Exiting from Fragility in Sub‐Saharan Africa: The Role of Fiscal Policies and Fiscal Institutions

• Author: Gustavo Ramirez,Ejona Fuli,Corinne Deléchat,Dafina Mulaj,Rui Xu
• Date: 01 September 2018
• Published date: 01 September 2018
• DOI: http://doi.org/10.1111/saje.12195

EXITING FROM FRAGILITY IN SUB-SAHARAN AFRICA: THE

ROLE OF FISCAL POLICIES AND FISCAL INSTITUTIONS

CORINNE DELE

´CHAT*, EJONA FULI

†

,DAFINA MULAJ

†

,GUSTAVO RAMIREZ

†

AND RUI XU

‡

Abstract

This paper studies the role of fiscal policies and institutions in building resilience in sub-Saharan

African countries, focussing on 26 countries that were deemed fragile in the 1990s. We use a

probabilistic framework together with GMM estimation to address endogeneity and reverse cau-

sality. We find that fiscal institutions and fiscal space, namely the capacity to raise tax revenue

and contain current spending, as well as the quality of public expenditure, are significantly and

robustly associated with building resilience. Similar conclusions arise from a qualitative study of

7 sub-Saharan African countries in the sample that built resilience since the 1990s.

JEL Classification: 011, 019, 023, 043, 055

Keywords: Fragility, resilience, fiscal policy, fiscal institutions, CPIA, sub-Saharan Africa

1. INTRODUCTION

Economic performance in most sub-Saharan African countries has improved substantially

over the past 20 years. The past decade was particularly favourable with annual average

growth rates above 3%. However, this strong growth performance was not equally

observed in every country in the region. Fragile states, in particular, faced severe obstacles

to generate high or consistent economic growth, even despite favourable headwinds from

increases in world commodity prices. In fact, the growth performance and social condi-

tions in fragile states have lagged behind the region’s average and these countries seem to

have fallen into a fragility trap, a vicious cycle of underdevelopment, instability and weak

institutions. Given the large number of fragile states in sub-Saharan Africa (SSA),

1

it is

imperative for the international community as well as the fragile state governments them-

selves to identify strategies for building resilience and achieving sustainable growth.

Past studies have identified several factors that contribute to fragility, including a

recent history of conflict (Collier and Hoeffler, 2004), poor economic performance

(Murdoch and Sandler, 2002; Miguel et al., 2004) as well as low institutional quality

and weak enforcement of contracts and property rights (Hegre et al., 2001; Bertocchi

and Guerzoni, 2010; David et al., 2011; Pritchett and De Veijer, 2011). All the

* Corresponding author: Division Chief, African Department, International Monetary Fund,

700 19th Street NW, Washington, DC 20431, USA. E-mail: cdelechat@imf.org

†

African Department, International Monetary Fund

‡

Standford University, International Monetary Fund

1

A total of 19 SSA countries remain fragile as of 2013 based on a CPIA score of 3.2 or less, or the

presence of a United Nations/regional peace-keeping or peace-building mission during 2011–

2013.

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The International Monetary Fund retains copyright and all other rights in the manuscript of this article as submitted

for publication.

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of Economics

aforementioned factors are closely intertwined and mutually reinforcing, making it diffi-

cult to break out of fragility (Andrimihaja et al., 2011). Previous work underlined that

democratic institutions are key to building resilience, as a broad-based enforcement of

property rights and rule of law will help spur economic institutions that favour develop-

ment and stability (Wantchekon and Neeman, 2002; Acemoglu et al., 2004). However,

political institutions tend to be persistent and the process of switching from a limited

access to an open access social order occurs only over a long time horizon (North et al.,

2009; Gollwitzer and Quintyn, 2012).

Taking a medium-term view, some studies have suggested that governments can take

more immediate and decisive actions to promote development and stability by building

fiscal capacity. Fiscal capacity, defined as the ability to raise revenue, is a key dimension

of state capacity, along with the capacity of the state to support the development of pri-

vate markets (legal capacity) and to provide public goods (collective capacity).

2

More spe-

cifically, effective tax collection institutions can spur demand for democracy and more

inclusive institutions, as tax payers expect an improved delivery of public services and

demand more transparency and accountability in the management of the tax revenue. A

higher tax intake is critical to allow the state to deliver basic goods and services and carry

out growth-enhancing investments, thus contributing to building resilience by reducing

poverty, inequality and the likelihood of conflict (Chu et al., 2000; Gupta et al., 2001,

2003; Burgoon, 2006; Collier and Hoeffler, 2007; Taydas and Peksen, 2012; Interna-

tional Monetary Fund (IMF), 2014a; Singh et al., 2014).

Based on this strand of the literature, we explore the role of fiscal policies and institu-

tions in building resilience and exiting fragility in the context of sub-Saharan African

countries. Even though the development of effective fiscal institutions takes time and

resources, these requirements are much smaller than those needed for more general insti-

tutional improvement and could thus act as the engine that jump starts the process and

helps fragile states exit their “capability trap” (Pritchett and De Weijer, 2011). Gollwitzer

and Quintyn (2010) find that strong budget institutions are particularly effective as a dis-

ciplining device in weak institutional frameworks. This would suggest relatively high

returns to focussing on building sound fiscal institutions in fragile states. The interna-

tional community can help this process through policy advice, technical assistance and

training on tax administration and budget reforms.

Our paper’s main contributions are, first, to use a comprehensive definition of state

fragility, to complement existing studies that focus on conflict (e.g. Taydas and Peksen,

2012). Our definition, based on the Country Policy and Institutional Assessment

(CPIA), acknowledges the complex and multidimensional nature of fragility. Although

fragility and conflict are closely intertwined, a state can be fragile in the absence of con-

flict (e.g. Guinea, Haiti). Second, we systematically analyse the impact of fiscal institu-

tions and that of the composition of tax and expenditures on building resilience. This is

an important improvement over a number of studies that focus on only one or few

aspects of fiscal capacity or institutions (e.g. welfare or military spending). Finally, we sys-

tematically examine the trajectory of a group of countries deemed successful at building

resilience, to identify lessons on the sequencing of reforms.

Our sample covers 44 sub-Saharan African countries (excluding South Sudan, which

was not a separate country until 2011) during 1990–2013, with specific emphasis on a

2

See Besley and Persson (2009, 2010, 2014), Besley et al. (2013), and OECD (2013).

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group of 26 countries that were deemed fragile in the 1990s. Fragility is measured by the

CPIA ratings published annually by the World Bank.

3

Even though the ratings may suf-

fer from subjective biases, they have been shown to be broadly correlated with rankings

based on a number of other indicators, including the World Governance Indicators and

the Heritage Foundation’s Economic Freedom Indicator.

4

We look at the impact of both

total spending and tax revenue and their components and use a number of proxies to

measure the quality of budget institutions. As in IMF (2014b), resource-rich fragile

countries are treated as a distinct group in the analysis. This distinction is introduced to

address the question of whether these countries used the commodity boom in 2000–

2008 to build resilience, and also because an abundant literature shows that resource-rich

countries tend to have weaker institutions and economic performances overall and a

weaker tax effort in particular (Sachs and Warner, 2001; Gupta and Ylaoutinen, 2014).

5

Because all factors affecting fragility are closely interrelated and causality is difficult to

establish, the empirical strategy relies on using a Generalized Methods of Moments

(GMM) specification, which uses econometric instruments to attempt to correct for endo-

geneity. As an alternative approach, we also estimate the model using a probabilistic model

which looks into factors associated with greater odds of being resilient, without making

strong judgments regarding the direction of causality. These findings are robust to estima-

tion method, sample choice and definition of dependent variable. The empirical analysis is

complemented by a more qualitative study of a group of seven countries that are deemed

to have overcome fragility and become “resilient” since the 1990s, based both on CPIA

ratings and the absence of major conflicts in recent years. Reordering the sample using as

the starting year (t50), the year in which the lowest CPIA score was registered in the

1980s or 1990s, we explore the pattern of key variables along the path to greater resilience

to gain some insights into the prioritisation and sequencing of policies and reforms.

The empirical results support the notion that sound fiscal policies and institutions

contribute to resilience. A better quality of budget institutions, and greater fiscal space as

measured by higher tax revenue and education spending, lower recurrent spending (par-

ticularly military spending) and higher domestic investment, are associated with signifi-

cant increases in the CPIA rating and with the probability of reaching the threshold of

“resilience.” Our findings also highlight the importance of the composition of tax and

expenditure for resilience. On the expenditure side, education and military spending are,

respectively, positively and negatively associated with resilience. The experience of the

seven countries that were identified as having built resilience during the period is consist-

ent with these findings. Economic stabilisation following a period of civil conflict is usu-

ally led by policies that stabilise inflation (if initially high or volatile) and create fiscal

space, the latter defined as the ability of the government to raise revenues and contain

3

The CPIA rates countries against a set of 16 criteria grouped in four clusters, namely economic

management, structural policies, policies for social inclusion and equity and public sector manage-

ment and institutions. Details about the scores can be found on the World Bank Website.

4

An evaluation by the World Bank’s independent evaluation office found that the content of the

CPIA broadly reflects the determinants of growth and poverty reduction identified in the econom-

ics literature, though it recommended some changes in indicators (World Bank [Independent

Evaluation Group], 2009).

5

Resource rich countries are defined as those that have primary commo dity rents exceeding 10%

of Gross Domestic Products (GDP).

3

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