Political fractionalization and delay in fiscal stabilizations: a duration analysis

Abstract

This article employs a duration analysis approach to empirically investigate whether political fractionalization leads to delayed fiscal stabilizations. Using a broad sample of both developed and developing countries for the period 1975-2011, we consistently find strong evidence that political fractionalization is significantly associated with longer delays in stabilizing high deficits. In particular, political fractionalization has a greater impact on delays in periods of macroeconomic distress. We also show that, while the fractionalization of government parties delays fiscal stabilization, the fractionalization of opposition parties tends to facilitate fiscal stabilization.

Political stability and fiscal consolidation in sub‐Saharan African countries

“…De Haan and Sturm (1994) confirmed these results, showing that the accumulation of debt in the 1980s is positively associated with the frequency of government change in the member countries of the European Community. Grier et al (2015) used a sample of 90 developed and developing countries over the period 1975-2011 and showed that political fragmentation delays fiscal stabilisation. Clemens et al (2016) also support this idea and suggested that the more fragmented a government is (with larger and more unstable coalitions), the more difficult it will be for it to respond to a fiscal crisis.…”

“…to Carrasco (2001), the variable (parcom) may be exogenous 9 and should have an effect on the endogenous variable (y * it ) only through the stability of the government (ps it ). Indeed, as Grier et al (2015) explain, unstable governments (fragmented by coalitions) exist only when political participation is competitive. These two variables are very likely to be statistically correlated.…”

“…Grier et al. (2015) used a sample of 90 developed and developing countries over the period 1975–2011 and showed that political fragmentation delays fiscal stabilisation. Clemens et al.…”

“…From the political economy of the fiscal reform literature, we learn that the political nature of public decision‐making implies that implementing a fiscal policy is not necessarily optimal but may be affected by political behaviour. From this perspective, many studies have explored the role of politics and political institutions, in the form of political polarisation and political turnover, on large deficits and government debt accumulation (Alesina et al, 1989; Alesina & Perotti, 1995a,b; Grechyna, 2016; Grier et al., 2015; Mulas‐Granados, 2006; Roubini & Sachs, 1989). These studies, in the context of Western Europe, Eastern Europe and Latin America, have shown that the occurrence of a fiscal consolidation depends on political institutions.…”

“…Moreover, some studies have linked the limited success of the widespread World Bank fiscal consolidation programme in the 1980s and 1990s to a misunderstanding of the political economy factors in some SSA countries (Dollar and Svensson, 2000). In addition, there is little information in the existing literature regarding the effect of government stability on the strategies of fiscal consolidation (Grier et al., 2015). Our study fills this gap by analysing the effect of government stability on two types of fiscal consolidation strategies: spending‐based and revenue‐based strategies.…”