Tortuous road toward countercyclical fiscal policy: Lessons from democratized sub-Saharan Africa

Diallo, Oumar

doi:10.1016/j.jpolmod.2008.03.004

Cited by 33 publications

(31 citation statements)

References 21 publications

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“…This amounts to a countercyclical policy effect, but for the wrong reasons, namely that an opportunistic incumbent tries to manipulate forecasts and fiscal policies in order to ensure her own re-election. In an empirical study on sub-Saharan African countries, Diallo [53] finds that democratic institutions make fiscal policies countercyclical. He had suspected, but could not find empirically, that political business cycles (caused by political competition) produce procyclical policies.…”

Section: Resultsmentioning

confidence: 99%

Political cycles: Beyond rational expectations

Bohn

2018

PLoS ONE

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Motivation and methodExisting rational expectations models cannot satisfactorily explain why political budget manipulations systematically raise re-election chances and only occur in “specific contexts”. This paper offers a theoretical explanation by including unsophisticated voters into an opportunistic political cycle model; unsophisticated voters are unable to take the optimal behaviour of other agents (fully) into account, but may, nonetheless, vaguely suspect government deception.ResultsFirst, rationally expected manipulations are, on average, fruitless in equilibrium. By including unsophisticated voters we can, however, corroborate empirically found electoral effects of political budget manipulations. Second, unsophisticated voters become anxious and suspicious in an intransparent or uncertain world, but the government tries to “outperform” their scepticism by increasing budget manipulations in order to appear more competent and, ultimately, increase re-election chances. It is, therefore, not surprising that political budget cycles are observed in countries suffering from intransparencies such as developing countries or new democracies. Third and in addition, the model presented here predicts that political opportunism produces, unintentionally, a countercyclical policy effect in election years, thereby, for instance, alleviating the typical problem of policy procyclicality in developing countries.Additional contributionThe paper also offers a theoretical explanation for political distortions found in forecasts by US states. Based on overly optimistic revenue forecasts the incumbent state government can conduct expansionary fiscal policies in order to appear more competent prior to an upcoming election. Since the resulting deficit can only be observed afterwards, the government can effectively circumvent a constitutional balanced budget constraint. As a result, there are political forecast and budget cycles in the state. More generally, however, these findings may also apply to European countries where balanced budget constraints are or will be in place (for instance the debt brakes in Switzerland and Germany); similarly, they apply to the supra-national European Fiscal Compact of the European Union.

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Section: Resultsmentioning

confidence: 99%

Political cycles: Beyond rational expectations

Bohn

2018

PLoS ONE

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“…For instance, lack of political and institutional controls in bad times prevents fiscal prudence in good times. This, in turn, jeopardizes fiscal sustainability and creditworthiness, making financing constraints more binding.11 Using samples of SSA countries,Thornton (2008) finds a similar impact for corruption andDiallo (2009) corroborates the results related to institutional restraints on the executive. See alsoManasse (2006).…”

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confidence: 69%

Budget Institutions and Fiscal Performance in Low-Income Countries

Gollwitzer

Kvintradze²,

Prakash³

et al. 2010

IMF Working Papers

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This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. This paper presents, for the first time, multi-dimensional indices of the quality of budget institutions in low-income countries. The indices allow for benchmarking against the performance of middle-income countries, across regions, and according to different institutional arrangements that deliver good fiscal performance. Using the constructed indices, the paper provides preliminary empirical support for the hypotheses that strong budget institutions help improve fiscal balances and public external debt outcomes; and countries with stronger fiscal institutions have better scope to conduct countercyclical policies.

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“…Bleaney, Gemmel and Greenaway (1995), with particular reference to sub-Saharan Africa, analysed the sources and the consequences of revenue instability in developing countries, and found that revenue instability is more common in poor, more open and more inflationary economies. Furthermore, Ebeke and Ehrhart (2010) in a study on the sources and consequences of instability in tax revenues in sub-Saharan African countries, using panel data for 39 countries over the period 1980 to 2005, give credence to Bleaney, Gemmel and Greenaway (1995), Guillanmont et al (1999), Fatas and Mihov, (2003), Telvi andVegh (2005), Furceri (2007), Loayza et al (2007), Thornthon (2008) and Diallo (2009). Ebeke and Ehrhart (2010) argue that tax revenue instability in sub-Saharan Africa leads to public investment and government consumption instability, which in turn generates a lower public investment ratio, and is therefore detrimental to long-term economic growth.…”

Section: Empirical Literaturementioning

confidence: 97%

Value Added Tax and price stability in Nigeria: A partial equilibrium analysis

Ikpe

Nteegah

2013

Eur J Gov Econ

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The economic impact of Value Added Tax (VAT) that was implemented in Nigeria in 1994 has generated much debate in recent times, especially with respect to its effect on the level of aggregate prices. This study empirically examines the influence of VAT on price stability in Nigeria using partial equilibrium analysis. We introduced the VAT variable in the framework of a combination of structuralist, monetarist and fiscalist approaches to inflation modelling. The analysis was carried out by applying multiple regression analysis in static form to data for the 1994-2010 period. The results reveal that VAT exerts a strong upward pressure on price levels, most likely due to the burden of VAT on intermediate outputs. The study rules out the option of VAT exemptions for intermediate outputs as a solution, due to the difficulty in distinguishing between intermediate and final outputs. Instead, it recommends a detailed post-VAT cost-benefit analysis to assess the social desirability of VAT policy in Nigeria.

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Tortuous road toward countercyclical fiscal policy: Lessons from democratized sub-Saharan Africa

Cited by 33 publications

References 21 publications

Political cycles: Beyond rational expectations

Political cycles: Beyond rational expectations

Budget Institutions and Fiscal Performance in Low-Income Countries

Value Added Tax and price stability in Nigeria: A partial equilibrium analysis

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