Why is Fiscal Policy Procyclical in MENA Countries?



The optimal fiscal policy is countercyclical, aiming to keep the output close to its potential. Nevertheless, it has been pointed out that developing countries are unable to run countercyclical fiscal policies. Several researchers have attributed these sub optimal fiscal policies to two groups of arguments. (i) The limited access to domestic or external funds may hinder the ability of government to pursue expansionary fiscal policy in bad time. (ii)  The second group of factors explains that sub-optimal fiscal policies are associated with institutional theories. The standard argument suggests that countries pursuing poor fiscal policies have, also, weak institutions, widespread corruption, and lack of property rights and repudiation of contract.

The main goal of this paper is to analyze empirically if the ability of MENA countries to conduct countercyclical fiscal policy is affected by the quality of their institutions, the nature of political regime and/or by the availability of financial resources either on the local or international capital markets.

From our fiscal policy regression, we find that government expenditure in MENA region is procyclical. We conclude that MENA countries are unable to run countercyclical fiscal policies if they have weak institutions, small access to international, domestic credit market, and democratic political regime.

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DOI: https://doi.org/10.5539/ijef.v2n5p44

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International Journal of Economics and Finance  ISSN  1916-971X (Print) ISSN  1916-9728 (Online)  Email: ijef@ccsenet.org

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