Essays on fiscal policy implementation and governance : evidence from sub-Saharan Africa (SSA)

Akongwale, Sabastine (2020-03)

Thesis (PhD)--Stellenbosch University, 2020.


ENGLISH SUMMARY : Despite the adoption of national and supranational fiscal rules, fiscal policy performance or fiscal outcome in sub-Saharan Africa (SSA) has been very poor, especially in terms of persistent deficits and unsustainable debt levels. This thesis analysed the performance of fiscal policy outcome in Africa vis-à-vis its adopted fiscal rules. It employs innovative empirical methods to investigate the determinants of fiscal transparency, a crucial controllable factor needed to accompany fiscal rules in order to achieve better fiscal outcomes. Despite its poor fiscal outcome and fiscal transparency, no known broad study focusing on these issues in the context of SSA is available. The findings of this thesis fill this literature gap. Chapter 1 provides a clear background to the study as well as the research objectives and significance of the thesis. Prior to the empirical investigation chapters and for proper guidance of our research estimations, relevant literature is reviewed and the theoretical framework for the study is presented in Chapter 2. Chapter 3, presents a broad overview of the research methods employed to address our research objectives. Chapter 4 addresses the first research objective – establishing the extent to which fiscal policy outcomes are determined by fiscal discipline (adherence to fiscal rules) in Africa. This chapter also x-rays the levels of fiscal transparency in Africa, upon situating fiscal transparency and accountability as elements of good governance. Using visual statistics such as graphs, tables and charts, the findings from Chapter 4 reveal a failure of fiscal rules to exclusively deliver better fiscal outcome in SSA countries. It also reveals the presence of poor levels of fiscal transparency in SSA countries. The findings from Chapter 4 necessitate empirical investigations of the determinants of fiscal transparency in SSA, given its importance towards achieving better fiscal outcome. In line with the extant studies, the empirical chapters are broken down into institutional, political and economic determinants of fiscal transparency in SSA. A dynamic panel data GMM technique is employed in the three empirical chapters with a view to overcoming all sources of endogeneity and the weaknesses of prior cross-sectional studies, and also to accommodate for the dynamic component impact which may be attributed to policy reform efforts. The next substantial chapter, Chapter 5 (empirical paper 1) empirically establishes the institutional determinants of fiscal transparency in SSA. This highlights the importance of fiscal transparency as an accompanying tool to fiscal rules if better fiscal outcome is to be realised and the need for the current poor level of fiscal transparency in Africa is to be reversed. This chapter investigates the role of institutional drivers of fiscal transparency in SSA. The findings revealed that the overall quality of institutions in Africa positively influences fiscal transparency when considered as an aggregate index, while discretely only government effectiveness and the rule of law significantly contribute to improvements in fiscal transparency in Africa. Control of corruption, political stability, voice and accountability and regulatory quality did not yield the expected positive relationship with fiscal transparency. This implies that the influence of institutional governance factors on fiscal transparency is more positively impactful when all of them are considered pari passu. It contributes to the literature in terms of scope and methodology as prior studies were mostly cross-sectional studies involving a global mixture of countries (developed and developing). The underlying political dynamics (factors) driving fiscal transparency in SSA were examined in Chapter 6. The highlights of this chapter include that it is the first to empirically examine the relationship between executive-legislative competitiveness (checks and balances) and fiscal transparency as well as its exclusive focus on SSA. Empirical evidence from the study reveals that political factors (internal and external) do sway the level of fiscal transparency in Africa. Specifically, evidence from the paper led to the conclusion that internal political forces such as partisan fragmentation and ethnic fractionalisation play a key role in determining the level of fiscal transparency in Africa. Interestingly, an important political instrument for public accountability, checks and balances does not positively influence fiscal transparency in Africa. A plausible reason for this finding may be attributed to the ‘toe the party line syndrome’ where party allegiance trumps democratic and institutional responsibilities, as is sometimes experienced in less developed democracies. Another key finding from this chapter is the positive role of independent candidature in the improvement of fiscal transparency in Africa. With regard to external political influence, the result confirms the positive contribution of the conditionality of improvements in fiscal transparency as a precondition for Africa’s receipt of foreign aid from donor agencies and countries. This has significantly contributed to improvements in fiscal transparency in SSA in the last decade. The findings also show that over-militarisation of the labour force (an indicator of a repressive regime) is negatively associated with fiscal transparency in Africa. In Chapter 7, the economic determinants of fiscal transparency were established. The chapter made contributions to the literature in terms of the scope, methodology and factors examined. The findings reveal that fiscal transparency in Africa is positively influenced by economic factors such as the extent of trade openness, debt service, foreign aid and business disclosure. In line with expectations, the study revealed a negative and significant association between natural resource revenue and fiscal transparency. This is not surprising given the level of opacity surrounding the reporting of mineral revenues in mineral-rich countries. The study is the first to consider both the de jure and the de facto measures of capital account openness in the capital account openness–fiscal transparency nexus discourse. The de jure measure of capital account yields a positive but not significant association with fiscal transparency, while the de facto measure yielded a negative nexus with fiscal transparency and statistically insignificant. From the findings of this thesis pertinent policy implications were drawn which could help improve fiscal transparency and consequently both fiscal outcome and public accountability. First is the need for a comprehensive institutional reform involving all the stakeholders in the budget process. These reforms should cover all the six sub-indices of institutions (underscored in Section 8.2) so as to achieve a major increase in fiscal transparency. On the political factors–fiscal transparency nexus, three discernible policy recommendations are drawn. First, there is a need for increased space for multiparty politics while also institutionalising the role of independent candidates in the electoral process. This would offer the principal (the electorate) a broader choice of candidates on the basis of transparency and immunity from the ‘toe the party line syndrome’ that encourages opacity in the management of public finances. There is also a need for capacity building for all arms of government that are involved in the budget process because they are the critical agents for proper checks and balances and hence public accountability. A deeper understanding of their role will help them comprehend the opportunity cost (the real cost) of surrendering their institutional independence to party lines – a less transparent public finance system, poor fiscal outcome, poor public accountability and consequently poor service delivery. Thirdly, from the external political scene, donor countries and agencies are encouraged to sustain their current foreign policy of tying receipt of future aid to improvements in current levels of fiscal transparency. With regard to the economic factors–fiscal transparency nexus in Africa, the positive link between trade openness on fiscal transparency calls for greater trade liberalisation reforms policies by SSA states, as countries of the world are more willing to trade with countries that are more transparent in the management of government’s finances. Also, closer economic integration between SSA countries such as the African Continental Free Trade Agreement (ACFTA) will be a step in the right direction. There is also a need to reverse the negative influence of mineral revenues on fiscal transparency in Africa. This can be achieved by institutionalising the precepts and resource charter of the Extractive Industry Transparency Initiatives (EITI), which sets the global standard for the good governance of oil, gas and mineral resources especially as it pertains to transparent reporting of revenues accruing from mineral wealth. Lastly, as with the foreign aid–fiscal transparency nexus, where aid receipt is tied to improvements in fiscal transparency, donor agencies should consider tying foreign aid to improvements in business disclosure given its positive nexus with fiscal transparency in Africa.

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