Is fiscal manipulation possible before polls?
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.