Summary of WP/94/121: “Political Business Cycles and Expenditure Policies in Developing Countries”

Authors of Working Papers are normally staff members of the Fund or consultants, although on occasion outside authors may collaborate with a staff member in writing a paper. The views expressed in the Working Papers or their summaries are, however, those of the authors and should not necessarily be interpreted as representing the views of the Fund. Copies of individual Working Papers and information on subscriptions to the annual series of Working Papers may be obtained from IMF Publication Services, International Monetary Fund, 700 19th Street, Washington, D.C. 20431. Telephone: (202) 623-7430 Telefax: (202) 623-7201 This compilation of summaries of Working Papers released during July-December 1994 is being issued as a part of the Working Paper series. It is designed to provide the reader with an overview of the research work performed by the staff during the period.

Abstract

Authors of Working Papers are normally staff members of the Fund or consultants, although on occasion outside authors may collaborate with a staff member in writing a paper. The views expressed in the Working Papers or their summaries are, however, those of the authors and should not necessarily be interpreted as representing the views of the Fund. Copies of individual Working Papers and information on subscriptions to the annual series of Working Papers may be obtained from IMF Publication Services, International Monetary Fund, 700 19th Street, Washington, D.C. 20431. Telephone: (202) 623-7430 Telefax: (202) 623-7201 This compilation of summaries of Working Papers released during July-December 1994 is being issued as a part of the Working Paper series. It is designed to provide the reader with an overview of the research work performed by the staff during the period.

This paper examines the impact of elections on economic policymaking in developing countries and finds that governments try to improve their re-election prospects by pursuing expansionary expenditure policies. Rising fiscal deficits before elections are followed by fiscal consolidation afterwards. These cycles are found particularly in countries that are less trade-oriented because additional demand does not leak abroad and in countries that pursue fixed exchange rate policies, perhaps because additional import demand does not trigger a devaluation-inflation spiral.

The paper also shows that certain IMF-supported programs contribute to fiscal stabilization but do not affect the incidence of fiscal cycles over elections. This finding suggests the importance of taking account of election constraints in macroeconomic projections and policy advice on the design and schedule of reforms. The political feasibility of reforms should be strengthened before elections.

The paper’s findings may be summarized as follows:

On fiscal deficits. Regression results show that the overall fiscal balance worsens by over 0.6 percent of GDP over an election period. Deteriorating terms of trade, natural catastrophes, and inward-oriented policies also contribute to larger fiscal deficits. On the other hand, SAF/ESAF programs (from the second program period) and EFF arrangements improve the overall fiscal balance.

On revenue and expenditure. Regression results indicate that the election-induced fiscal stimulation translates into increasing government expenditures rather than declining revenues.

On the expenditure composition. The estimations show that, prior to elections, capital expenditure rises as a share of both overall expenditure and GDP, presumably to create short-term employment in public works.

On fiscal cycles in various country groups. Countries with flexible exchange rate regimes do not exhibit election cycles, but cycles are very pronounced in countries with fixed rates and adequate reserves. Fiscal cycles over elections occur both when a country has an IMF-supported program and when it does not, which indicates that domestic political constraints dominate international influences. Economies that are not trade-oriented exhibit very pronounced election cycles, while trade-oriented countries show more fiscal stability over election periods.

Working Paper Summaries (WP/94/77 - WP/94/147)
Author: International Monetary Fund