Is fis­cal ma­nip­u­la­tion pos­si­ble be­fore polls?

Sunday Express - - HAVE YOUR SAY -

AS Le­sotho heads for the 3 June 2017 polls, there is a per­cep­tion that the in­cum­bent gov­ern­ment fre­quently tries to use ex­pan­sion­ary fis­cal pol­icy to im­prove their re-elec­tion prospects. Most politi­cians and non-politi­cians would sub­scribe to such a view.

In po­lit­i­cal eco­nomics lit­er­a­ture, such a view is sum­ma­rized as the po­lit­i­cal busi­ness cy­cle and the mod­els po­lit­i­cal busi­ness cy­cles are mo­ti­vated by the find­ings that good macro­eco­nomics con­di­tion prior the elec­tion helps the in­cum­bent to get re-elected and these find­ings have wide sup­port in the stud­ies con­ducted mainly in the de­vel­oped eco­nomics. The most in­flu­en­tial work is prob­a­bly that of Fair (1978).

Fair looked at pres­i­den­tial elec­tions in US from 1916 through 1976 and found that change in real eco­nomic ac­tiv­ity in the year of the elec­tion ap­pears to have an im­por­tant ef­fect on the votes for the pres­i­dent specif­i­cally a one per­cent in­crease in the growth rate in­creases the in­cum­bents vote to­tal by about one per­cent.

Fur­ther­more Tufte (1978) doc­u­mented a num­ber of clear in­cum­bents of pre­elec­toral op­por­tu­ni­ties ma­nip­u­la­tion in fis­cal in­stru­ments such as the gov­ern­ment trans­fers. In sup­port Alesina (1988) per­forms or­di­nary least square re­gres­sion on a one coun­try and find a sig­nif­i­cant elec­tion year in­crease in net trans­fer over GNP for the U.S.A over the pe­riod of 1961 – 1985.

In ad­di­tion Alesina el al. (1992 ; 1997) ex­tended the anal­y­sis to other in­dus­tri­al­ized coun­tries. They per­form cross-sec­tion time series on the panel of 13 coun­tries (OECD) for the pe­riod be­tween 1961 and 1993 and found that the gov­ern­ment bud­get deficit is high by 0.6 per­cent of GDP in elec­tion years.

Not­with­stand­ing both com­mon per­cep­tion and the sub­stan­tial ev­i­dence that the strong econ­omy helps the in­cum­bent get re-elected. Some econo­me­tri­cians ar­gued that em­pir­i­cal ev­i­dence pro­vide lit­tle ev­i­dence of a reg­u­lar and sta­tis­ti­cal sig­nif­i­cant in eco­nomic ac­tiv­ity be­fore the elec­tions. Specif­i­cally they stip­u­lated that vot­ers care about strong eco­nomics but that does not ap­pear to trans­late into econo­met­ri­cally ver­i­fi­able cy­cles in ag­gre­gate eco­nomic ac­tiv­ity.

Also politi­cians have lim­ited abil­ity to suc­cess­ful ma­nip­u­late the econ­omy to help their re – elec­tion chances this cast doubt on the wide spread ex­is­tence of the macroe­co­nomic po­lit­i­cal bud­get cy­cle.

The pro­po­nents of this al­ter­na­tive view ac­cept the pos­i­tive ef­fect of a strong econ­omy on an in­cum­bent re – elec­tion prospects. How­ever they ar­gued that such an ef­fect does not au­to­mat­i­cally im­ply that op­por­tunis­tic politi­cians can suc­cess­fully en­gage in elec­tion – year eco­nomics at the ag­gre­gate level. Lewis Beck (1988) ar­gued that the ab­sence of a sig­nif­i­cant op­por­tunis­tic cy­cle ei­ther in out­comes or in in­stru­ment re­flect how hard it is to time eco­nomic ma­nip­u­la­tion since both mone­tary and fis­cal pol­icy can be used only with great im­pul­sion so that politi­cians can­not ex­pect to time the stim­u­lus to come right be­fore the elec­tions rather op­por­tunis­tic politi­cians will try to pro­vide for con­tin­ual good eco­nomic news. There­fore it is im­pos­si­ble to fine – tune the ag­gre­gate eco­nomic ef­fects of eco­nomic pol­icy so that they can be turned on and off with pre­ci­sion.

More­over, even if it were tech­ni­cally pos­si­ble to pre­cisely tie the ag­gre­gate ef­fects of the pol­icy there is yet an­other rea­son why politi­cians may not be suc­cess­ful in ma­nip­u­lat­ing fis­cal pol­icy that is pol­icy shift­ing of the econ­omy so that the ex­pend be­fore the elec­tion are con­sid­ered harm­ful to the econ­omy over­time in terms of un­smooth­ing con­sump­tion and in­vest­ment cy­cle. There­fore ra­tio­nal vot­ers would not sup­port such poli­cies so that pre – elec­toral ma­nip­u­la­tion would be pun­ished rather than re­warded at the polls. Peltz­man (1992), Alesina, Per­rotti and Ta­vores (1998) ar­gued that ra­tio­nal vot­ers are fis­cal con­ser­va­tive and of­ten tend to re­move deficit – pro­duc­ing in­cum­bent from the of­fice.

For the de­vel­op­ing economies there are large num­ber of cross – coun­try stud­ies, Ames (1987) pre­sented a panel study of sev­en­teen Latin Amer­i­can coun­tries he showed that over the pe­riod 1947 – 1982 gov­ern­ment ex­pen­di­ture in­creases by 6.3 per­cent in the pre –elec­tion year after the elec­tion and this is con­sis­tent with Shi and Sves­sion (2002) find­ings where the ev­i­dence of sig­nif­i­cant pre – elec­toral de­creases in fis­cal bal­ance in the panel of 91 de­vel­op­ing and de­vel­oped coun­tries over pe­riod 1975 – 95.

Sim­i­larly Krae­mar (1997) and Ro­jas – Suarez et al (1998) both show ev­i­dence that Latin Amer­i­can gov­ern­ments are in- clined to adopt ex­pan­sion­ary fis­cal poli­cies dur­ing elec­toral pe­riod which re­sults in a sig­nif­i­cant de­te­ri­o­ra­tion of fis­cal stance and de­vel­op­ing coun­tries pro­vides ev­i­dence that gov­ern­ment ex­pen­di­ture shift to­wards more vis­i­ble cur­rent con­sump­tion and away from pub­lic in­vest­ment in com­pet­i­tive and the ap­par­ent strength of the re­sults has fos­tered the view that po­lit­i­cal fis­cal cy­cle is in fact a wide spread phe­nom­e­non in less de­vel­op­ing eco­nomics.

In Le­sotho the find­ings were con­sis­tent with Schukrecht (1996) in that there is a room for fis­cal pol­icy ma­nip­u­la­tion since checks and bal­ances are weaker and the in­cum­bent has more power over fis­cal pol­icy. In ad­di­tion ex­pen­di­ture poli­cies such as the dis­tri­bu­tion of sub­si­dized goods and em­ploy­ment via pub­lic works pro­grams are prob­a­bly more ef­fec­tive to af­fect voter’s be­hav­ior. More­over pre-elec­toral in­crease in the cur­rent ex­pen­di­ture seems largely to be caused by an in­crease in sub­si­dies. In­deed sub­si­dies are gen­er­ally re­garded as pop­ulist cat­e­gories that need to be sub­stan­tially in or­der to af­fect large num­ber of vot­ers in Le­sotho.

There is a clear sig­nif­i­cant ef­fect on the fis­cal bal­ance but no sig­nif­i­cant ef­fect on out­put hence not econo­met­ri­cally ver­i­fi­able in Le­sotho .Also be­cause of un­cer­tainty as for the out­come of elec­tion in Le­sotho seemed to be crit­i­cal in mo­ti­vat­ing in­cum­bent to en­gage in the pre­elec­toral eco­nomic pol­icy dis­tor­tion in or to pre­serve their rent.

Mokhe­seng Kuleile.

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