Why Some Countries Can Escape the Fiscal Pro-Cyclicality Trap and Others Cannot ?
This paper analyzes the procyclicality of fiscal policy on the tax and spending sides in a sample of 116 developing countries between 2000 and 2016. About 20 percent of the countries in the sample switched from procyclical to countercyclical policy...
| Main Authors: | , , |
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| Format: | Working Paper |
| Language: | English |
| Published: |
World Bank, Washington, DC
2019
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/510041565102137832/Why-Some-Countries-Can-Escape-the-Fiscal-Pro-Cyclicality-Trap-and-Others-Cannot http://hdl.handle.net/10986/32215 |
| Summary: | This paper analyzes the procyclicality
of fiscal policy on the tax and spending sides in a sample
of 116 developing countries between 2000 and 2016. About 20
percent of the countries in the sample switched from
procyclical to countercyclical policy stance. In Sub-Saharan
Africa, 30 of 39 countries remained caught in the
procyclicality trap and the region has the highest degree of
procyclicality. The Middle East and North Africa region
switched from a countercyclical policy stance to a
procyclical one over time. The Europe and Central Asia and
Latin America and the Caribbean regions significantly
reduced the degree of procyclicality. The main economic
variables that affect procyclicality are financial depth,
tax base variability, and natural resource dependence. In
line with the political economy literature, the perception
of corruption, social fragmentation, and inequality in
resource distribution are positively associated with
procyclicality. The findings also show that the quality of
fiscal institutions is associated with procyclicality;
countries with fiscal rules have smaller procyclical bias,
but the effect is not homogeneous; and higher degrees of
expenditure rigidity are associated with lower procyclical
bias. The study finds asymmetric policy stances along the
business cycle, with procyclicality being more pronounced
during recessions. Similarly, the political cycle affects
procyclicality, as procyclical bias increases in electoral
years. From the tax management perspective, procyclical bias
is still present, but there are significant changes: most of
the political economy variables lose significance; the
resource-dependence variable is not significant; external
credit availability reduces procyclicality; tax base
variability increases procyclical bias; and expenditure
rigidity is no longer significant, but fiscal space becomes
determinant of procyclical bias. |
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