Political Budget Cycles in the Context of a Transition Economy: The Case of Albania

Comparative Economic Studies https://doi.org/10.1057/s41294-022-00191-6 Political Budget Cycles in the Context of a Transition Economy: The Case of Albania Endrit Lami1,2 Accepted: 18 April 2022 © The Author(s) 2022 Abstract There is growing research on the political budget cycles in transition economies whose institutions, economies and societies differ significantly from those of developed countries. New democracies are more vulnerable to political budget (fiscal) cycles. Most studies focus on policy instruments (e.g. fiscal policies) rather than on macroeconomic outcomes. In this paper, we analyse the political budget/fiscal cycle in Albania, a transition post-communist country. We analyse monthly data on the budget balance (deficit). The findings show a strong difference in deficits during pre- and post-election quarters, which do not appear when econometric analysis is replicated on annually collapsed data. This paper highlights the importance of distinguishing between types of elections according to their outcomes. Electoral competitiveness (heightened incumbents’ fear of elections loss), lower management efficiency, incumbent’s carelessness about the budget situation during the mandate of political rivals and higher corruption can all be associated with elections that yield rotation (change of the party/coalition in power), thus resulting in a higher budget deficit. Keywords Political budget cycles · Budget balance (deficit) · Transition economies · Election outcomes JEL Classification D72 · E62 · P16 · H26 Disclaimer: The views and opinions expressed are those of the author and do not necessarily represent the views of the institutions with which the author is affiliated. * Endrit Lami 1 Martin Luther University Halle-Wittenberg, Halle (Saale), Germany 2 Ministry of Finance and Economy of Albania, Tirana, Albania Vol.:(0123456789) E. Lami Introduction Political Budget Cycles (hereinafter, PBCs) result from the inclination of incumbent politicians to exploit fiscal policy instruments for their private political interest, in particular, to boost the odds of re-election. Such opportunistic exploitation of fiscal policy could manifest itself as deteriorated budgetary balances before elections, through either higher aggregate spending or lower revenues, or both, which then could (sometimes) reverse after elections. Over the last three decades, there have been many empirical studies of PBCs. Nowadays, empirical tests on the hypothetical presence of PBCs in instruments and targeted variables (parameters) of fiscal policy are regarded as more convincing than tests in relation to macroeconomic outcomes (i.e. unemployment, inflation, growth), which have thus become less common (Dubois, 2016). Empirical research on monetary policy (political monetary cycles) have also been common in this branch of political economy, albeit with more ambiguous findings as conditioned by a number of factors, most notably the institutional independence of the central banks. Empirical research has been focused both in developed and developing or transition countries. The evidence on different manifestations of PBCs has been clearly stronger in the latter cluster of countries, whose emerging economies, institutions and societies (i.e. voting culture and context) vary significantly from those of developed countries, as well as among each other (e.g. see Brender and Drazen, 2005; Shi and Svensson, 2006; Alt and Lassen, 2006a, 2006b; Kyriacou et al., 2021). In this paper, we empirically investigate political budget cycles in Albania, a post-communist transition democracy, prone to opportunistic political (electoral) manipulation of economic policies and outcomes. We analyse the general government budget (fiscal) balance (i.e. the headline deficit). The budget balance is usually one of the main targeted parameters of fiscal policy conducted by a government. That is certainly the case in Albania. We analyse monthly data on the fiscal balance. Most studies in this field of research rely on annual data which have been considered a serious drawback (Streb et al., 2012; Akhmedov and Zhuravskaya 2004). Empirical analysis based on annual data could mask intra-year variation. Accordingly, studies using annual data could miss important electoral related dynamics in the analysed variables and thus underestimate the presence of political budgetary cycles, especially when elections fall in the middle of the (fiscal) year, which is the case in Albania. Indeed, our findings show a strong difference in deficits during pre- and postelection intra-annual time intervals, which does not appear when the econometric analysis is replicated on annually collapsed data. Previous research on Albania found evidence of significant expansion of public expenditures (Imami and Lami, 2006) as well as a deteriorating tax collection performance before elections (Lami et al., 2021), which—especially when the two combined—can result in higher deficits. This paper completes a trilogy of papers that all point to the same conclusion. Any of these papers is suggestive, Political Budget Cycles in the Context of a Transition Economy:… but all three together more conclusively point to “the habit” of political budget cycles in Albanian as a sub-optimal way of conducting fiscal policy. During early transition, income from privatization may sustain increased expenditure prior to elections (as highlighted by Lami et al., 2016), in the long run, as most (large) privatizations have been concluded, income from taxation and borrowing are the key sources of financing governmental spending. We investigate also how PBCs are affected by “electoral competitiveness”, which is a germane dimension of analysis in the case of Albania, following the conceptualization of this aspect by Eibl and Lynge-Mangueira (2017) as explained in the third section below. The empirical approach we follow to test for this dimension of PBCs in Albania is the same as in Lami et al. (2021) who make an outcome-wise categorization of elections (i.e. elections that yield a change of political power and those that do not) and test for electoral cycles in tax collection performance around each category. They find that fiscal performance deteriorates substantially more intensively before elections that result in a change of political power than before those elections that reaffirm the incumbent. This paper presents further corroborating evidence that incumbents engage in much stronger PBC behaviour, manifested in budget balance, around those elections which result in a change of the political power. Hence, in the light of the argument developed by Eibl and Lynge-Mangueira (2017), incumbents behave as such when they face higher “electoral competiveness”, or, more bluntly, when they feel the fear of loss. Another institutional aspect in relation to PBC behaviour that we empirically look into is how the constitutional changes introduced in Albania in 2008, which affected t (...truncated)