4. Conclusion

A larger log of per capita GDP is associated with more countercyclical fiscal expenditures. This finding is consistent with Figure 1. This association is more prominent in bad times. The coefficients of the interactions are much larger and more statistically significant in bad than in good times. This result suggests that richer countries can expand government expenditures in bad times more than poorer countries can.

Table 3 has the same structure but focuses on the Middle East and North Africa countries during 2000 to 2020. Overall, the same findings apply. Middle East and North Africa countries with better vertical accountability have more procyclical fiscal expenditures in good times (column 4 of Table 3). Diagonal and horizontal accountability are associated with more countercyclical fiscal expenditures in both good and bad times.

However, the associations between accountability measures and the cyclicality of fiscal expenditures are much higher and more statistically significant in the Middle East and North Africa than in the rest of the world. The coefficients 0.393 in column 4 of Table 3 imply that when vertical accountability increases by 1 percent, the cyclicality of government expenditure is larger by another 0.4 percent (i.e., more procyclical). This magnitude is larger than the magnitude in Table 2. Horizontal accountability also plays a bigger role. The coefficient -1.452 in column 6 of Table 3 states that when horizontal accountability increases by 1 percent, the cyclicality of government expenditures is smaller by 1.5 percent in good times. Similarly, the coefficient -1.193 in column 9 of Table 3 states that when horizontal accountability increases by 1 percent, the cyclicality of government expenditures is smaller by 1.2 percent in bad times. The findings are also robust to having country fixed effects, although the coefficients for vertical accountability are less statistically significant. The finding highlights the oversized importance of intra-government checks and balances in helping Middle East and North Africa countries develop countercyclical fiscal policies.

4. Conclusion

This chapter examines the cyclicality of fiscal expenditure in the last two decades, with a focus on the Middle East and North Africa countries. It reports three findings. First, fiscal expenditures in the Middle East and North Africa remained procyclical between 2000 and 2020, although it became less than between 1980 and 1999. Fiscal expenditures of Middle East and North Africa countries have been more procyclical than those of income peers in the last two decades. Second, accountability of a government’s executive branch matters in the cyclicality of government expenditures. We consider three measures of accountability, discussed in Luhrmann et al. (2020). They are vertical accountability, which refers to the ability of citizens to hold their government accountable through elections; horizontal accountability, which refers to checks and balances between state institutions; and diagonal accountability, which refers to oversight by civil society organizations and the media. This chapter finds that in good times, better vertical accountability is associated with more procyclical expenditures, an interesting new finding. In bad times, diagonal accountability help reduce procyclicality. Third, there is a much stronger role of accountability, especially horizontal accountability, in the cyclicality of government expenditure in the Middle East and North Africa than in the rest of the world. The finding highlights the oversized importance of intra-government checks and balances in helping Middle East and North Africa countries develop countercyclical fiscal policies.