When are fiscal adjustments successful? The role of social capital

Abstract

High levels of social capital, by fostering cooperation and coordination, have direct implications for the intensity of collective action problems in a society. While it has been shown that high levels of social capital facilitate the implementation of institutional reforms we argue that the extent of social capital also determines the success of reforms. Specifically, we analyse fiscal adjustments in a sample of OECD countries and find that higher levels of social capital significantly increase the probability that adjustments are associated with persistent declines in debt-to-GDP ratios.

Keywords:

• fiscal adjustment
• social capital
• probit estimation

JEL Classification:

• H00
• H60

Notes

1 The countries included are Australia, Austria, Belgium, Canada, Denmark, Germany, Finland, France, Italy, Ireland, Japan, Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, UK and Greece. In contrast to Alesina and Ardagna (2010) we exclude the 1970s due to missing data on social capital.

2 An alternative to using the latest survey value before the adjustment year is to take the value from the first World Value Survey wave in which a country participates. This alternative approach is based on the notion that social capital is rather inert and, thus, reverse causality rather unlikely e.g., Knack and Keefer (1997). Applying the alternative approach to operationalize generalized trust leads to similar results, which is reassuring for the intent to avoid reverse causality.

3 In the few cases for which no information is provided, we distinguish between early and late elections (July to December) and assume that in case of late (early) elections the old (new) government is responsible for the adjustment package.

4 We apply the Hodrick–Prescott filter with a smoothing parameter of 6.25.

5 Existing evidence on the link between exchange rate movements and the success of adjustments is mixed. See, e.g., Ardagna (2004) and Lambertini and Tavares (2005).

6 The overall mean of Trust_i is 43.73 and the SD is 14.45 in our sample.