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3. Association between accountability and fiscal cyclicality
On average, fiscal expenditures for Middle East and North Africa countries became slightly more countercyclical from 1980–1999 to 2000–2020, as did the rest of the world (Figure 3). This is consistent with the finding reported in Frankel et al. (2013). The changes are clear and consistent for the Gulf Cooperation Council, suggesting the GCC countries have been more able to save in good times and spend in bad times. On the other hand, fiscal expenditure for Lebanon, Iran, and Yemen became more procyclical.
As discussed in the introduction, an important distinction is cyclicality of fiscal expenditures in good versus in bad times. In bad times, fiscal expansion probably depends more on the population’s need and access to finance (Riascos and Végh, 2003) whereas in good times, countercyclical fiscal expenditures indicate a voluntary restraint of government expenditure. This restraint requires fiscal discipline and hence probably depends more on the checks and balances that help rein in fiscal spending.
This chapter measures cyclicality in good times and bad times by calculating two correlations corr[(git − git),(yit − yit)] for each country between 1980 and 2000. The first correlation is when (yit − yit) > 0, signaling good times. The second correlation is when (yit − yit) < 0, signaling bad times.
The Middle East and North Africa, on average, is more procyclical in good than in bad times and so is the rest of the world. Figure 4 shows fiscal expenditure cyclicality in good times minus cyclicality in bad times. The two bars on the right side show the average differences for the Middle East and North Africa and the rest of the world. Both bars are above zero. This finding suggests that it is harder to reduce spending in good times than to increase spending in bad times. In the Middle East and North Africa, there is no clear association of income nor oil-exporting status with the difference in fiscal cyclicality between good and bad times (Figure 4).
Figure 4. Fiscal cyclicality (good times) minus fiscal cyclicality (bad times)
0.8 0.6 0.4 0.2 0.070.10 0 -0.2 -0.4 -0.6 -0.8 Djibouti SyrianArab RepublicMorocco Yemen, Rep. West Bank and Gaza Egypt,Arab Rep. TunisiaAlgeriaJordan Iran, Islamic Rep.IraqLibyaLebanon SaudiArabiaOman BahrainKuwaitQatar UnitedArab EmiratesMENA Rest of the World
Source: General government expenditures, International Monetary Fund October 2021 World Economic Outlook, log of real per capita gross domestic product (GDP) (constant local currency unit) from World Bank World Development Indicators. Data period is from 2000 to 2020. Note: A common sample composed of 194 countries—of which 19 are in the Middle East and North Africa is selected to compare the periods. Countries are in ascending order of real per capita GDP in 2000.
This section examines whether accountability of the executive branch correlates with fiscal cyclicality. The literature has established an association between institutions and fiscal cyclicality (Frankel et al., 2013; Céspedes and Velasco, 2014; Calderon and Nguyen, 2016). Frankel et al. (2013) show that property rights, the control of corruption, higher bureaucratic quality, and a strong rule of law allowed many developing countries to “graduate” from fiscal procyclicality. Céspedes and Velasco (2014) find similar evidence in a sample of 60 resource-rich countries. Calderon and Nguyen (2016) show that a better international country risk guide index6 is associated with more countercyclical fiscal expenditures.
6 The index comprises several aspects of economic institutions, including government stability, socioeconomic conditions and democratic accountability.
