Conditional Political Budget Cycles: A Reconsideration of the Role of Economic Development

We revisit work that has indicated that the presence and strength of Political Budget Cycles depends on a range of conditioning factors. We focus on the mediating effect of economic development. Our results, based on a sample of up to 67 developing and developed countries over the period 1995 to 2016, indicate that budget cycles emerge in countries with a GDP per capita below a threshold ranging from 21,000 to 25,000 U.S. dollars. To explain this we suggest that GDP per capita may be capturing for the effect of time preference. Specifically, in relatively poorer countries, high discount rates will lead voters to value immediate consumption over the future costs from fiscally irresponsible policies. This goes beyond previous explanations of budget cycles based on voters with short memories who underestimate the costs of expansionary policies, voters with little experience with democracy or voters who are poorly informed about the competence or policy preferences of political candidates.