Why is Fiscal Policy Procyclical in MENA Countries?

Abstract

The optimal fiscal policy is countercyclical, aiming to keep the output close to its potential. Nevertheless, it has been pointed out that developing countries are unable to run countercyclical fiscal policies. Several researchers have attributed these sub optimal fiscal policies to two groups of arguments. (i) The limited access to domestic or external funds may hinder the ability of government to pursue expansionary fiscal policy in bad time.(ii) The second group of factors explains that sub-optimal fiscal policies are associated with institutional theories. The standard argument suggests that countries pursuing poor fiscal policies have, also, weak institutions, widespread corruption, and lack of property rights and repudiation of contract.The main goal of this paper is to analyze empirically if the ability of MENA countries to conduct countercyclical fiscal policy is affected by the quality of their institutions, the nature of political regime and/or by the availability of financial resources either on the local or international capital markets.From our fiscal policy regression, we find that government expenditure in MENA region is procyclical. We conclude that MENA countries are unable to run countercyclical fiscal policies if they have weak institutions, small access to international, domestic credit market, and democratic political regime.

The Impacts of Monetary and Fiscal Policies on Economic Growth in Malaysia, Singapore and Thailand

“…Thus, countercyclical fiscal policies can be seen to have shortened the recessionary period during financial crises (Baldacci et al, 2009; Prakash et al, 2009). In contrast, Slimane and Tahar (2010) discovered that countries in the MENA region had to run procyclical policies because they were unable to run countercyclical fiscal policies, this was especially true for those countries with weak institutions, less access to the international and domestic credit market, as well as democratic political regime.…”

Role of Oil Price in Fiscal Cyclicality in Saudi Arabia

“…For instance, there are some studies on the effect of OP on energy depletion in GCC countries (Alkhateeb and Mahmood, 2020b), the effect of OP on stock markets of GCC countries (Siddiqui et al, 2019), the effect of OP on capital formation in GCC countries (Alkhateeb and Mahmood, 2021) the effect of OP on capital formation in GCC countries (Alkhateeb and Mahmood, 2020a), the effect of OP on consumption in Saudi Arabia (Mahmood and Zamil, 2019), the effect of OP on investments in Saudi Arabia (Mahmood and Alkhateeb, 2018) and the effect of OP on employment in Saudi Arabia (Alkhateeb et al, 2017a(Alkhateeb et al, , 2017b. In the MENA region, Slimane et al (2010) has corroborated a procyclicality of fiscal policy in the whole MENA region. But, this investigation for a giant oil exporter Saudi Arabia is missing in the literature.…”

“…Mesea (2013) investigated the type of cyclicality in the European Union and found that the developing countries were prominently following procyclicality while developed countries were following the countercyclicality or acyclicality. Slimane et al (2010) investigated cyclicality in the MENA region and found evidence of procyclicality. They also found that the financial constraints of a country are responsible for procyclicality as the government could not manage finance to use expansionary policy in the recessions.…”

Promoting Counter-Cyclical Fiscal Policy: Fiscal Rules Versus Institutions

“…Iara and Wolff (2014) show that the legal base of fiscal rules and their enforcement mechanisms are the most important dimensions of rule-based fiscal governance. Furthermore, Slimane et al (2010) show that the ability of MENA countries to conduct countercyclical fiscal policy is affected by the quality of their institutions. Frankel (2011) shows that structural budget institutions succeeded in the case of Chile in implementing countercyclical fiscal policy.…”