Fiscal Policy Institutions and Economic Transition in North Africa

Baldi, Guido (2013): Fiscal Policy Institutions and Economic Transition in North Africa.

Abstract

Sound public finances are crucial for ensuring a successful transformation of transition countries to democratic market economies. The transition countries in North Africa are an important example for this. These countries experienced increasing budget deficits in 2011 and 2012. Public finances will probably remain a serious issue in the coming years due to political uncertainties, distributional struggles and weak world economic growth. What kind of institutional rules for the budget process are suitable to limiting the size of these potential budget deficits in a new democracy? In this paper, I argue that numerical fiscal restraints are not the right tool to reduce budget deficits in a new and fragile democracy. Instead, I hold the view that a strong finance minister and a transparent budget process are much more important than numerical fiscal rules. Assigning prerogatives to the finance minister allows limiting the political deficit bias that may arise due to distributional struggles over government spending and revenue. History has shown that numerical policy rules on their own do not lead to desirable outcomes if they are not supported and embedded by the main political parties. If there are weak institutions, fiscal policy rules might even have a perverse effect when politicians – in trying to comply with the rules – use optimistic forecasts and creative accounting, which would lead to a deterioration of the actual budget situation. Therefore, transition countries should first focus on improving the transparency and accountability of the budget process.

• Item Type: MPRA Paper
• Language: English
• Keywords: Fiscal Policy Institutions, Numerical Rules, Constitutional Economics
• Subjects: E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E61 - Policy Objectives ; Policy Designs and Consistency ; Policy Coordination; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E62 - Fiscal Policy; H - Public Economics > H6 - National Budget, Deficit, and Debt > H60 - General

References

Abdih, Y., P. Lopez-Murphy, A. Roitman, and R. Sahay (2010): "The Cyclicality of Fiscal Policy in the Middle East and Central Asia: Is the Current Crisis Different?", IMF Working Paper No. 10/68.

Acemoglu, D. and J. Robinson (2012): "Why Nations Fail: The Origins of Power, Prosperity, and Poverty", Crown Publishers, New York.

Achy, L. (2011): "Tunisia’s Economic Challenges", Carnegie Papers, Carnegie Middle East Center, Beirut.

Alesina, A., N. Roubini and G. Cohen (1997): "Political Cycles and the Macroeconomy", MIT Press.

Alesina, A. and R. Perotti (1996): "Fiscal Discipline and the Budget Process", American Economic Review, American Economic Association, vol. 86(2), pages 401-07, May.

Amin M., R. Assaad, N. al-Baharna, K. Dervis, R. M. Desai, N. S. Dhillon, A. Galal, H. Ghanem, C. Graham, and D. Kaufmann (2012): "After the Spring: Economic Transitions in the Arab World", Oxford University Press.

Anderson, B. and J. Minarik (2006): "Design Choices for Fiscal Policy Rules", OECD Journal of Budgeting, Vol 5, No 4.

Bernoth, K. and G. Wolff (2008): "Fool The Markets? Creative Accounting, Fiscal Transparency and Sovereign Risk Premia", Scottish Journal of Political Economy, vol. 55(4), pp. 465-487, 09.

Brender, A. and A. Drazen (2005): "Political Budget Cycles in New Versus Established Democracies", Journal of Monetary Economics, vol. 52(7), pp. 1271-1295.

Buti M., J. Nogueira Martins and A. Turrini (2007). "From Deficits to Debt and Back: Political Incentives under Numerical Fiscal Rules", CESifo Economic Studies, Oxford University Press, vol. 53(1), pp. 115-152.

Calmfors, L. and S. Wren‐Lewis (2011): "What Should Fiscal Councils Do?", Economic Policy, CEPR & CES & MSH, vol. 26(68), pp. 649-695.

Drazen, A. (2000): "Political Economy in Macroeconomics", Princeton University Press.

Faour, M. and M. Muasher (2011): "Education for Citizenship in the Arab World", Carnegie Papers, Carnegie Middle East Center, Beirut.

Feld, L. and G. Kirchgassner (1999): "Public Debt and Budgetary Procedures: Top Down or Bottom Up? Some Evidence from Swiss Municipalities", NBER Chapters, in: Fiscal Institutions and Fiscal Performance, pp. 151-180 National Bureau of Economic Research.

Fitoussi J.-P. and F. Saraceno (2008) : "Fiscal Discipline as a Social Norm: The European Stability Pact", Journal of Public Economic Theory, vol. 10(6), pp. 1143-1168.

Hallerberg, M., R. Strauch and J. von Hagen (2009): "Fiscal Governance in Europe", Cambridge Books, Cambridge University Press.

IMF (2009): "Fiscal Rules – Anchoring Expectations for Sustainable Public Finances", International Monetary Fund.

Kaufmann D., A. Kraay and M. Mastruzzi (2009): "Worldwide Governance Indicators: A Summary of Data, Methodology and Analytical Issues", Worldwide Governance Indicators Project, www.govindicators.org.

Koen, V. and P. van den Noord (2005): "Fiscal Gimmickry in Europe: One-Off Measures and Creative Accounting", OECD Economics Department Working Papers 417, OECD Publishing.

Kontopoulos, Y. and R. Perotti (1999): "Government Fragmentation and Fiscal Policy Outcomes: Evidence from OECD Countries", NBER Chapters, in: Fiscal Institutions and Fiscal Performance, pp. 81-102, National Bureau of Economic Research.

Kopits, G. (ed.) (2004): "Rules-Based Fiscal Policy in Emerging Markets: Background, Analysis and Prospects", London, Macmillan.

Kopits, G. and S. Symansky (1998): "Fiscal Policy Rules," IMF Occasional Papers 162, International Monetary Fund.

Malik, A. and B. Awadallah (2011): "The Economics of the Arab Spring", CSAE Working Paper 2011-23, University of Oxford.

Milesi-Ferretti, G. (2004) : "Good, bad or ugly? On the effects of fiscal rules with creative accounting," Journal of Public Economics, vol. 88(1-2), pp. 377-394.

Poterba, J. and J. von Hagen (1999): "Fiscal Institutions and Fiscal Performance", NBER Books, National Bureau of Economic Research, Number 99-1.

Sika, N. (2011): "The Political Economy of Arab Uprisings", European Institute of the Mediterranean, Barcelona.

Velasco, A. (1999): "A Model of Endogenous Fiscal Deficits and Delayed Fiscal Reforms", NBER Chapters, in: Poterba and von Hagen (1999): Fiscal Institutions and Fiscal Performance, pp. 81-102 National Bureau of Economic Research.

von Hagen, J. and G. Wolff (2006): "What do Deficits tell us about Debt? Empirical Evidence on Creative Accounting with Fiscal Rules in the EU", Journal of Banking & Finance, vol. 30(12), pp. 3259-3279.