Socioeconomic Contexts of Government Expenditure Across OECD Countries

Abstract

In contrast to the literature which analyzes government size using contingent factors, this article proposes that socioeconomic traditions, such as trust and state–business relations (SBR), complement the explanations of government size in an economy. Using 29 Organization for Economic Co-Operation and Development (OECD) countries from 1995 to 2008, this study shows that a high level of trust is negatively related to government expenditure, whereas tight SBRs are positively related to it even under the decreasing trend of government expenditure. We suggest that attention should be paid to the societal contexts of an economy in addition to its contingent factors, when analyzing changes in political economic activities.

Keywords

government expenditure socioeconomic context state–business relations trust

Introduction

For many years, scholarship in political economy has been interested in analyzing change in government size, especially changes in the size of government expenditure, using the contingent factors of a country. Government debt (Alesina, 2012; Mahdavi, 2004), partisan positions (Jacoby, 2000; Rudolph & Evans, 2005), and trade relations (Alesina & Wacziarg, 1998; Liberati, 2007) have been examined as determinant factors. For instance, under the growing influence of neoliberal economic thought, the efficiency thesis emphasizes a government’s debt status, or the macroeconomic performance of a country, as a catalyst for change in government size (Alesina, 2012). The governing party’s political position (Blais, Kim, & Foucault, 2010) and trade relations with an influential country like the United States (Lee & Strang, 2006) also affect government size. However, the relationship between government size and those contingent factors is not consistent. The explanatory power of partisan position on government policy—including government spending—is very limited. According to a meta-analysis of 693 parameter estimates in 43 empirical studies, only 154 estimates (22%) support the left–right party impact hypothesis (Imbeau, Pétry, & Lamari, 2001, p. 23). Other research also reports a weak relationship between trade openness and government expenditure (Benarroch & Pandey, 2012; Iversen & Cusak, 2000), and between government debt and government expenditure (Kenworthy, 2011; Lewis, 2012).

The inconsistent findings present a compelling need to complement existing explanations for the determinants of government size. An argument that only relies on contingent factors is problematic empirically as well as theoretically. Existing empirical studies find inconclusive evidence of the extent to which changes in government size are related to the factors identified by the efficiency thesis, partisan positions, and trade relations. That is, the changes in government size could show distinct trajectories across countries. In theory, these findings cast some doubt on the exclusive link between contingent factors and government expenditure (Benarroch & Pandey, 2008; Hays, Ehrlich, & Peinhardt, 2005). We therefore revisit the nexus between contingent factors and government size by focusing on state structures, such as the socioeconomic factors of a country (Imbeau et al., 2001; Schmidt, 1996). Various global trends in political, economic, and international dimensions are not translated into common pressures without institutional frictions. They are mediated by a country’s socioeconomic arrangements and refracted into divergent struggles over particular national practices (Locke & Thelen, 1995, p. 338). We understand that the degree to which newly advocated organizational practices are seamlessly accommodated is affected by the socioeconomic traditions of a country (Battaglio, 2009; Boyer, 2005; Welch & Wong, 2001).

In this article, we examine the relationship between government size, measured by the ratio of government expenditure to gross domestic product (GDP), and the socioeconomic traditions of a specific country. We define the socioeconomic traditions of a country as those social values and norms that affect the institutional and organizational characteristics of a country. These social values and norms in turn affect a country’s resource acquisition and allocation (S. Lee & Yoo, 2008). Based on previous research on social values and norms (Coleman, 1988; Knack & Keefer, 1997; La Porta, Lopez-de-Silanes, Shleifer, & Vishny, 1997; Woolcock, 1998), we first include the level of trust within a country in our measure of a country’s socioeconomic traditions. Trust is understood as the general inclination of people to have faith in their fellow citizens (Hall, 1999, p. 431) and is culturally sensitive to idiosyncratic features (Bate, Khan, & Pye, 2000). It affects both organizational structure and individual behavior in economic activities (Nooteboom, 2000). Trust modifies the connectivity between organizations, transforming the boundaries between internal and external or between public and private systems of organizations (Lane & Bachmann, 1996). Thus, we suggest that differences in trust across countries should be taken into consideration when predicting changes in the size of government expenditure.

Second, we include in our definition of socioeconomic tradition the characteristics of the state in a country, namely, the relationship between the state and business (Hall & Soskice, 2001). As illustrated by South Korea—where even liberalization is utilized as a state-initiated development strategy (Jho, 2007)—each economy presents a distinctive tradition of state–business relations (SBR), such as dirigiste or laissez-faire. We expect that in economies of the dirigiste tradition, the state will maintain a relatively conspicuous presence in economic activity through partial state ownership or a return of state activism, consequently leading to a relatively large size of government. We suggest that the socioeconomic traditions of a society, operationalized by trust and SBR in this study, inform the understanding of various trajectories in the size of government expenditure across countries. Countries that experience a transformation in their practices in government expenditure will face further modifications to be congruent with the socioeconomic norms and values in their societies.

This article is organized as follows. The first section reviews the literature on government expenditure. The second section proposes a framework that illuminates the generally accepted socioeconomic rationales of a country and develops several hypotheses for empirical tests. The methods, data, and results of the empirical analyses are presented in the subsequent two sections. Using contrasting statistical findings across 29 Organization for Economic Co-Operation and Development (OECD) countries from 1995 to 2008, the analysis will illustrate the sustained influence of distinct socioeconomic traditions in each country. Theoretical and practical implications are discussed with concluding remarks.

The Literature on Government Expenditure

As the Conservative Party under Margaret Thatcher in the United Kingdom initiated large-scale privatization of state-owned enterprises (SOEs) in the early 1980s, “small government” has been a buzzword in both academia and industry. As the deregulation process continues, the field of political economy has increasingly paid attention to the effect of market-oriented reforms on government expenditure. The efficiency thesis argues that small government is a government response to economic adversity, such as a government’s financial distress, and to the inefficiencies of an economy as a whole (Alesina, 2012). Other researchers have also examined government size—measured as total government expenditure—in terms of partisan positions (Jacoby, 2000) and trade relations (Liberati, 2007). We review these approaches and pave the way for a complementary framework that sheds light on socioeconomic traditions of a country through an analysis of the variations in government expenditure across countries.

The efficiency thesis analyzes the change in government size within a framework of pragmatic objectives such as international competitiveness. It emphasizes the reduction of government expenditure under the influence of globalized markets (Swank & Steinmo, 2002). When the costs of conducting and monitoring transactions by the government become excessive, market agents will turn to more efficient governing arrangements. According to this view, the principal objectives of market-oriented reform are as follows: fiscal sustainability achieved by reducing government subsidies to SOEs and by generating new revenues through their sales, improvement of enterprise performance, and enhanced efficiency of the entire economy through market-based allocation of resources across firms and sectors (Berg & Berg, 1997, p. 359). Greater debt to GDP ratios are highly correlated with the size of government as measured by government expenditure and government employment (Bortolotti, Fantini, & Siniscalco, 2003). There is a positive relationship between government expenditure and economic conditions, such as government’s financial distress (Bortolotti et al., 2003; La Porta, Lopez-de-Silanes, Shleifer, & Vishny, 1999). For instance, the French government had to deal with an economic recession in the 1990s, and it embarked on the selling of government assets, which led to a decrease in government size (Zohlnhöfer, Obinger, & Wolf, 2008).

While acknowledging the importance of economic factors, the advocates of political dimensions have claimed that politics does matter in understanding the change in government size (Castles & McKinlay, 1979; Thérien & Noël, 2000). The political approach explains the change of government expenditure by emphasizing the importance of the struggle between diverse groups attempting to achieve different goals, such as conservative versus democratic-socialist parties (Busemeyer, 2009). Government expenditure is thus affected by a governing party’s political position (Rudolph & Evans, 2005). The political approach explains why some parties with specific political propensities—such as the Conservatives in the United Kingdom—have advocated for small government, whereas others—such as the Socialists of France—do not. In practice, leftist governments increase government expenditure under rapid globalization, although the differences between left- and right-wing parties have diminished since the 1990s (Potrafke, 2009). This illustrates that diverse constellations of political stance facilitate different trajectories in government size (Amable, Gatti, & Schmacher, 2006; Blais et al., 2010).

Furthermore, scholars studying the implications of international relations have indicated a strong association between trade relations or capital openness and government size. It is claimed that rapid growth of trade and cross-border financial transactions in the 1990s drove governments to take corrective market interventions that often engenders economic inefficiency and disrupts the benefits of self-equilibrating markets. Both trade (the sum of imports and exports as a share of GDP) and capital openness (the sum of inward and outward foreign direct investments [FDIs] as a percent of GDP) decrease government expenditure (Liberati, 2007). The so-called emulation thesis explains that trade relations with an influential country—such as the United States—affects government size, because powerful actors may prevail over the policy choice of others (Henisz, Bennet, & Guillén, 2005). Emulation is an effective policy-making strategy under conditions of uncertainty, and thus governments tend to decrease their expenditure by reducing search costs and acquiring legitimacy (Henisz et al., 2005). When a policy is legitimated as a norm, it spreads more rapidly than it does without legitimacy (Davis & Greve, 1997). Small government policies of the United Kingdom and the United States in the 1980s illustrate this case (Lee & Strang, 2006).

Limitations of the Existing Perspectives

There are still inconsistent outcomes between the contingent factors mentioned above and government expenditure. Empirically, government debt, partisan positions, and trade relations do not show consistent directions in understanding the change of government expenditure. A high debt/GDP ratio has not necessarily led to a decrease in government size (Kenworthy, 2011; Lewis, 2012). According to a panel analysis of 34 countries from 1977 to 1999, debt/GDP does not show significant effect on small government policy as measured by privatization revenues and the percentage of privatized stock (Bortolotti et al., 2003). A combined analysis of debt and partisan positions also indicates the insignificance of debt on government size as measured by government employment (Lee & Strang, 2006). Regarding the influence of political factors, such as the ruling party’s political position, a panel analysis of 14 EU member countries shows that the left–right party divide does not matter (Zohlnhöfer et al., 2008). A comparative analysis of Canada and the United States also illustrates that partisan positions are not significant in predicting government size (Kelly-Gagnon & Geloso, 2013). The left-wing party will not necessarily increase the relative size of government, nor will the right-wing party necessarily do the opposite. The different telecommunications policies of the United Kingdom and French conservative parties also imply that we should consider something other than partisan explanations of government size (Castles, 2005). In addition, recent findings on trade and capital openness indicate that international relations do not directly influence the expansion of government expenditure (Benarroch & Pandey, 2008; Hays et al., 2005; Iversen & Cusak, 2000). These empirical findings raise doubts as to the common explanations of the literature discussed in the previous section. This denotes that the three factors have not been analyzed simultaneously, and suggests the need to consider additional dimensions and examine all the factors in an integrated framework.

The inconsistent or incomplete empirical findings indicate that the existing theoretical approaches in the literature require complementary perspectives in understanding the change of government size. Although we acknowledge the relationships between the contingent factors and government spending, the literature has paid little attention to the socioeconomic traditions of a country (Garrett & Mitchell, 2001; Imbeau et al., 2001; M. Schmidt, 1996). In short, the existing literature has not considered how economic practices are formulated in general and how SBR affects economic activities in examining government size. For instance, we do not know much about the possible continuation of idiosyncratic organizational characteristics in a country’s economy even after the decrease of government expenditure. Japan is an illustrative case. With regard to the telecommunications market, the Japanese government increased its influence and implemented “strategic re-regulation” despite its huge government debt (Vogel, 1996, pp. 45-46). We thus need to consider the socioeconomic traditions of a country, in addition to its economic, political, and international factors in understanding the contrasting trajectories of government size across countries.

A Complementary Perspective: Socioeconomic Factors

Why do some countries maintain a large government in the face of overwhelming government debt and influential right-wing parties? Faced with inconsistent findings in the literature, in this study, we seek a complementary framework through which to examine whether socioeconomic conditions of a country affect government expenditure. We draw on the level of trust and the SBR of a country. A certain set of coordination practices in a country is nurtured through the society’s heterogeneous socioeconomic arrangements, such as behavioral norms and governance patterns. Coordination practices of a country reflect how individuals’ economic activities are practically arranged and the extent to which government intervention into economic activity matters, thus affecting government expenditure.

Figure 1 illustrates that each country has an idiosyncratic position in relation to its level of trust and SBR. The Y-axis represents trust scores of each country by the World Values Survey (WVS), whereas the X-axis denotes SBR according to the Index of Economic Freedom published by the Heritage Foundation. Higher values for a country indicate greater level of trust and stronger government-intervening characteristics of such country. Using Figure 1, we categorize countries into four groups: (a) high trust and tight SBR, (b) high trust and loose SBR, (c) low trust and tight SBR, and (d) low trust and loose SBR. The four groups of countries in Figure 1 epitomize the idiosyncratic socioeconomic features across countries. These characteristics may lead to distinct organizational practices of a country, including the size of government expenditure.

Trust and Government Expenditure

As Arrow (1972) notes, “Virtually every commercial transaction has within itself an element of trust . . . much of the economic backwardness in the world can be explained by the lack of mutual confidence” (p. 357). Trust, as a mechanism of relationships, especially in terms of risk management, affects exchange relationships between organizations (Nooteboom, 2007). Trust reduces the risks inherent in inter-organizational activities and consequently influences the practices of organizational exchanges. Thus, trust in a country influences the pattern by which society coordinates conflicts and facilitates cooperation between organizations (Adler, 2001). Trust helps establish fluent connections between organizations, which in turn lowers the boundaries between internal and external systems of organizations (Lane & Bachmann, 1996). If actors between organizations can predict each other’s future behaviors, inter-organizational transactions will increase.

If trust is low between actors or between organizations, they will increase control over assets and refrain from entering into mutually beneficial contracts. Furthermore, economic actors in low-trust environments may prefer hierarchical or relationship-based exchange patterns (Williamson, 1993). In such low-trust countries, transactions depend on individual contacts and personal preferences, because the lack of confidence between parties needs to be complemented by an individual linkage between the parties such as family background, career path, and religion or ethnicity (Bachmann, 2001; Ouchi, 1980). Therefore, we understand that low trust could restrict the scope of exchange between organizations and between individuals. This phenomenon will necessitate a greater public sector role, for instance, government’s direct coordination, to make up for the insufficient transactions in the private sector. This could lead to large government. Consequently, a country of low trust may not effectively support a decrease in government expenditure, owing to the substantive contributions of the public sector and the relatively atomized economic relations of the country. Low trust will also restrict active exchange between public and private organizations because of relatively high boundaries between them and consequently promote individual- or industry-specific economic relations rather than publicly recognizable institutional arrangements. A comparison of the northern region with the southern counterpart in Italy illustrates how distinctively the different levels of trust between societies may organize economic activities and civic cooperation (Putnam, 1993).

The level of trust in a country thus helps predict the size of government expenditure. In a country of high trust, inter-organizational transactions between the private sectors and between public and private sectors will be implemented without substantial friction, thus resulting in small government because of the decreasing role of government in promoting transactions. In contrast, if a country shows low trust, there could be higher boundaries between organizations regardless of whether they operate in public or private sectors. The higher boundaries between organizations will restrict boundary-spanning exchanges and consequently drive a country to maintain a relatively large size government, despite the overall trend of small government under globalization. Given that trust helps diminish barriers between economic players and increase inter-organizational transactions, we propose the following:

Hypothesis 1: Higher trust in a country will be negatively related to the size of government expenditure.

SBR and Government Expenditure

Across countries we find different types of SBR, which we define as a measure of the extent to which a country is familiar with government intervention in economic activity. Studies of business systems identify the socioeconomic traditions of a country according to its SBR in economic activity (Biggart & Guillén, 1999; Whitley, 2000; Zysman, 1994). A country of the laissez-faire tradition, that is, loose SBR, shows less frequent and narrowly defined government intervention in economic activity, while a country with a tradition of extensive government coordination, that is, tight SBR, advocates the state’s presence in business (Hall & Soskice, 2001). In this study, we consider the state’s presence in areas such as high-technology ventures, wage negotiations, foreign investment, fiscal burden, monetary policies, property rights, and the banking system (Miller & Holmes, 2010). While the autonomy of firms is emphasized and flexible labor relations are common in the laissez-faire economy, the growth of substantially coordinated economies relies on the government’s active participation in industrial networks and labor relations (Yoo & Lee, 2009). Therefore, the organizational distinctions between the two types of economies arise from their different societal contexts based on contrasting SBR.

The mechanisms through which SBR influences the size of government expenditure are related to the principles regarding the role of government and subsequent institutional arrangements. A country that is organized in a laissez-faire tradition, as illustrated by the United States in Figure 1, advocates for free markets, assuming that markets facilitate optimal organizational structures for efficiency. Government intervention is criticized as incompetent and bureaucratic; such interventions distort market efficiency and lead to transitory market failures. Thus, the government solution to a problem is regarded to be as bad as the problem itself (Friedman, 1993). Furthermore, this kind of economic interpretation in the laissez-faire tradition will promote relevant institutions. For instance, flexible labor relations are common in laissez-faire economies and could limit government expenditure because of the lack of government intervention in firm-level labor coordination (Hall & Gingerich, 2009). The size of privately operated stock markets is relatively large in laissez-faire economies, and this could marginalize government subsidies to corporations. We thus expect that decrease of government spending will be extensive in the countries with loose SBR.

However, advocates for an interventional role of the state insist that the market economy and organizations should be contextually interpreted in terms of institutional arrangements (Boyer, 2005; Guillén, 2004). The general advocate for laissez-faire relations is often criticized for disregarding the state’s effective roles in government-led economic development. Even the accumulation of capital and labor, which facilitates economic development, is interpreted as an outcome of effective government policies (Weiss, 2003). Whereas countries of the laissez-faire tradition perceive market failure from the presence of the state in economic activity, state-activist countries find an organizational complement from it (Lazonick, 1991). We thus find relevant institutions in state-activist countries—such as bank-based financing and national-level labor coordination—which increases government intervention. Exemplified by the trilateral innovation system between the state, academia, and industry in France (Yoo & Lee, 2009), the industrial networks of state-activist countries also encourage government subsidies.

The contrasting traditions and conceptualizations regarding SBR will facilitate distinct outcomes in government expenditure. We thus propose the following:

Hypothesis 2: Tighter SBR in a country will be positively related to the size of government expenditure.

Moderating Effects Between Trust and SBR

Based on the discussion of the effects of trust and SBR on government expenditure and on how each is measured, we understand that trust and SBR exhibit opposite influences. Given that the socioeconomic traditions of a country are relatively stable despite inevitable alterations over time owing to institutional changes under environmental pressures such as globalization, we expect that the directions of the two factors will not abruptly change. The studies of trust suggest that trust reflects the societal norms and consequently general patterns of transaction behaviors (Arrow, 1972), and determines the outcomes of societal and organizational cooperation (Bachmann, 2003). SBR also steadily affects the pattern and size of government intervention owing to its regulatory power, even though they could be affected by political and economic conditions of a country. The sustained influence of the French government on economic activities illustrates a case in point, despite its relative withdrawal from the dirigiste tradition (Schmidt, 2003). This means that when we consider trust and SBR simultaneously, the interactive term of trust and SBR will compromise (decrease) each other’s effects on the size of government expenditure.

In examining the interaction (moderating) effects between two explanatory variables, it is suggested that we “should not interpret constitutive terms as if they are unconditional marginal effects” (Brambor, Clark, & Golder, 2006, p. 64). Therefore, if we consider the relational terms of trust and SBR in terms of trust, we could propose that trust negatively moderates (decreases) the positive influence of SBR on government expenditure, especially when trust is high. This proposition indicates that we could not find the negative moderating effect of trust on the positive relationship between SBR and government expenditure, when trust is low. We therefore suggest the following:

Hypothesis 3: Trust will negatively moderate (decrease) the influence of SBR on the size of government expenditure, especially when trust is high.

Method

We use panel data from 1995 to 2008 for 29 OECD countries, constructing the data from several sources. One could argue that panel data might not be appropriate to examine the effects of trust and SBR, given the relatively stable characteristics of a country’s socioeconomic traditions. However, the relatively stable characteristics of trust and SBR do not indicate that they can avoid inevitable and constant alterations over time within a country despite institutional changes under environmental pressures such as globalization. Tables 2 and 3 below, which show the descriptive statistics of the variables in this study, illustrate the variation of each variable from 1995 to 2008. The variation demonstrates the constant but relatively stable, compared with contingent factors such as government debt, trade with the United States, and partisan position, alterations of trust and SBR in a country. This justifies the use of panel data to evaluate the effects of a country’s socioeconomic traditions on government expenditure across countries.

As described in Table 1, data on per capita GDP, union density, government debt divided by GDP, and government expenditure divided by GDP were collected from the OECD Statistics Portal. Other sources of the data are as follows: the United Nations Conference on Trade and Development (UNCTAD) for the ratio of inward FDI to GDP; Djankov, La Porta, Lopez-de-Silanes, and Shleifer (2008) for a country’s legal origin; Potrafke’s (2009) updated data for the political positions of ruling parties; the U.S. Census Bureau for the amount of each country’s trade with the United States; the WVS for the trust scores; and the Index of Economic Freedom (Miller & Holmes, 2010) for the SBR.

Table 1.

Sources and Descriptions of Data.

Data	Source	Description
GDP per capita	The OECD Statistics Portal (www.oecd.org/statsportal)	GDP per head (2000 constant PPPs, U.S. dollars)
FDI inward/GDP	The UNCTAD (www.unctad.org)	Capital provided (either directly or through other related enterprises) by foreign investors, divided by GDP
Union density	The OECD Statistics Portal	The ratio of wage and salary earners who are trade union members to the total number of wage and salary earners
Legal origin	Article I. Djankov, La Porta, Lopez-de-Silanes, and Shleifer (2008)	Others = 1, common law = 0
Government debt/GDP	The OECD Statistics Portal	Total central government’s debt, divided by GDP
Partisan position	Potrafke (2009, updated by Potrafke)	In terms of governing party’s seats in cabinet and parliament
		Left 2/3 majority = 5,
		Left 1/3 ~ 2/3 = 4,
		Left–right coalition or center 1/2 = 3,
		Right1/3~2/3 = 2,
		Right 2/3 majority = 1
Trade with United States/GDP	The U.S. Census Bureau (www.census.gov/foreign-trade)	A country’s total export and import of goods into and from the United States, divided by the country’s GDP
Trust	The World Values Survey (www.worldvaluessurvey.org)	The score of the question regarding trust about other people in a country
SBR	Miller and Holmes (2010)	100—The score of economic freedom except government size and corruption
Government expenditure/GDP	The OECD Statistics Portal	The sum of expenditure by central, state, and local governments and social security funds, divided by GDP

Note. GDP = gross domestic product; PPP = purchasing power parity; OECD = Organization for Economic Co-Operation and Development; UNCTAD = United Nations Conference on Trade and Development; SBR = state–business relations; FDI = foreign direct investment.

Analyses

The result of a Hausman test rejected the null hypothesis that favors a random-effects model at a significance level of 1%. We thus chose a panel regression model with fixed effects. We also addressed the heteroskedasticity and correlation issues in a panel data analysis (Wooldridge, 2002). Given our choice of fixed effects and the significance of heteroskedasticity and correlation issues in our panel data analysis, we have two options: feasible generalized least squares (FGLS) and panel corrected standard errors (PCSEs) estimations (Blackwell, 2005). The two estimations provide all of the tools for panel-specific heteroskedasticity and correlation problems (Blackwell, 2005). However, FGLS is not as efficient as PCSEs, especially for panel data with relatively short time periods (Beck & Katz, 1995; Blackwell, 2005). Our panel data consist of 29 panels and 14 time periods. We thus used PCSEs estimation using STATA (version 11). For robustness of the analysis, however, we also present the outcomes of fixed effects and FGLS estimations.

Dependent Variable

We measured the size of government expenditure by the ratio of government expenditure to GDP. This measure was calculated by the aggregates of general government expenditure—including central, state, and local governments and social security funds, in areas such as general public services, defense, public order and safety, economic affairs, environmental protection, housing and community amenities, health, recreation, education, and social protection (source: OECD Statistics). This measure quantifies the size of government in a country’s overall economic activity. If the economic activity of a country is still largely driven by government expenditure relative to that of other countries even under the trend of small government, the country will show a relatively large ratio of government expenditure to GDP.

Independent Variables

As illustrated in Figure 1, we measured the socioeconomic traditions of a country using trust and SBR. First, we accumulated the trust scores of each country from the WVS. Since 1981, the WVS has provided information on changing values and their impact on social and political life in 97 societies covering almost 90% of the world’s population (www.worldvaluessurvey.org). Among the various WVS indicators, we assessed the general trust in a country using the scores from the following question: “Generally speaking, would you say that most people can be trusted or that you need to be very careful in dealing with people?” The WVS executed five surveys from 1981 to 2007 at 4- or 5-year intervals. We applied the trust score of one survey to all years of the corresponding interval, including the year in which the survey was executed.

Second, we measured the SBR of each country using the Index of Economic Freedom by the Heritage Foundation and the Wall Street Journal. It is notable that SBR is usually defined as the formal and informal institutional arrangements existing between government and business. It is more culture-oriented, not just the economic freedom. However, the existing literature on SBR, such as Culture’s Consequences by Hofstede (2001), has a critical shortcoming in that they fail to deal with changes over time. This raises a significant issue: The current literature on SBR has not appropriately considered institutional changes in response to the pressures of globalization. In contrast, the Index of Economic Freedom, published annually since 1995, helps identify the characteristic trajectory of SBR in each country by measuring how strongly its government regulates and intervenes in business activities faced with the growing influence of globalization, particularly since the mid-1990s. Therefore, although the economic index does not fully capture the intangible aspects of SBR, we selected eight components of the index, excluding government size and corruption: namely, business freedom, trade freedom, fiscal freedom, monetary freedom, investment freedom, property rights, and labor freedom. As denoted by the Index of Economic Freedom, corruption is not directly associated with SBR, while government size is related to the dependent variable of this study. The original index implies that governments relying on extensive coordination show lower scores of economic freedom. We transformed the selected score by subtracting it from 100 to indicate that the higher the score, the tighter the SBR.

We also included other variables from the literature: government debt to GDP, governing party’s political position, and trade volume with the United States in relation to GDP. These variables, respectively, represent the economic, political (Bortolotti et al., 2003), and international factors (Lee & Strang, 2006) related to government expenditure found in the literature.

Control Variables

We control for several variables that may affect the relationship between a country’s socioeconomic traditions and government expenditure. Because the degrees of economic development and financial openness could affect government expenditure (Busemeyer, 2009), we included per capital GDP (Potrafke, 2009) and inward FDI (Zohlnhöfer et al., 2008). We also considered the characteristics of labor relations, measured by the union density score (Lee & Strang, 2006). We further categorized legal differences between countries into two groups: common versus civil law systems (Djankov et al., 2008).

Results

Table 2 presents summary statistics, showing the means, standard deviations, and correlations of the variables in this study. Table 3 shows descriptive statistics on trust, SBR, and the size of government expenditure by countries, to illustrate, for instance, the level of trust in Japan compared with other countries in this study.

Table 2.

Means, Standard Deviations, and Correlations of Variables.

Variables	Obs.	M	SD	1	2	3	4	5	6	7	8	9	10
1.GDP per capita (log)	450	9.99	0.42	1.00
2.FDI inward/GDP	458	45.29	98.07	.28*	1.00
3.Union density	418	31.83	20.61	.34*	.07	1.00
4.Legal origin (civil = 1)	464	0.79	0.40	−.26*	.03	.14*	1.00
5.Government debt/GDP	418	0.72	1.49	−.23*	−.06	−.00	.11*	1.00
6.Party politics (left majority = 5)	449	2.92	0.88	−.03	−.02	.04	−.02	−.07	1.00
7.Trade with United States/GDP	464	0.09	0.18	.14*	−.04	−.19*	−.49*	−.08	.04	1.00
8.Trust	464	32.37	14.83	.56*	−.03	.57*	−.15*	−.16*	.09*	.06	1.00
9.SBR	459	27.15	6.69	−.61*	−.21*	−.15*	.43*	.20*	.00	−.17*	−.44*	1.00
10.Government expenditure/GDP	409	0.43	0.08	.07	−.08	.48*	.23*	.04	.12*	−.32*	.15*	.16*	1.00

Note. SBR = state–business relations; GDP = gross domestic product; FDI = foreign direct investment.

p < .05.

Table 3.

Descriptive Statistics on Trust, SBR, and the Size of Government Expenditure.

Country	Variables	Obs.	M	SD	Minimum	Maximum
1. Australia	SBR	14	21.3	1.665505	17.57	23.37
	Trust	14	42.72143	2.569099	39.4	45.6
	Government expenditure	13	0.3533531	0.0093951	0.340794	0.374213
2. Austria	SBR	14	26.04143	1.619154	23.63	29.1
	Trust	14	31.43929	1.319175	29.75	32.93
	Government expenditure	14	0.5223409	0.0243854	0.488161	0.563307
3. Belgium	SBR	13	26.02385	3.171064	20.84	29.04
	Trust	13	29.31154	0.4759877	28.81	30
	Government expenditure	13	0.5017148	0.0129366	0.483956	0.524926
4. Canada	SBR	13	24.43846	3.696271	17.1	29.01
	Trust	13	41.12692	2.493291	38.4	44.55
	Government expenditure	9	0.4304391	0.0286066	0.398645	0.484789
5. Czech Republic	SBR	14	24.84572	0.7621296	23.36	25.7
	Trust	14	23.31786	2.923776	20.13	27.2
	Government expenditure	14	0.4462915	0.0324901	0.418155	0.544683
6. Denmark	SBR	13	23.45539	3.19973	17.51	26.6
	Trust	13	64.88077	3.580103	59.8	68.71
	Government expenditure	13	0.543533	0.0224961	0.509231	0.589092
7. Finland	SBR	13	25.44154	5.129173	17.87	31.4
	Trust	14	54.68571	4.484649	47.9	58
	Government expenditure	14	0.5157712	0.0449269	0.473007	0.614615
8. France	SBR	14	34.005	2.691891	28.09	37.6
	Trust	14	20.43571	1.342561	18.7	21.4
	Government expenditure	14	0.5297369	0.0090633	0.515678	0.544726
9. Germany	SBR	14	26.53357	3.530605	21.51	32.97
	Trust	14	34.06429	1.584351	32.1	35.9
	Government expenditure	14	0.474603	0.0275427	0.436805	0.547664
10. Greece	SBR	14	36.87071	1.292448	33.26	38.8
	Trust	14	20.5	0	20.5	20.5
	Government expenditure	9	0.4517454	0.0159536	0.428552	0.483317
11. Hungary	SBR	14	30.60286	3.25264	24.63	36.14
	Trust	14	21.33929	.8901551	20.35	22.5
	Government expenditure	14	0.4991337	0.0214851	0.468721	0.555865
12. Iceland	SBR	12	24.3675	3.533652	17.96	28.04
	Trust	12	39.75	0.4522676	39.3	40.5
	Government expenditure	10	0.4283344	0.0152029	0.406895	0.457043
13. Ireland	SBR	14	19.04714	4.645228	13.48	24.64
	Trust	14	36.85714	2.719082	35.2	41
	Government expenditure	13	0.3493805	0.0268234	0.313189	0.411348
14. Italy	SBR	14	31.03786	1.675884	29.36	34.71
	Trust	14	30.40714	2.258135	27.5	32.3
	Government expenditure	14	0.4883973	0.0179478	0.461801	0.525142
15. Japan	SBR	14	28.83929	3.078173	25.6	35.37
	Trust	14	39.58571	2.770131	36.6	43.3
	Government expenditure	12	0.3800567	0.0184947	0.357438	0.424672
16. South Korea	SBR	14	28.85857	1.318629	25.36	30.79
	Trust	14	28.40714	1.279702	27.3	30.3
	Government expenditure	8	0.2598703	0.0244013	0.224331	0.289018
17. Luxembourg	SBR	13	20.30154	3.622399	16.37	25
	Trust	13	24.9	0	24.9	24.9
	Government expenditure	13	0.3980011	0.0201738	0.362263	0.425541
18. Mexico	SBR	14	36.895	4.484904	31	43
	Trust	14	21.32857	5.802709	15.4	29.4
	Government expenditure	10	0.1887104	0.0079949	0.173658	0.199296
19. Netherlands	SBR	13	22.26	3.196275	16.79	26.46
	Trust	13	51.88846	7.851783	42.6	59.4
	Government expenditure	13	0.4618072	0.0132701	0.441698	0.494328
20. New Zealand	SBR	13	17.69539	1.396683	16.14	19.71
	Trust	14	48.03571	0.414371	47.5	48.5
	Government expenditure	13	0.394136	0.0156304	0.372115	0.415559
21. Norway	SBR	8	29.48875	1.571827	27.84	31.59
	Trust	9	69.74444	4.690709	64.8	73.7
	Government expenditure	9	0.4491758	0.0416211	0.399451	0.509389
22. Poland	SBR	14	35.73429	3.697515	29.36	43.33
	Trust	14	17.82857	.6157279	16.9	18.3
	Government expenditure	14	0.443799	0.0253716	0.410809	0.510063
23. Portugal	SBR	14	30.845	1.436757	28.87	34.86
	Trust	14	10.10714	3.707988	6.3	15.25
	Government expenditure	14	0.4473831	0.0153834	0.427904	0.476178
24. Slovak Republic	SBR	14	32.67714	5.746319	24.43	40.01
	Trust	14	20.12143	4.392332	15.2	25.8
	Government expenditure	14	0.4347994	0.0647112	0.344004	0.53693
25. Spain	SBR	14	29.83428	2.572362	25.96	34.31
	Trust	14	27.59286	6.487203	19.8	34.5
	Government expenditure	14	0.4008756	0.0192361	0.38391	0.444382
26. Sweden	SBR	14	26.95	4.589488	21.51	33.93
	Trust	14	62.20714	3.738462	56.6	65.2
	Government expenditure	14	0.5725554	0.0368652	0.524908	0.650976
27. Switzerland	SBR	13	19.13846	1.208075	17.86	21.77
	Trust	14	44.97857	5.552572	37.8	51.2
	Government expenditure	14	0.3478854	0.0139236	0.318297	0.363863
28. United Kingdom	SBR	14	18.66	1.929631	15.3	20.24
	Trust	14	29.57857	0.8505007	28.5	30.4
	Government expenditure	14	0.4217658	0.0248267	0.388691	0.475307
29. United States	SBR	14	20.14571	2.26919	16.94	22.57
	Trust	14	36.64286	1.91179	35	39.1
	Government expenditure	13	0.3611768	0.01055	0.343427	0.374331

Note. SBR = state–business relations.

Hypothesis 1 states that higher trust decreases government expenditure. In Models 3 and 5 of Table 4, trust in an economy shows a negative relationship with government expenditure (p value < .05). Hypothesis 2 asserts that tighter SBR increases government expenditure. In Models 4 and 5 of Table 4, SBR shows a positive direction in the ratio of government expenditure to GDP (p value < .001). The outcomes support both Hypotheses 1 and 2. Regarding the interpretation of the coefficients of trust and SBR, it is notable that as described in the section on variables (also in Table 2 for descriptive statistics), the values of trust and SBR were measured by the scale of percentage points, while the dependent variable, that is, government expenditure/GDP, was measured by the scale of points. Given the different scales of values between trust and SBR and the dependent variable, the coefficient of .001 of trust, for instance, indicates that the increase of trust by 10% results in the decrease of government expenditure by 1%. In empirical analysis, the change is not too small to be meaningless (Potrafke, 2009). Furthermore, the coefficients of trust and SBR are similar with or much larger than those of other explanatory variables, such as government debt and partisan position in this study. The empirical discussions support the theoretical arguments for the effects of trust and SBR on government expenditure.

Table 4.

Results of Regression With PCSEs Estimation.

Dependent variable	Government expenditure/GDP
Independent variables	Model 1	Model 2	Model 3	Model 4	Model 5	Model 6
Lagged dependent variable	0.615*** (0.026)	0.625*** (0.020)	0.607*** (0.026)	0.595*** (0.022)	0.569*** (0.029)	0.577*** (0.028)
GDP per capita (log)	0.011*** (0.001)	0.012*** (0.001)	0.016*** (0.002)	0.012*** (0.001)	0.016*** (0.002)	0.013*** (0.002)
FDI inward/GDP	−0.000* (0.000)	−0.000 (0.000)	−0.000 (0.000)	−0.000 (0.000)	−0.000 (0.000)	−0.000 (0.000)
Union density	0.001*** (0.000)	0.001*** (0.000)	0.001*** (0.000)	0.000*** (0.000)	0.001*** (0.000)	0.001*** (0.000)
Legal origin (civil = 1)	−0.031^† (0.016)	0.122*** (0.010)	0.112*** (0.012)	0.116*** (0.010)	0.104*** (0.013)	0.004 (0.010)
Government debt/GDP		−0.011*** (0.001)	−0.012*** (0.002)	−0.011*** (0.001)	−0.011*** (0.002)	−0.010*** (0.001)
Partisan position (left = 5)		−0.000 (0.001)	−0.000 (0.001)	−0.000 (0.001)	−0.000 (0.001)	−0.000 (0.001)
Trade with United States/GDP		−0.136* (0.061)	−0.162* (0.074)	−0.167** (0.065)	−0.191* (0.077)	−0.185* (0.076)
Trust			−0.001* (0.000)		−0.001* (0.000)	0.000 (0.000)
SBR				0.001*** (0.000)	0.001*** (0.000)	0.002*** (0.000)
Trust × SBR						−0.001*** (0.000)
constant	0.485 (0.126)	0.785 (0.077)	0.916 (0.081)	0.772 (0.113)	0.908 (0.101)	0 .881* (0.107)
country (dummy)	included	Included	included	included	included	included
Observations	345	341	341	339	339	339
R ²	.368	.434	.443	.457	.458	.489
Number of id	29	29	29	29	29	29

Note. Standard errors are in parentheses. PCSEs = panel corrected standard errors; SBR = state–business relations; GDP = gross domestic product; FDI = foreign direct investment.

†

p < .1. *p < .05. **p < .01. ***p < .001.

Hypothesis 3 suggests that trust will negatively moderate (decrease) the influence of SBR on the size of government expenditure, especially when trust is high. In Model 6 of Table 4, the interaction between trust and SBR shows a negative impact on the ratio of government expenditure to GDP (p value < .001), supporting Hypothesis 3.

Regarding Hypothesis 3, Figure 2, which was produced using all the constitutive terms of the model, that is, trust, SBR, and their interaction, displays the moderating effect of trust on the relationship between government expenditure and SBR in detail. In Figure 2, the X-axis represents SBR, ranging from mean minus 1 SD on the left-end and mean plus 1 SD on the right-end. The moderating effect of trust was calculated by the mean minus 1 SD and mean plus 1 SD. Figure 2 illustrates the changes in government expenditure as trust and SBR vary from mean minus 1 SD or mean plus 1 SD. In short, tighter SBR increases government expenditure, whereas higher trust decreases it. In addition, when we consider the interactive terms of trust and SBR, we find that trust negatively moderates (decreases) the positive influence of SBR on government expenditure, especially when trust is high (here, when trust is 1 SD larger than its mean). However, we do not find the negative moderating effect of trust on the positive relationship between SBR and government expenditure, when trust is low; here, when trust is 1 SD smaller than its mean.

The variables for the economic and international factors show the expected directions of influence in the literature, whereas the variable for the political factor does not. Government debt and trade volume with the United States consistently show a negative relationship with government expenditure/GDP (p value < .001 or <.05). In contrast to the findings of earlier research, the political position of the ruling party is not statistically significant.

For robustness of the analysis, we also report the results of the FGLS and fixed-effects estimations in Table 5. The outcomes generally support Hypotheses 1, 2, and 3. Another issue with the analysis is reverse causality between the two explanatory variables and government expenditure. That is, larger governments result in low trust and lead to tight SBR. In practical, however, as illustrated by the Scandinavian countries—where trust is high and at the same time government expenditure is large—larger government does not necessarily promote low trust. With regard to SBR, the Scandinavian countries also demonstrate that larger governments do not always mean strong states. According to Knack and Keefer (1997), Scandinavian countries exhibit strong civic participation. In theory, previous research on trust (e.g., Knack & Keefer, 1997; La Porta et al., 1997; Zak & Knack, 2001) and state activism (Levy, Miura, & Park, 2006; Prasad, 2005; Weiss, 2005) suggest the causal relationship through which trust and SBR affect government policies, including the size of government. The practical cases and theoretical arguments regarding the role of trust and SBR in government size support the causal relationship proposed in the hypotheses of this study.

Table 5.

Results of Regression With FGLS and Fixed-Effects Estimations.

	Government expenditure/GDP
Dependent variable	FGLS				Fixed effects
Independent variables	Model 1	Model 2	Model 3	Model 4	Model 5	Model 6	Model 7	Model 8
GDP per capita (log)	0.037*** (0.002)	0.031*** (0.002)	0.034*** (0.003)	0.027*** (0.004)	−0.083*** (0.024)	−0.048^† (0.026)	−0.049^† (0.025)	−0.049^† (0.026)
FDI inward/GDP	−0.000*** (0.000)	−0.000** (0.000)	−0.000** (0.000)	−0.000** (0.000)	−0.000 (0.000)	−0.000 (0.000)	−0.000 (0.000)	−0.000 (0.000)
Union density	0.002*** (0.000)	0.002*** (0.000)	0.002*** (0.000)	0.002*** (0.000)	0.001* (0.000)	0.001* (0.000)	0.001* (0.000)	0.001* (0.000)
Legal origin (civil = 1)	0.031*** (0.006)	0.029*** (0.008)	0.026*** (0.008)	0.032*** (0.008)	Omitted	Omitted	Omitted	Omitted
Government debt/GDP	0.002 (0.002)	0.002 (0.002)	0.001 (0.002)	0.000 (0.002)	−0.011*** (0.003)	−0.008** (0.003)	−0.011*** (0.003)	−0.011*** (0.003)
Partisan position (left = 5)	0.012*** (0.003)	0.015*** (0.003)	0.014*** (0.003)	0.013*** (0.003)	0.001 (0.001)	0.000 (0.001)	0.000 (0.001)	0.000 (0.001)
Trade with United States/GDP	−0.035^† (0.018)	−0.034^† (0.018)	−0.035* (0.018)	−0.024 (0.018)	−0.297*** (0.090)	−0.277** (0.092)	−0.327*** (0.088)	−0.327*** (0.088)
Trust	−0.001*** (0.000)		−0.001** (0.000)	0.002* (0.001)	−0.002*** (0.000)		−0.002*** (0.000)	−0.002** (0.001)
SBR		0.001* (0.001)	0.001 (0.001)	0.004*** (0.001)		0.002*** (0.000)	0.002*** (0.000)	0.002^† (0.001)
Trust × SBR				−0.000*** (0.000)				−0.000 (0.000)
Constant	0.065 (0.117)	0.100 (0.121)	0.010 (0.122)	−0.041 (0.161)	1.358*** (0.248)	0.886*** (0.272)	0.981*** (0.258)	0.975*** (−0.268)
Year (dummy)	Included	Included	Included	Included	Included	Included	Included	Included
Observations	357	354	354	354	357	354	354	354
Wald χ² (R²)	43,474***	40,231**	40,745***	40,550***	(.512)	(.479)	(.534)	(.534)
Number of id	29	29	29	29	29	29	29	29

Note. Standard errors are in parentheses; FGLS = feasible generalized least squares; SBR = state–business relations; GDP = gross domestic product; FDI = foreign direct investment.

†

p < .1. *p < .05. **p < .01. ***p < .001.

Discussion and Conclusion

Perspectives on Government Expenditure and Socioeconomic Traditions

Using trust and SBR, this study complements the literature: socioeconomic factors, in addition to economic, political, and trade relations, should be included in an understanding of the level of government expenditure. The literature on government size has analyzed it in terms of such contingent factors that are affected by the economic and political conditions of a country or its trade relations. As the findings of this study illustrate, however, the suggestions in the literature do not fully explain why the decrease of government expenditure has shown different scales of change across countries. Our complementary framework accounts for the relatively stable, but inevitably and constantly adjusting under globalization, contextual mechanisms of a country to understand the influence of newly emergent rationales, such as small government. We found that idiosyncratic types of trust and SBR alter the scale of change in government expenditure, helping to conceptualize organizational heterogeneity across countries.

Complementing the earlier studies that have paid relatively little attention to socioeconomic factors in their analyses of government expenditure, our analysis of the contextual mechanisms of a country sheds light on historically embedded behavioral patterns. Thus, it helps understand the seemingly incompatible compromises between traditionally existing mechanisms and the newly emerging logic for change in a country. While the wave of small government is unavoidable and massive, the tradition of state activism is still alive and government expenditure remains relatively high, as shown by the cases of France and South Korea. This implies that the organizational traditions of a country affect the way they can be utilized and determine the extent to which they can be combined with newly advocated rationales. This phenomenon produces different system-level behavior, explaining the organizational heterogeneity of each country. There is not a general form of organizational change, and the outcomes cannot be understood apart from the embedded socioeconomic traditions of a country. The consideration of societal contexts will highlight diverse business systems and subsequent varieties of capitalism across countries.

Practices on Government Expenditure and Socioeconomic Traditions

Regarding policy implications, our analysis helps reconsider how to organize sustainable structures and practices when implementing changes to economic activities. France, the United Kingdom, and Germany are illustrative cases. State activism in France has led economic development despite a low level of trust (Schmidt, 2003; Whitley, 1999). Even under the global diffusion of small government since the 1980s, the French government has shown a tendency to maintain large government expenditure, as shown in Table 3, and to keep control over SOEs (Zahariadis, 1992; Ziegler, 1997). The French case illustrates the positive relationship between the state’s initiative (tight SBR) and government expenditure in an environment of low trust, which is shown by the solid line in Figure 2. In contrast, economies with high trust and loose SBR, such as the United Kingdom, show a propensity to rely on the private sectors (La Porta et al., 1997). The British policy of small government aims not only to give control back to private owners but also to reintroduce market discipline into economic activity (McAllister & Studlar, 1989). The relatively high level of trust makes the transaction cost low between the private and public sectors. Although the political position of the Labor Party contrasts with that of the Conservative Party, there have not been severe conflicts with the neoliberal stances since the mid-1990s. The German case also sheds light on the moderating effect of trust on the relationship between SBR and government expenditure. In German society, both trust and SBR have remained relatively high. However, we find that its government expenditure has steadily decreased since the mid-1990s. This is demonstrated by the dotted line in Figure 2. The contrasting cases of government size between France, the United Kingdom, and Germany show that changes in government expenditure reflect the socioeconomic traditions of a country.

The long-standing debate on government size has focused on whether a government should intervene in economic activities, whereas the literature has paid little attention to the sustainable mechanisms of current organizational change in the public sector. By incorporating the socioeconomic traditions of a country at the initial stage of analysis along with the contingent factors found in the existing literature—for example, the emerging power of a new coalition or external pressure under globalization—our analysis suggests that changes in economic activities, such as the decrease of government expenditure, could be sustainable when balanced attention is paid to both contingent and contextual factors. An application of unidirectional programs to a country with an idiosyncratic socioeconomic background may not work well owing to the organizational conflicts between newly emerging rationales and the characteristic coordination traditions of the country. Skepticism on International Monetary Fund (IMF)-sponsored programs, which introduce one-size-fit-all change in public sectors across countries, reflects this socioeconomic perspective.

Concluding Remarks

In this study, we complementarily examined the role of the socioeconomic traditions of a country in the size of government expenditure. Here, the important variables cannot only be political and economic factors. Consideration of embedded coordination traditions of a country could prevent unexpected disarray, highlighting a multiplicity of destinies of organizational change across countries. Opportunities for future research include considering more diverse socioeconomic factors, such as industrial structure and family business, to provide a clearer understanding of the change in government expenditure.

Footnotes

Authors’ Note

A previous version of the article was presented at the 2011 European Group for Organization Studies (EGOS) in Gothenburg, Sweden. We thank Niklas Potrafke for his kind support for data collection and appreciate the valuable comments and suggestions of the Editor, Gary Wamsley, and the anonymous reviewers.

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) disclosed receipt of the following financial support for the research, authorship, and/or publication of this article: This work was supported by Hankuk University of Foreign Studies Research Fund of 2014 and by the National Research Foundation of Korea Grant funded by the Korean Government (NRF-2013S1A3A2053799).

Author Biographies

Taeyoung Yoo is an associate professor at the College of Business Administration, Hankuk University of Foreign Studies in Seoul, South Korea. He holds a PhD in management from Birkbeck College, University of London. His current research interests draw on organizational and institutional changes in light of identity roles and socioeconomic arrangements. His research appears in journals such as Asian Business & Management, Corporate Governance, Organization Studies, Scandinavian Journal of Management, and Technology Analysis & Strategic Management.

Whasun Jho is an associate professor in the Department of Political Science and International Studies at Yonsei University in Seoul, South Korea. She holds a PhD in political science from Northwestern University. She is the author of Digital Governance and the editor of Political Economy of Collective Intelligence. Her articles appear in Asian Perspective, Governance, International Review of Administrative Sciences, and Telecommunications Policy.

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