| Abstract: |
The author empirically assesses the effects of institutional and political
factors on the need and willingness of governments to make large fiscal
adjustments. In contrast to earlier studies, which consider the role of
political economy determinants only during periods of fiscal consolidation,
the author expands the field of analysis by examining periods when governments
should be making fiscal efforts but fail to do so (or do not try), as well as
periods when no adjustment is required. To analyze this greater range of
fiscal situations, a multinomial logit framework is applied to a panel of 61
advanced and developing countries, generating a sample size significantly
larger than previous work. A key finding is that the political economy factors
favouring the maintenance of sensible fiscal policies are different from those
that increase the probability of achieving an exceptional adjustment. For
instance, the results for developing countries indicate that sound economic
institutions help governments avoid dire fiscal situations; however, those
countries that actually succeed in making lasting adjustments in the face of a
serious need tend to have weak institutions. There is also some evidence that
high levels of transfers and subsidies diminish the probability of successful
adjustment in developing countries, and that legislative majorities improve
the odds. In advanced countries, strong democratic institutions appear to
increase the likelihood of avoiding situations of fiscal distress. |