Table 3. Governance and fiscal cyclicality - Middle East and North Africa countries 2000–2020

expenditures8 increases by 0.21 percent. This is a novel finding. Vertical accountability, which refers to the ability of citizens to hold their government accountable through elections, can increase the procyclicality of government expenditure in good times. This finding is consistent with the notion of the political business cycle: with the pressure of elections, politicians can try to increase spending to win votes (see Nordhaus, 1975 and Drazen, 2000). Better vertical accountability is associated with more countercyclical expenditures in bad times (although the association is not statistically significant at 10 percent level - see column 7). Electoral pressure still works to force government expenditures to rise in bad times. Because the association between vertical accountability and fiscal expenditures is positive in good times and negative in bad times, they offset each other and yield a close-to-zero association in all years (see column 1).

Table 3. Governance and fiscal cyclicality - Middle East and North Africa countries 2000–2020

Y = Cyclical Fiscal Expenditure All Years Good Times Bad Times Vertical Diagonal Horizontal Vertical Diagonal Horizontal Vertical Diagonal Horizontal (1) (2) (3) (4) (5) (6) (7) (8) (9)

Cyclical GDP

1.499 3.258 3.042 -1.310 0.786 0.483 2.749 3.261 3.243 (5.278) (4.030) (3.145) (6.255) (5.579) (4.218) (3.517) (2.924) (2.097)

Cyclical GDP * Log real per capita GDP (t-1) Cyclical GDP * Log vertical acc (t-1) Cyclical GDP * Log diagonal acc (t-1) Cyclical GDP * Log horizontal acc (t-1)

Constant

Number of observations -0.102 -0.369 -0.375 0.301 -0.071 -0.077 -0.292 -0.384 -0.394* (0.570) (0.431) (0.339) (0.693) (0.615) (0.470) (0.339) (0.308) (0.209) -0.109 (0.164) 0.393** (0.143) -0.375 (0.335)

-0.459*** (0.126) -0.489*** (0.147) -0.494** (0.214)

-1.222** (0.448) -1.452** (0.523)

-1.193** (0.539) 0.061*** 0.056*** 0.059*** 0.082** 0.084** 0.078** 0.044** 0.033* 0.046* (0.019) (0.019) (0.019) (0.036) (0.035) (0.035) (0.019) (0.018) (0.022)

357 357 357 178 178 178 179 179 179

Number of countries 19 19 19 19 19 19 19 19 19 Year fixed effects yes yes yes yes yes yes yes yes yes Country fixed effects no no no no no no no no no

Adjusted R2 0.214 0.267 0.288 0.167 0.189 0.244 0.344 0.390 0.399

Source: Fiscal expenditure (as a percentage of gross domestic product) data are obtained from the International Monetary Fund World Economic Outlook dataset, real per capita GDP (constant 2015 US$) and real per capita GDP (constant local currency unit (LCU)) are obtained from the World Bank World Development Indicators dataset, and the accountability indices (vertical, diagonal, horizontal) are obtained from the V-DEM Varieties of Democracy dataset. Note: For level of significance in regressions, *** 1%; ** 5%; * 10%. Cyclical fiscal expenditures are obtained by applying a Hodrick–Prescott (HP) filter to isolate the cyclical component of log of real fiscal expenditures (constant LCU). Real fiscal expenditures are obtained by multiplying share of fiscal expenditures (as a percentage of GDP) by real per capita GDP (constant LCU). Cyclical GDP is obtained by applying an HP filter to isolate the cyclical component to the log of real per capita GDP (constant LCU). All accountability measures are normalized from 0 to 1. Good times are when the cyclical GDP is positive. Bad times are when the cyclical GDP is negative.

Diagonal accountability, representing oversight by civil society organizations and the media, is associated with more countercyclical fiscal expenditures in both good and bad times. The interaction between diagonal accountability and cyclical fiscal expenditures in bad times is statistically significant at the 10 percent level (column 8). Horizontal accountability, representing intra-government checks and balances, does not significantly associate with fiscal cyclicality. The interaction has a small magnitude and is not statistically significant.

8 To be precise, cyclical government expenditures over cyclical output (see equation 2).