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...

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Main Authors:	Herrera, Santiago, Kouame, Wilfred A., Mandon, Pierre
Format:	Working Paper
Language:	English
Published:	World Bank, Washington, DC 2019
Subjects:	CYCLICALITY PUBLIC SPENDING TAX RATE RIGIDITY FISCAL POLICY PROCYCLICAL POLICY POLITICAL ECONOMY BUSINESS CYCLE
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

id	okr-10986-32215
recordtype	oai_dc
spelling	okr-10986-322152022-09-20T00:14:11Z Why Some Countries Can Escape the Fiscal Pro-Cyclicality Trap and Others Cannot ? Herrera, Santiago Kouame, Wilfred A. Mandon, Pierre CYCLICALITY PUBLIC SPENDING TAX RATE RIGIDITY FISCAL POLICY PROCYCLICAL POLICY POLITICAL ECONOMY BUSINESS CYCLE 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. 2019-08-07T21:33:22Z 2019-08-07T21:33:22Z 2019-08 Working Paper 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 English Policy Research working paper,no. WPS 8963; Policy Research Working Paper;No. 8963 CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo World Bank World Bank, Washington, DC Publications & Research Publications & Research :: Policy Research Working Paper
repository_type	Digital Repository
institution_category	Foreign Institution
institution	Digital Repositories
building	World Bank Open Knowledge Repository
collection	World Bank
language	English
topic	CYCLICALITY PUBLIC SPENDING TAX RATE RIGIDITY FISCAL POLICY PROCYCLICAL POLICY POLITICAL ECONOMY BUSINESS CYCLE
spellingShingle	CYCLICALITY PUBLIC SPENDING TAX RATE RIGIDITY FISCAL POLICY PROCYCLICAL POLICY POLITICAL ECONOMY BUSINESS CYCLE Herrera, Santiago Kouame, Wilfred A. Mandon, Pierre Why Some Countries Can Escape the Fiscal Pro-Cyclicality Trap and Others Cannot ?
relation	Policy Research working paper,no. WPS 8963;
description	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.
format	Working Paper
author	Herrera, Santiago Kouame, Wilfred A. Mandon, Pierre
author_facet	Herrera, Santiago Kouame, Wilfred A. Mandon, Pierre
author_sort	Herrera, Santiago
title	Why Some Countries Can Escape the Fiscal Pro-Cyclicality Trap and Others Cannot ?
title_short	Why Some Countries Can Escape the Fiscal Pro-Cyclicality Trap and Others Cannot ?
title_full	Why Some Countries Can Escape the Fiscal Pro-Cyclicality Trap and Others Cannot ?
title_fullStr	Why Some Countries Can Escape the Fiscal Pro-Cyclicality Trap and Others Cannot ?
title_full_unstemmed	Why Some Countries Can Escape the Fiscal Pro-Cyclicality Trap and Others Cannot ?
title_sort	why some countries can escape the fiscal pro-cyclicality trap and others cannot ?
publisher	World Bank, Washington, DC
publishDate	2019
url	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
_version_	1764476049898340352

Why Some Countries Can Escape the Fiscal Pro-Cyclicality Trap and Others Cannot ?

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