent a wide range of regions, income levels, and country characteristics (Wehner & de Renzio, 2013). Ross (2011) demonstrated that the OBI is representative and free of self-selection bias by employing a difference in means test, which found no statistically significant differences between countries that are included in the survey and those that are not. Fourth, robustness checks provide evidence that the OBI is capable of offering meaningful comparisons of fiscal transparency across countries and time (IBP, 2012a).³ Therefore, when studying determinants of international fiscal transparency, recent studies have shown a preference for the OBI rather than other available measures.⁴ The next subsection of the article details the factors associated with fiscal transparency and develops testable hypotheses.

Demand Sources for Fiscal Transparency

Political conditions

According to the literature, a country’s political conditions may drive demand for fiscal transparency. Alt et al. (2006) found that high political competition in the United States is associated with increased fiscal transparency. According to Wehner and de Renzio (2013),

politicians who share policy-making authority under divided government, or who are faced with a high probability of losing power in the next election, have incentives to attempt to tie hands of their competitors with reforms that promote transparency and reduce discretion. (p. 100)

Principal–agent theory underlies the aforementioned. When elected officials (agents) face competition, they can be expected to increase transparency initiatives so that the voters (principals) can monitor the actions of their competitors (Wehner & de Renzio, 2013). Voters will then be informed about the actions of the competing parties and enabled to select the party that aligns with their policy preferences. This positive relationship between political competition and fiscal transparency is reflected in the first hypothesis:

Hypothesis 1 (H1): Greater political competition is associated with increased fiscal transparency.

In addition to political competition, democracy may also be associated with fiscal transparency. On one hand, democratic elections can have a positive effect on fiscal transparency (Rios et al., 2016; Wehner & de Renzio, 2013). In free and fair elections, citizens can vote for officials who support open government. In fact, Hollyer et al. (2011) found empirical evidence that democratically elected governments engage in more extensive reporting of economic-related statistics, allowing voters to monitor whether elected officials are maximizing social welfare. On the other hand, Kono (2006) found that democracy might not always lead to greater policy transparency. By studying trade policies among 75 countries in the 1990s, he showed that democracy generates considerable information only when the effects of trade policies on consumer welfare can be easily communicated to voters. In contrast, when the effects of trade policies are harder to communicate to voters, elected officials promote obfuscation, limiting citizens’ ability to monitor their actions. Overall, the literature suggests that democracy is associated with fiscal transparency, but evidence on the direction of this relationship is mixed. Given these conflicting findings, we hypothesize that a relationship exists, but no directionality is specified:

Hypothesis 2 (H2): A country’s degree of democracy is associated with fiscal transparency.

In Ferejohn’s (1999) political agency model, when voters (principals) receive sufficient information about the actions of politicians (agents), they are inclined to allocate more resources to the public sector. Ferejohn’s theory, therefore, indicates that elected officials who desire a larger public sector and increased government spending should also allow voters to monitor how public resources are spent (Alt et al., 2006). Citizens could achieve monitoring of government actions through fiscal transparency (Carlitz, 2013). As a result, increased government spending is expected to be associated with increased fiscal transparency, as stated in the third hypothesis:

Hypothesis 3 (H3): Increased government spending is positively associated with fiscal transparency.

Fiscal factors

When Alt et al. (2006) examined fiscal transparency among American states, they found that fiscal imbalances—either surpluses or deficits—had a positive effect on fiscal transparency. American voters appeared to receive explanations during both economic upturns and downturns. On one hand, when economic conditions enable a surplus, politicians want to increase transparency so that voters receive an impression of good governance. But, when fiscal conditions tighten, decisions to increase fiscal transparency may also occur. For example, Alt et al. (2006) discussed the cases of Delaware and North Carolina, both of which responded to budget crises by increasing fiscal transparency. Similarly, in response to the recent global fiscal crisis, the European Commission (2009) developed reforms intended to increase monitoring of government decision making (see Claessens, Dell’Ariccia, Igan, & Laeven, 2010; Hallerberg, 2010). Following the literature, we expect a positive relationship between fiscal imbalances and fiscal transparency. This is reflected in our next hypothesis:

Hypothesis 4 (H4): Fiscal imbalances are associated with increased fiscal transparency.

A country’s debt level is another potential factor associated with the degree of fiscal transparency. When debt is high, politicians might obscure available information, so that voters are unable to understand the extent of the problem, the borrowing costs involved, or the risk of default (Bastida, Guillamon, & Benito, 2016; IMF, 2012; Rios et al., 2016). As a result, transparency could limit elected officials’ incentives for exercising fiscally irresponsible behavior (Rogoff, 1990). Among U.S. state governments, Alt et al. (2006) showed that higher levels of debt were associated with lower levels of transparency. Similarly, at the international level, Alt and Lassen (2006) found a correlation between greater transparency and lower public debt in 19 OECD countries. As a result, the next hypothesis tests for a negative relationship between debt and fiscal transparency:

Hypothesis 5 (H5): Higher levels of debt are associated with less fiscal transparency.

A country’s revenue portfolio can also influence fiscal transparency (Brautigam, Fjeldstad, & Moore, 2008). For example, citizens may demand transparency more strongly when government spending derives primarily from taxes (Wehner & de Renzio, 2013). In contrast, when government depends on wealth derived from natural resources, governments face less pressure to disclose information about public expenditures (Humphreys, Sachs, & Stiglitz, 2007; Jensen & Wantchekon, 2004; Ross, 2001, 2012). According to Ross (2001, 2012), and Humphreys et al. (2007), higher levels of natural resource revenue allow elected officials to sustain their political support by maintaining lower tax rate and concealing fiscal information (Williams, 2011). A negative association is expected between natural resource wealth and transparency, as reflected in the sixth hypothesis:

Hypothesis 6 (H6): Greater natural resource wealth is associated with lower levels of fiscal transparency.

External fiscal factors such as international development aid could also play an important role in a country’s fiscal transparency level. Within the last decade, donors’ involvement in strengthening budget management and processes in aid-dependent countries has increased tremendously. Especially since the 2005 Paris Declaration on Aid Effectiveness, donors have assumed a very active role in increasing fiscal transparency among aid recipient countries to ensure that funding is used as intended. The 2008 Accra Agenda for Action further strengthened this action-oriented declaration (OECD, 2015). Transparency has now become a key for developing strong ties between the donor and country receiving aid (de Renzio & Angemi, 2012). Hollyer et al. (2011) found evidence that IMF development programs have increased fiscal transparency across an international sample of countries. de Renzio and Angemi (2012), who studied 16 aid-dependent countries, found support for a positive relationship between fiscal transparency and an index that measures the quality but not the quantity of development assistance. These recent developments in donor aid are reflected in the seventh hypothesis:

Hypothesis 7 (H7): Foreign aid is associated with increased fiscal transparency.

Information access

Another critical area of concern with regard to fiscal transparency is citizens’ ability to access government information. Historically, information on government processes has been difficult to obtain for a variety of reasons, ranging from the lack of easily reproducible documents to the classic doctrine of divine right, which empowered monarchs to govern without disclosing information about their methods of governing (Irwin, 2012). But the rise of modern technology and the Internet has facilitated an information age. Research has identified Internet use as an effective means of obtaining government information, leading to satisfaction with transparency (Welch & Hinnant, 2003). As a result, we hypothesize,

Hypothesis 8 (H8): Increased Internet usage is associated with more demand for fiscal transparency.

As noted previously, about 100 countries worldwide have established laws that define public information and how citizens can gain access to it (Islam, 2006). Adoption of freedom of information (FOI) laws reduces the information costs that voters face when trying to evaluate their elected officials (Costa, 2013). Over the long term, voters become accustomed to such legal traditions and come to view FOI laws as critical components of efficient and transparent governance (Islam, 2006; La Porta, Lopez-de-Silanes, Shleifer, & Vishny, 1999). Therefore, in the next hypothesis, a positive relationship between the length of time since adoption of a FOI law and fiscal transparency is expected:

Hypothesis 9 (H9): The longer a FOI law has been in place, the higher the level of fiscal transparency.

Although enhancing government transparency is the main purpose of laws regarding information access (Matheson & Kwon, 2003), Rios et al. (2016) noted that their effectiveness is contingent upon the structure of a country’s legal system. In fact, common-law countries, which are more market-oriented than civil-law countries, promote a sentiment for ensuring the protection of property (Rios et al., 2016). As a result, common law may increase the demands for fiscal transparency. In fact, Alt and Lassen (2006) found empirical evidence that common-law countries are more transparent than civil-law ones. This is reflected in our next hypothesis:

Hypothesis 10 (H10): Fiscal transparency should be greater among common-law countries.

Economic conditions

Since the 1990s, economic conditions have triggered progress in fiscal transparency. According to Khagram et al. (2013), economic crises have provided “important windows of opportunity that reformers both within and outside government have used strategically to push through accountability-enhancing measures” (p. 33). South Africa, for instance, responded to the 1996 crisis with a wide range of fiscal transparency reforms to address excess expenditures by subnational governments (Friedman, 2013). Likewise, Brazil in the late 1990s introduced fiscal reforms to control patronage politics and excessive spending and borrowing by its subnational governments (Alves & Heller, 2013). During the Asian crisis, South Korea, under pressure from the IMF and civil society groups, passed a new bill designed to safeguard fiscal soundness (You & Lee, 2013). The Asian crisis also led the IMF and the OECD to develop their fiscal transparency standards. More recently, the 2008 fiscal crisis and its aftermath have spawned a number of fiscal and labor reforms among OECD countries for the purpose of improving fiscal sustainability and competitiveness (OECD, 2012). Such observations suggest our final hypothesis:

Hypothesis 11 (H11): There is a positive relationship between economic crisis and fiscal transparency.

Research Method

Research Model

To test each hypothesis, our model regresses a vector of political, fiscal, information access, and economic conditions on the OBI. To estimate the model, we employ a balanced panel research design over four periods (2006, 2008, 2010, 2012) and 59 countries. The linear model is presented in Equation 1:

O B I_{i t} = B_{1} P o l i t i c a l_{i t} + B_{2} F i s c a l_{i t} + B_{3} I n f o r m a t i o n_{i t} + B_{4} E c o n o m i c_{i t} + u_{i t}

Both Breusch-Pagan and White tests suggested that Equation 1 suffers from heteroscedasticity. We also found presence of autocorrelation when using the method established by Wooldridge (2002). Given these concerns, we employed a first-differenced panel regression with robust standard errors clustered by country, as shown in the following equation:

Δ O B I_{i t} = Δ B_{1} P o l i t i c a l_{i t} + Δ B_{2} F i s c a l_{i t} + Δ B_{3} I n f o r m a t i o n_{i t} + Δ B_{4} E c o n o m i c_{i t} + u_{i t}

While first-differencing eliminates unobserved time invariant factors, a common issue with panel series designs, robust standard errors clustered by country are employed to address panel heteroscedasticity and autocorrelation (Wooldridge, 2002). Variable Inflation Factor (VIF) analysis indicated no concerns about high multicollinearity, with all VIF values below 5 (Garson, 2014). Furthermore, all variables are standardized to provide a uniform scale when interpreting the results.

Dependent Variable

All variables used in this study are presented in Table 1. The OBI, this study’s dependent variable, comes from the OBS, which is conducted by the IBP. This index assesses the availability, timeliness, and comprehensiveness of budget process information and its openness to the public. The OBI includes 92 out of 123 OBS questions in its calculation; possible scores range from 0 to 100. OBI scores above 61 indicate that governments release sufficient information to permit the public to comprehend and analyze the budget process. Scores below 61, however, indicate that the information released to the public about the budget process is insufficient.

Table 1.

Variable Definitions, Hypothesis, and Data Sources.

Variables	Definitions	Hypothesis	Sources
Dependent variable
OBI index	Transparency index		Open Budget Survey (IBP)
Political conditions
Political competition	% of seats obtained in the parliament by the governing party	+	World Bank Database of Political Institutions
Degree of democracy	Democracy index based upon five requirements: (a) electoral process and pluralism, (b) civil liberties, (c) functioning of government, (d) political culture, and (e) civic participation	+	Economist Intelligence Unit
Size of govt. sector	Total government expenditures per capita	+	World Bank
Fiscal characteristics
Fund balance per capita	Total fund balance per capita	+	World Bank
Gross debt per capita	Gross debt per capita	−	World Bank
Oil rents per capita	The difference between the value of crude oil production at world prices and total cost of production per capita	−	World Bank
Mineral depletion per capita	The ratio of the value of stock of mineral resources to the remaining reserve lifetime (capped at 25 years) per capita. Mineral depletion covers tin, gold, lead, zinc, iron, copper, nickel, silver, bauxite, and phosphate	−	World Bank
Foreign aid per capita	Sum of official development assistance and aid official development assistance consists of disbursements of loans on concessional terms and grants. Official aid received refers to aid flows from official donors to countries	+	World Bank
Information access
Internet use	Internet use per 100 people	+	World Bank
Freedom of information	FOI index	+	Centre for Law and Democracy
Legal origin	Binary variable; 1 for common law, 0 for civil law	+	World Bank Database of Political Institutions
Economic controls
Recession	Binary variable; 1 for negative annual GDP growth change; 0 otherwise	+	World Bank

Note. FOI = freedom of information; OBI = open budget index; IBP = International Budget Partnership.

Typically, the IBP has released its OBS results on a biennial basis since its inception in 2006. The 2014 survey was delayed by 1 year because of improvements made to the questionnaire and to the online platform used to collect results (IBP, 2015). The 2014 OBS iteration was excluded from our analysis, primarily because 2015 data for most of our independent variables were not available at the time of this study. Furthermore, although the number of countries participating in IBP’s survey has increased over time from 59 to 102, since we were conducting a longitudinal analysis we could use only the data from the 59 countries covered in the initial 2006 survey. Adding countries that began to participate in the OBS after 2006 would result in an unbalanced panel with nonrandomly missing data, which could bias the coefficients (Baltagi & Chang, 1994).

Independent Variables

Political conditions

This study’s model incorporates three measures of political condition: political competition, degree of democracy, and government size. To measure political competition, we borrow from Wehner and de Renzio’s (2013) work and use a Herfindahl-based index of political competition. This index is preferred over other measures of political competition (e.g., divided government, the share of Democratic votes in gubernatorial elections, and the Democratic seat share in the upper and lower houses) as it better captures competition in multiparty political systems (Wehner & de Renzio, 2013). This variable, available in the World Bank Database of Political Institutions, evaluates the percentage of seats in parliament controlled by the governing party (Beck, Clarke, Groff, Keefer, & Walsh, 2001; World Bank, 2013). The values of this index range from 0 to 1, with 1 indicating that a single party occupies all seats and controls both executive and legislative branches, whereas 0 indicates a highly diverse picture in which the executive branch finds it harder to control the legislative branch.

In regard to democracy, there is no consensus on which is the most appropriate measure (Coppedge et al., 2011; Kekic, 2007). For this study, each country’s degree of democracy is measured using data from the global democracy index, published annually by the Economist Intelligence Unit since 2006. This index derives after assessing five principal characteristics of democratic systems: (a) electoral process and pluralism, (b) civil liberties, (c) functioning of government, (d) political culture, and (e) political participation. Countries are rated from 0 (least democratic) to 10 (most democratic). In addition, some of the other commonly used democracy indices do not have data for all countries included in this sample (e.g., Freedom House Countries at the Crossroads), which could lead to bias due to missing data.⁵ Furthermore, the democracy index is still produced, which allows for further testing with the same source of data in future research studies examining the relationship between democracy and fiscal transparency.

Following Alt et al. (2006), per capita calculations are employed to test the relationship between government size and fiscal transparency. In more detail, we use government expenditures divided by each country’s population to test the relationship between government size and fiscal transparency. Information about each country’s government expenditures is obtained from the World Bank.

Fiscal factors

In addition to political factors, our model also includes fiscal factors. Following Alt et al. (2006), Ross (2011), and Wehner and de Renzio (2013), all fiscal variables are expressed in per capita terms and derived from the World Bank. To measure fiscal imbalances, we use fund balance per capita—the difference between assets and liabilities divided by country population. Debt is captured by the ratio of total government gross debt to country population. Furthermore, we employed two variables—oil rent and mineral depletion per capita—to better capture natural resource wealth (Ploeg, 2013). In terms of foreign aid, net official aid received per capita is included. Unlike Hollyer et al. (2011) who used a binary variable, we employed a continuous measurement to better capture foreign aid’s heterogeneity on this study’s sample of countries. Table 1 provides more information on these variables and their definitions.

Information access

To capture citizens’ ability to access government information, our study employs Internet use, adoption of FOI laws, and a country’s legal system. Table 1 provides more information on the Internet use and legal system variables. With regard to FOI laws, following Islam (2006), we constructed an index recognizing the time period for which FOI laws have been in place. Countries that have adopted a FOI law in the past 5 years receive 1 point; 2 points are assigned to countries with FOI laws 5 to 10 years old, 3 points for laws 10 to 15 years old, 4 points for laws 15 to 20 years old, and 5 points for laws in existence for more than 20 years. Information on FOI laws comes from the Centre for Law and Democracy.

Economic conditions

To control for economic conditions, we studied GDP growth changes to determine when a country has entered a recession. Although recessions are usually identified by quarterly changes in GDP growth, such detailed data were not available for all countries in our sample. Instead, we decided to use the annual change in GDP growth, calculated from the World Bank’s World Development Indicators database. A negative growth indicated that a region’s economy has shrunk and hence it has experienced a recession. Countries were coded as 1 if they were in a recession and as 0 otherwise. This variable is lagged by 1 year to account for the time it takes policy makers to respond to recessionary periods (see Perotti, 2008).

Findings

Descriptive Statistics

Table 2 describes the study’s dependent and independent variables from 2006 to 2012. The OBI average is 48.7 points or, approximately, 12 points below the minimum threshold considered as sufficiently permitting the public to comprehend and monitor the budget process. However, the data also provide some reasons for optimism. The large range and standard deviation indicate a diverse sample containing a substantial number of high scores. In 2012, 18 of the 59 countries in our sample scored at least 61 points (see Appendix A). Half of these countries were located in Europe. Moreover, 38 of the 59 countries have made improvements in their fiscal transparency since 2006, the date of the first OBS. Considerable improvements were observed in all regions, but the strongest progress has occurred in Asia, where all countries except Sri Lanka and the Philippines have increased their OBI (see Appendix B). This increased Asia’s regional OBI from 40 points in 2006 to 52 points in 2012 (see Appendix A).

Table 2.

Descriptive Statistics (2006-2012).

	Obs	M	SD	Min	Max
Dependent variable
OBI index	236	48.767	22.321	0.000	93.000
Independent variables
Political conditions
Political competition	236	0.803	0.259	0.185	1.000
Democracy index	236	5.949	1.810	1.520	9.930
Size of govt. sector	236	1,854.54	3,420.88	26.97	21116.56
Fiscal characteristics
Fund balance per capita	236	101.889	1,850.347	−4,503.110	15,291.908
Gross debt per capita	236	451,941.861	909,504.251	20.110	5,202,870.888
Oil rents per capita	236	45,421.23	151,302.200	0.000	1,404,146.000
Mineral depletion per capita	236	0.001	0.005	0.000	0.038
Foreign aid per capita	236	33.577	44.804	0.000	366.010
Information access
Internet use	236	28.137	26.002	0.425	94.650
Freedom of information	236	1.300	0.468	0.000	5.000
Legal system	236	0.322	0.468	0.000	1.000
Economic conditions
Recession	236	0.589	0.493	0.000	1.000

Note. OBI = open budget index.

Diversity was also observed for most of this study’s independent variables. As shown in Table 2, our sample countries spent on average approximately US$1,855 per capita. However, regional patterns indicated that European countries spent on average about 12 times as much as African countries and 6 times as much as Asian and Latin American countries.⁶ Likewise, the standard deviation and range of fund balances per capita indicate that fiscal imbalances (either surpluses or deficits) are common for our sample countries. Debt level, natural resource wealth, and foreign aid also fluctuate considerably between countries.

The average democracy index score (5.949), according to the categorizations from the Economist Intelligence Unit, classifies our sample’s degree of democracy as between flawed and hybrid on average. But again, the range indicates a variation within our sample from full democracies to autocracies. On average, the Herfindahl index score was quite high (at 0.8), signifying low political competition. Not surprisingly, Europe exhibited the highest levels of political competition across all time periods.⁷ Finally, the mean length of time for which an FOI law has been in existence was less than 10 years although European countries have had FOI laws for at least 20 years.

Regression Estimates

The regression estimates (see Table 3) revealed a range of factors associated with the OBI. All political variables used in our model except political competition had a significant relationship with the OBI, contradicting H1. This lack of evidence for a positive association between political competition and fiscal transparency as hypothesized in H1 challenges the findings in Alt et al (2006) and Wehner and de Renzio (2013). It should be noted that Alt et al.’s (2006) research was focused on U.S. state governments and not on national governments from different parts of the world. Furthermore, while Wehner and de Renzio’s (2013) study was international, it followed cross-sectional analysis using the 2008 OBI data. The difference in findings can potentially be due to the panel methodology and time period of our study.

Table 3.

First Difference OLS Regression With Robust Standard Errors Clustered by Country.

	Coefficient	Clustered SE	VIF
Political conditions
Δ size of govt. sector	2.528***	0.402	1.43
Δ political competition	−0.076	0.085	1.09
Δ democracy index	−1.137**	0.403	1.05
Fiscal characteristics
Δ fund balance per capita	0.302*	0.168	1.67
Δ gross debt per capita	−0.066	0.161	1.47
Δ oil rents per capita	−0.641***	0.174	2.03
Δ mineral depletion per capita	−0.002	0.108	1.13
Δ foreign aid	0.077**	0.032	1.1
Information access
Δ Internet use	0.470	0.432	2.59
Δ freedom of information	0.577**	0.254	1.37
Legal origin	0.309**	0.117	1.1
Global crisis
Δ recession	0.397**	0.132	2.42
Constant	−0.486	0.195
Obs.	171
R ²	.294
Prob.>F	0.000

Note. OLS = ordinary least squares; VIF = variable inflation factor.

p < .05. **p < .01. ***p < .001.

With regard to H2, we found evidence that democracy has an inverse relationship with fiscal transparency, which challenges evidence from Wehner and de Renzio (2012) and Rios et al. (2016), but supports Kono (2006). According to the coefficient, an increase of one standard deviation on the Economist’s democracy index (The Economist, 2006, 2008, 2010, 2012) decreased the OBI by 1.1 units. In addition, the size of government had a strong positive association with the OBI, providing evidence for H3. This finding reinforces Ferejohn’s (1999) political agency theory, according to which politicians who spend more use fiscal transparency to gain voters’ trust and resources. According to the coefficient, an increase in government spending per capita by one standard deviation increased the OBI by 2.5 units.

Among this study’s fiscal factors, fund balance, oil rents, and foreign aid per capita had significant relationships with the OBI in the expected direction. Consistent with Alt et al. (2006), fiscal imbalances as measured by the fund balance showed a positive association with transparency, which supports H4 at an exploratory level of statistical significance. The coefficient suggests that an increase of one standard deviation in fund balance per capita improves the OBI score by 0.3 units. Unlike the findings from Alt et al. (2006) and Alt and Lassen (2006), we found no evidence for a negative relationship between debt per capita and the OBI. Therefore, there is no support for H5, which was also the case in Rios et al.’s (2016) recent study.

There is mixed support for H6, depending on which measure of natural resource wealth is examined. The negative relationship between oil rents per capita and OBI provides support for H6. This finding adds evidence that governments dependent upon the supply of oil face less pressure from their citizens to disclose fiscal information and may therefore obfuscate information, as argued by Jensen and Wantchekon (2004), Ross (2011), and Williams (2011). Our results suggested that an increase of one standard deviation in oil rents per capita decreased the OBI by 0.6 units. In contrast, there is no evidence of a statistically significant relationship between other natural resources, mineral depletion in specific, and OBI, potentially indicating that H6 depends on the type of natural resource.

Unlike natural resource wealth, foreign aid per capita had a positive relationship with OBI, suggesting a more active role of donors in encouraging transparency, as predicted by H7. The model estimates showed that an increase of one standard deviation in foreign aid per capita improved the OBI by 0.08 units. This finding builds upon evidence established in Hollyer et al. (2011) and de Renzio and Angemi (2012), and highlights the importance of the 2005 Paris Declaration on Aid Effectiveness and the 2008 Accra Agenda for Action (OECD, 2015).

With regard to the variables used to test the effect of information access on the OBI, both FOI laws and a country’s legal system are statistically significant. In contrast, there is no support for the relationship between Internet usage and OBI, which challenges arguments from Welch and Hinnant (2003) and does not provide evidence for H8. In support of H9, the regression estimates showed a correlation between establishment of FOI laws and fiscal transparency, as an increase of one standard deviation in the FOI index improved the OBI score by 0.58 units. Support for H9 is consistent with theory and empirical evidence in La Porta et al. (1999), Islam (2006), and Costa (2013). Consistent with H10 and also with Alt and Lassen (2006), market-oriented common-law countries promoted transparency to a greater degree than government-oriented civil-law countries; specifically, common-law systems were associated with an increase in the OBI of 0.3 units.

Finally, the results show an association between a country’s economic conditions and fiscal transparency, as expected by H11. Our variable measuring economic growth showed that recessions have a moderate positive influence on the OBI at the .001 level of significance. This finding supports arguments developed in Khagram et al. (2013).

Conclusion

Implications for Research

In response to the IMF’s (2012) call for further research on fiscal transparency, this study has completed a longitudinal analysis using an international panel approach. The model estimated in this article shows that political, fiscal, information, and economic conditions were associated with international fiscal transparency from 2006 to 2012. Our 59 sample countries come from all over the world, and we found that fiscal transparency has increased in all major geographic regions (see Appendices A and B). As of 2012, 65% of the countries in our sample had improved their level of transparency relative to 2006. However, there was still room for improvement, as 45% of the sample countries in 2012 scored below 61 OBI points, the minimum information threshold for allowing the public to understand the budget process (IBP, 2015).

According to our findings, there is an association between economic conditions and fiscal transparency. Specifically, we found that economic recessions positively associate with a country’s fiscal transparency level. This finding advances arguments from Khagram et al. (2013) that periods of fiscal crisis may provide “important windows of opportunity that reformers both within and outside government have used strategically to push through accountability-enhancing measures” (p. 33). Fiscal imbalances are also associated with fiscal transparency. In this regard, our results support those of Alt et al. (2006). They also extend evidence of the positive relationship between fiscal imbalances and fiscal transparency from U.S. states to the international arena. Even when economic conditions slow down and recessions occur, our results suggest that countries still appear to value fiscal transparency.

Among the results, we found the negative relationship between democracy and fiscal transparency quite notable. As discussed in the theoretical framework, the existing literature offers mixed conclusions on the link between transparency and democracy. Our results challenge the expectation that precise information generates higher benefits than obfuscation (Hollyer et al., 2011). Instead, they suggest that democratic countries may be releasing information selectively in an effort to ensure that the public (principals) monitors politicians (agents) only to the extent that the agents’ interests are not harmed. As Stiglitz (2002) noted, although democratic societies generally favor transparency, governments “do not have the incentive to disclose, let alone to disseminate, information that is contrary to their interests” (p. 29).

Our study also provides evidence that donors play a positive role in fiscal transparency, an expectation linked to the Paris Declaration on Aid Effectiveness and the Accra Agenda for Action. Currently, donor agencies are driving budget reforms in many countries to reduce the risk that foreign aid will be misappropriated or poorly used (de Renzio & Angemi, 2012). Interestingly, our study is among the few to provide evidence for this positive relationship between foreign aid and the OBI. Panel series designs, therefore, might be more suitable than cross-sectional ones when studying the impact of this factor on fiscal transparency.

Limitations and Future Research

While this article further develops the literature on fiscal transparency, there are limitations in addition to areas for future research. One limitation of our study is that its final model does not include some factors that previous research has found to be associated with fiscal transparency. Specifically, our study does not test the association between political party ideology and OBI. In particular, Alt et al. (2006) and Rios et al. (2016) used a binary measure of conservative or liberal party ideology in power. However, scholars have challenged the validity and reliability of cross-national ideological measures (Molder, 2013). According to Benoit and Laver (2006) “it may be impossible for any single scale to measure this dimension in a manner that can be used for reliable or meaningful cross-national comparison” (p. 158). Alternatively, some have used a variety of variables from the Manifesto Project to measure party ideology (see Dinas & Gemenis, 2010). This database though, does not provide data for all countries in our sample. This would create the problem of missing data, which would introduce bias into our model estimates (Wooldridge, 2002).

Furthermore, we have not included legislative supervision identified in Rios et al. (2016) due to the way it is measured. In particular, Rios et al. (2016) develop a measure of legislative supervision from a subset of survey questions used to generate OBI. Incorporating this measure into our study would introduce bias into the model. In particular, including in the right hand side of the equation a legislative supervision variable that derives from the OBI questionnaire, would introduce reverse causation with the outcome variable OBI, potentially leading to bias in the model estimates (Wooldridge, 2002).

In regard to future research, as more countries continue to adopt transparency policies and laws, additional cross-national comparisons should be conducted. Future studies on fiscal transparency could particularly benefit by decomposing data based on country characteristics. In the present study, we interpreted the negative relationship between democracy and fiscal transparency by suggesting that elected officials in a democracy may be vulnerable to citizens’ disapproval and hence use obfuscation to protect their position in government. However, another possibility is that autocratic governments have improved their fiscal transparency to attract foreign investment and development assistance (Rios et al., 2016). Therefore, studying the factors associated with OBI scores in full democracies and autocracies could help us to understand how various systems can promote or hinder fiscal transparency.

As political, fiscal, information access, and economic conditions change over time, country comparisons should be made using a longitudinal design. To facilitate longitudinal research, global institutions (e.g., the IMF and IBP) should become more consistent in their measurement and evaluations of fiscal transparency. For example, the IBP deviated from its standard biennial schedule of transparency measurement, ultimately releasing OBI rankings in 2015, a year later than expected. This inconsistency in the time gaps between measurements creates significant limitations for researchers and practitioners seeking to understand fiscal transparency trends, as it creates an unbalanced set of panel data. Likewise, the IMF appears to use ROSC for evaluating fiscal transparency progress among its member countries, but without any systematic evaluation schedule. Conducting a ROSC only in response to a country’s petition and not publishing the results without the country’s consent prohibits researchers and practitioners from studying fiscal transparency and contributing to its dissemination. Overall, greater standardization in measuring fiscal transparency can facilitate an understanding of how it evolves over time.

Footnotes

Appendix A

Table A1.

Average Country OBI by Year.

	2006	2008	2010	2012
Europe	64.1	67.4	66.8	70.0
Albania	25	37	33	47
Bulgaria	47	57	56	65
Croatia	42	59	57	61
Czech Republic	61	62	62	75
France	89	87	87	83
Norway	72	80	83	83
Poland	74	67	64	59
Romania	66	62	59	47
Russia	47	58	60	74
Slovenia	82	74	70	74
Sweden	76	78	83	84
The United Kingdom	88	88	87	88
Africa	35.4	34.1	35.1	37.1
Algeria	28	2	1	13
Angola	5	4	26	28
Botswana	65	62	51	50
Burkina Faso	11	14	5	23
Cameroon	29	5	2	10
Chad	5	8	0	3
Ghana	42	50	54	50
Kenya	48	58	49	49
Malawi	42	28	47	52
Morocco	19	28	28	38
Namibia	50	46	53	55
Nigeria	20	19	18	16
South Africa	86	87	92	90
Tanzania	48	36	45	47
Uganda	32	51	55	65
Zambia	37	48	36	4
Middle East	37.0	46.3	52.0	40.0
Egypt	19	43	49	13
Jordan	50	53	50	57
Turkey	42	43	57	50
Latin America	44.1	43.2	44.3	48.4
Argentina	40	56	56	50
Bolivia	21	7	13	12
Brazil	74	74	71	73
Colombia	57	61	61	58
Costa Rica	45	45	47	50
Ecuador	32	39	31	31
El Salvador	28	37	37	43
Guatemala	46	46	50	51
Honduras	38	12	11	53
Mexico	50	55	52	61
Nicaragua	21	19	37	42
Peru	77	67	65	57
Asia	40.0	45.1	50.2	51.8
Azerbaijan	30	37	43	42
Bangladesh	39	42	48	58
Georgia	34	53	55	55
India	53	60	67	68
Indonesia	42	54	51	62
Kazakhstan	43	35	38	48
Mongolia	18	36	60	51
Nepal	36	43	45	44
Pakistan	51	38	38	58
Philippines	51	48	55	48
South Korea	73	66	71	75
Sri Lanka	47	64	67	46
Vietnam	3	10	14	19
Other	73.0	76.3	76.3	76.0
New Zealand	86	86	90	93
Papua New Guinea	52	61	57	56
The United States	81	82	82	79

Note. OBI = open budget index.

Source: International Budget Partnership ( 2008, 2010, 2012b).

Appendix B

Declaration of Conflicting Interests

The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.

Funding

The author(s) received no financial support for the research, authorship, and/or publication of this article.

Notes

Author Biographies

Theodore Arapis, PhD, is an assistant professor at Villanova University, where he teaches financial management and statsicts in the graduate program of Public Administration. His research interests focus on public finance and budgeting. He has authored articles in a variety of journals, including Public Budgeting & Finance, Public Finance Review, Public Budgeting Accounting and Financial Management, and Government Financial Management.

Vincent Reitano, PhD, conducts research on public budgeting and finance. He is published in a variety of journals, including Public Budgeting & Finance, Public Finance Review, and Contemporary Economic Policy.

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