## _wp07219

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---

### I. INTRODUCTION
- The political budget cycle literature argues that incumbent governments may use expansionary economic policies prior to elections to influence voters and maximize chances of re-election.
- In the political economy literature, this outcome is known as the political business cycle, that is, a macroeconomic cycle induced by the political cycle.
- Empirical testing of competing models supporting the theory has relied mostly on data from the industrial democracies, where results have been mixed.
- To date, there have been few tests of political business cycle theory in developing countries, and none with significant reference to Papua New Guinea.
- This paper examines and tests the existence of political budget cycles in Papua New Guinea during the period 1988–2004.

### Factors pointing to political budget cycles in Papua New Guinea
- Anecdotal evidence suggests pre-election periods have seen:
  - increases in social welfare transfers and capital spending,
  - rapid liquidation of public sector arrears, and
  - an increase in public debt.
- Institutional context:
  - Papua New Guinea, as many other developing countries, has relatively weak institutions.
  - As a result, there are relatively few constraints on government actions and accountability.

### Papua New Guinea’s political system (context relevant for cycles)
- Political and institutional features:
  - Unicameral Westminster-style parliament: 109 members (89 “open” electorates, 20 “regional” electorates).
  - Parliamentary term: five years. National elections began in 1964; most recent held in June 2002. First general election using Limited Preferential Vote system scheduled for 2007.
  - Democratic longevity with over 40 years of uninterrupted national elections, universal suffrage, and generally peaceful transfers of power, but widespread irregularities (vote buying, ballot rigging, violence).
  - Institutional instability: no government since independence in 1975 had lasted its full term until Somare (2002–2007); average life of a government is less than three years; government changed hands ten times since July 1977.
  - Politics driven by personalities and patronage rather than ideology; high voter volatility and emphasis on tangible constituency benefits; members of parliament seek portfolios enabling disbursement of constituency benefits.
  - Organic Law on the Integrity of Political Parties (2001) aimed to reduce instability; effectiveness remains to be seen.

### Data and model used in empirical analysis
- Data coverage and fiscal variables:
  - Quarterly seasonally adjusted fiscal policy indicators covering 1988:Q1–2004:Q4 (three parliamentary elections and four government changes from votes of no confidence or resignations).
  - Fiscal variables: central government total revenue, total expenditure, recurrent expenditure, development expenditure, and net credit to the public sector. Expenditure items include total expenditures, non-interest expenditures, non-interest recurrent expenditures, and development expenditures.
  - Interest expenditure averaged 13 percent per year during 1988–2004.
  - Primary and fiscal deficits averaged 0.57 and -1.5 percent of GDP per quarter.
  - Average ratio of revenue to expenditure equaled 7.3 percent of GDP with a standard division of 1.08 during 1988:Q2–2004:Q4.
  - Stock of net claims on the government averaged 9 percent of GDP per quarter with a standard deviation of 3.13.
- Descriptive statistics (Table 2, 1988:2–2004:4) — values preserved exactly as presented:
  - Revenues: Mean 7.34; Median 7.27; Maximum 10.01; Minimum 5.63; Std. Dev. 1.08; Skewness 0.63; Kurtosis 2.79; Observations 65
  - Recurrent: Mean 5.50; Median 5.31; Maximum 8.55; Minimum 3.35; Std. Dev. 1.21; Skewness 0.31; Kurtosis 2.34; Observations 65
  - Development: Mean 1.21; Median 0.88; Maximum 4.20; Minimum 0.17; Std. Dev. 1.89; Skewness 1.54; Kurtosis 5.23; Observations 65
  - Primary Expenditure: Mean 8.97; Median 8.54; Maximum 17.29; Minimum 5.21; Std. Dev. 2.36; Skewness 0.89; Kurtosis 4.06; Observations 65
  - Primary Deficit: Mean 0.57; Median 0.51; Maximum 3.48; Minimum -3.50; Std. Dev. 1.23; Skewness -0.26; Kurtosis 3.86; Observations 65
  - Total Deficit: Mean -1.50; Median -1.23; Maximum 1.70; Minimum -5.96; Std. Dev. 1.57; Skewness -0.67; Kurtosis 3.37; Observations 65
  - Net Claims on government: Mean 9.03; Median 9.57; Maximum 15.71; Minimum 1.98; Std. Dev. 3.13; Skewness -0.61; Kurtosis 3.02; Observations 65
- Methodology:
  - Baxter-King filter used to decompose macroeconomic time series into non-cyclical and cyclical components.
  - Estimated autoregressive model interrupted by election dummies (k = 1,2,3...8 representing quarters around elections). Dummy takes value 1 when expansionary policies expected and -1 when post-election contraction anticipated.
  - Controls include rate of growth of external terms of trade and a “confidence” dummy to indicate government changes via vote of no confidence or other constitutional means (to capture coalition/common-pool effects).

### Empirical results (main findings)
- Total primary expenditure:
  - First significant jump of 48 percent three quarters before elections compared with trend.
  - Rise of 17 percent in the quarter preceding the elections.
  - No significant change in the election quarter.
  - Statistically significant fall of around 46 percent in the quarter following the elections.
- Development expenditure:
  - Pattern mimics total primary expenditures.
  - Sharp decline in development expenditure of about 68 percent three quarters after the elections.
- Primary recurrent expenditures:
  - No evidence of budget cycles in primary recurrent expenditures.
- Revenues:
  - Revenue was not statistically significantly related to elections in the pre- or post-election period.
- Net claims on government (domestic borrowing):
  - Net claims on the central government as a percentage of GDP increase on average by 16 percent in the quarter immediately preceding an election.
  - Post-election increases in net claims are not reversed in the post-election period.
- Statistical controls and diagnostics:
  - Lagged dependent variable is statistically significant in all estimations.
  - Terms of trade control is statistically significant in all but the estimation of net public credit.
  - “Confidence” variable (proxy for coalition instability) shows no evidence of affecting the political budget cycle in Papua New Guinea.
  - Diagnostic test outcomes (Table 3) reported p-values; reported adjusted R-squared values include 0.748, 0.499, 0.611, 0.766 for the estimations shown.
  - Significance notation: * = Significance at the 5 percent level. ** = Significance at the 10 percent level.

### Conclusions and policy implications
- Evidence indicates opportunistic political business cycles in Papua New Guinea consistent with rational opportunistic models (Rogoff and Sibert, 1988; Rogoff, 1990):
  - Incumbent governments manipulate fiscal instruments pre-election—mainly increased development spending and overall primary expenditure—followed by post-election retrenchment.
  - Election-year spending is financed in part through domestic borrowing (increases in net claims on government).
- Broader implication:
  - The political-business-cycle pressures (pre-election expansion and post-election retrenchment financed via domestic borrowing) may be incompatible with ongoing economic and political reform objectives, including long-term fiscal sustainability.

### References (selected from source)
- Akhmedov, Akhmed and Ekaterina Zhuravskaya, 2004. “Opportunistic Political Cycles: Test in a Young Democracy Setting,” Quarterly Journal of Economics, Vol.119, pp.1301–38.
- Alesina, Alberto and Jeffrey Sachs, 1988. “Political Parties and Business Cycle in the United States, 1948–1984,” Journal of Money, Credit, and Banking, Vol. 20, pp. 63–82.
- Alesina, Alberto, Nouriel Roubini and Gerald Cohen, 1997. Political Cycles and the Macroeconomy, (MIT Press, Cambridge, Mass.).
- Ames, Barry, 1987. Political Survival: Politicians and Public Policy in Latin America, (UCB Press, Berkeley, Calif.).
- Block, Steven, 2001. “Elections, Electoral Competitiveness, and Political Budget Cycles in Developing Countries,” CID Working Paper No. 78, Harvard University.
- Block, Steven, 2002. “Political Business Cycles, Democratization, and Economic Reform: The Case of Africa,” Journal of Development Economics, Vol. 67, pp.205–228.
- Drazen, Allan, 2001. “The Political Business Cycle After 25 Years,” NBER Macroeconomics Annual 2000, (MIT Press, Cambridge, Mass.).
- Gonzalez, Maria, 2002. “Do Changes in Democracy Affect the Political Budget Cycle? Evidence from Mexico,” Review of Development Economics, Vol. 6, pp. 204–24.
- Khemani, Stuti, 2004. “Political Cycles in a Developing Economy: Effect of Elections in the Indian States,” Journal of Development Economics Vol. 73, pp. 125–54.
- Okole, Henry, 2004. “Westminster Practices in Papua New Guinea: Governance in a Melanesian State,” Paper presented at the Political Culture, Representation, and Electoral Systems Conference, Port Vila, Vanuatu. July 2004.
- Persson, Torsten and Guido Tabellini, 2003. “Do Electoral Cycles Differ Across Political Systems?” Working Paper 232, IGIER, University of Bocconi.
- Rogoff, Kenneth, 1990.“Equilibrium Political Budget Cycles,” American Economic Review, Vol. 80, pp. 21–36.
- Rogoff, Kenneth and Anne Sibert, 1988. “Elections and Macroeconomic Policy Cycles,” Review of Economic Studies, Vol. 55, pp.1–16.
- Shi, Min and Jakob Svensson, 2000. “Political Business Cycles in Developed and Developing Countries,” Development Research Group, (World Bank, Washington D.C.).

*Source: Fund staff estimates as presented in the PDF chapter _wp07219 - Section V details the paper’s conclusion.*

### References..............................................................................................................

### _wp07219 - References

### I. INTRODUCTION
- The political budget cycle literature argues that incumbent governments may use expansionary economic policies prior to elections to influence voters and maximize chances of re-election.
- In the political economy literature, this outcome is known as the political business cycle, that is, a macroeconomic cycle induced by the political cycle.
- Empirical testing of competing models supporting the theory has relied mostly on data from the industrial democracies, where results have been mixed.
- To date, there have been few tests of political business cycle theory in developing countries, and none with significant reference to Papua New Guinea.

### Factors pointing to political budget cycles in Papua New Guinea
- Anecdotal evidence suggests pre-election periods have seen increases in social welfare transfers and capital spending, and a rapid liquidation of public sector arrears and increase in public debt.
- Papua New Guinea, as many other developing countries, has relatively weak institutions.
- As a result, there are relatively few constraints on government actions and accountability.

### Scope of the paper and structure
- This paper examines and tests the existence of political budget cycles in Papua New Guinea during the period 1988–2004.
- Section II provides an overview of the political business cycle literature.
- Section III provides an overview of Papua New Guinea’s political structure and processes.
- Section IV describes the data set and the empirical methods used to test for the presence of election-influenced spending, and presents the results of a time series analysis.

*Source: _wp07219 - References (IMF PDF).*

### Section V details the paper’s conclusion.

### _wp07219 - Section V details the paper’s conclusion.

### Theoretical and empirical considerations
- Two main literatures: opportunistic political business cycles (incumbents manipulate economic policy to increase re-election probability) and partisan theory (policies predetermined by ideology; left-wing parties care more about unemployment than inflation, inverse for right-wing).
- Early opportunistic models assume voter myopia; later models (Rogoff and Sibert, 1988; Rogoff, 1990) adopt the Lucas critique and rational expectations with asymmetric information: incumbents signal competence via expansionary fiscal policy, especially shifting expenditure toward easily observed consumption spending and away from investment.
- Empirical evidence is mixed:
  - Developed countries: stronger evidence of partisan rather than opportunistic cycles (Alesina and Sachs, 1988; Alesina and Roubini, 1988).
  - Developing countries: more convincing evidence of opportunistic cycles (Ames, 1987; Khemani, 2004).
  - Determinants identified in other studies: electoral competition (Block, 2001), levels of democracy and transparency (Gonzalez, 2002).

### Papua New Guinea’s political system (context relevant for cycles)
- Papua New Guinea features:
  - Unicameral Westminster-style parliament: 109 members (89 “open” electorates, 20 “regional” electorates).
  - Parliamentary term: five years. National elections began in 1964; most recent held in June 2002. First general election using Limited Preferential Vote system scheduled for 2007.
- Political features with fiscal implications:
  - Democratic longevity with over 40 years of uninterrupted national elections, universal suffrage, and generally peaceful transfers of power, but widespread irregularities (vote buying, ballot rigging, violence).
  - Institutional instability: no government since independence in 1975 had lasted its full term until Somare (2002–2007); average life of a government is less than three years; government changed hands ten times since July 1977.
  - Politics driven by personalities and patronage rather than ideology; high voter volatility and emphasis on tangible constituency benefits; members of parliament seek portfolios enabling disbursement of constituency benefits.
  - Organic Law on the Integrity of Political Parties (2001) aimed to reduce instability; effectiveness remains to be seen.

### Data and model used in empirical analysis
- Data:
  - Quarterly seasonally adjusted fiscal policy indicators covering 1988:Q1–2004:Q4 (three parliamentary elections and four government changes from votes of no confidence or resignations).
  - Fiscal variables: central government total revenue, total expenditure, recurrent expenditure, development expenditure, and net credit to the public sector. Expenditure items include total expenditures, non-interest expenditures, non-interest recurrent expenditures, and development expenditures.
  - Interest expenditure averaged 13 percent per year during 1988–2004.
  - Primary and fiscal deficits averaged 0.57 and -1.5 percent of GDP per quarter.
  - Average ratio of revenue to expenditure equaled 7.3 percent of GDP with a standard division of 1.08 during 1988:Q2–2004:Q4.
  - Stock of net claims on the government averaged 9 percent of GDP per quarter with a standard deviation of 3.13.
- Descriptive statistics (Table 2, 1988:2–2004:4) — values preserved exactly as presented:
  - Revenues: Mean 7.34; Median 7.27; Maximum 10.01; Minimum 5.63; Std. Dev. 1.08; Skewness 0.63; Kurtosis 2.79; Observations 65
  - Recurrent: Mean 5.50; Median 5.31; Maximum 8.55; Minimum 3.35; Std. Dev. 1.21; Skewness 0.31; Kurtosis 2.34; Observations 65
  - Development: Mean 1.21; Median 0.88; Maximum 4.20; Minimum 0.17; Std. Dev. 1.89; Skewness 1.54; Kurtosis 5.23; Observations 65
  - Primary Expenditure: Mean 8.97; Median 8.54; Maximum 17.29; Minimum 5.21; Std. Dev. 2.36; Skewness 0.89; Kurtosis 4.06; Observations 65
  - Primary Deficit: Mean 0.57; Median 0.51; Maximum 3.48; Minimum -3.50; Std. Dev. 1.23; Skewness -0.26; Kurtosis 3.86; Observations 65
  - Total Deficit: Mean -1.50; Median -1.23; Maximum 1.70; Minimum -5.96; Std. Dev. 1.57; Skewness -0.67; Kurtosis 3.37; Observations 65
  - Net Claims on government: Mean 9.03; Median 9.57; Maximum 15.71; Minimum 1.98; Std. Dev. 3.13; Skewness -0.61; Kurtosis 3.02; Observations 65
- Methodology:
  - Baxter-King filter used to decompose macroeconomic time series into non-cyclical and cyclical components.
  - Estimated autoregressive model interrupted by election dummies (k = 1,2,3...8 representing quarters around elections). Dummy takes value 1 when expansionary policies expected and -1 when post-election contraction anticipated.
  - Controls include rate of growth of external terms of trade and a “confidence” dummy to indicate government changes via vote of no confidence or other constitutional means (to capture coalition/common-pool effects).

### Empirical results (main findings)
- Main cyclical fiscal responses to elections (as reported in Section V and Table 3):
  - Total primary expenditure:
    - First significant jump of 48 percent three quarters before elections compared with trend.
    - Rise of 17 percent in the quarter preceding the elections.
    - No significant change in the election quarter.
    - Statistically significant fall of around 46 percent in the quarter following the elections.
  - Development expenditure:
    - Pattern mimics total primary expenditures.
    - Sharp decline in development expenditure of about 68 percent three quarters after the elections.
  - Primary recurrent expenditures:
    - No evidence of budget cycles in primary recurrent expenditures.
  - Revenues:
    - Revenue was not statistically significantly related to elections in the pre- or post-election period.
  - Net claims on government (domestic borrowing):
    - Net claims on the central government as a percentage of GDP increase on average by 16 percent in the quarter immediately preceding an election.
    - Post-election increases in net claims are not reversed in the post-election period.
- Statistical controls and significance:
  - Lagged dependent variable is statistically significant in all estimations.
  - Terms of trade control is statistically significant in all but the estimation of net public credit.
  - “Confidence” variable (proxy for coalition instability) shows no evidence of affecting the political budget cycle in Papua New Guinea.
  - Diagnostic test outcomes (Table 3) reported p-values; reported adjusted R-squared values include 0.748, 0.499, 0.611, 0.766 for the estimations shown.
  - Significance notation: * = Significance at the 5 percent level. ** = Significance at the 10 percent level.

### Conclusions and policy implications
- Evidence indicates opportunistic political business cycles in Papua New Guinea consistent with rational opportunistic models (Rogoff and Sibert, 1988; Rogoff, 1990):
  - Incumbent governments manipulate fiscal instruments pre-election—mainly increased development spending and overall primary expenditure—followed by post-election retrenchment.
  - Election-year spending is financed in part through domestic borrowing (increases in net claims on government).
- Broader implication:
  - The political-business-cycle pressures (pre-election expansion and post-election retrenchment financed via domestic borrowing) may be incompatible with ongoing economic and political reform objectives, including long-term fiscal sustainability.

*Source: Fund staff estimates as presented in the PDF chapter _wp07219 - Section V details the paper’s conclusion.*

### REFERENCES

### _wp07219 - REFERENCES

### References

- Akhmedov, Akhmed and Ekaterina Zhuravskaya, 2004. “Opportunistic Political Cycles: Test in a Young Democracy Setting,” Quarterly Journal of Economics, Vol.119, pp.1301–38.
- Alesina, Alberto and Jeffrey Sachs, 1988. “Political Parties and Business Cycle in the United States, 1948–1984,” Journal of Money, Credit, and Banking, Vol. 20, pp. 63–82.
- Alesina, Alberto, Nouriel Roubini and Gerald Cohen, 1997. Political Cycles and the Macroeconomy, (MIT Press, Cambridge, Mass.).
- Ames, Barry, 1987. Political Survival: Politicians and Public Policy in Latin America, (UCB Press, Berkeley, Calif.).
- Block, Steven, 2001. “Elections, Electoral Competitiveness, and Political Budget Cycles in Developing Countries,” CID Working Paper No. 78, Harvard University.
- Block, Steven, 2002. “Political Business Cycles, Democratization, and Economic Reform: The Case of Africa,” Journal of Development Economics, Vol. 67, pp.205–228.
- Drazen, Allan, 2001. “The Political Business Cycle After 25 Years,” NBER Macroeconomics Annual 2000, (MIT Press, Cambridge, Mass.).
- Frey, Bruno and Friedrich Schneider, 1978. “A Politico-Economic Model of the United Kingdom,” Economic Journal, Vol. 88, pp. 243–253.
- Gonzalez, Maria, 2002. “Do Changes in Democracy Affect the Political Budget Cycle? Evidence from Mexico,” Review of Development Economics, Vol. 6, pp. 204–24.
- Hibbs, Douglas, 1977. “Political Parties and Macroeconomic Policy,” American Political Science Review, Vol. 71, pp. 1467–87.
- Khemani, Stuti, 2004. “Political Cycles in a Developing Economy: Effect of Elections in the Indian States,” Journal of Development Economics Vol. 73, pp. 125–54.
- Lijphart, Arend, 1999. Patterns of Democracy: Government Forms and Performance in 36 Countries. (Yale University Press, New Haven, Conn.).
- Lindbeck, Assar, 1976. “Stabilization Policies in Open Economies with Endogenous Politicians,” American Economic Review Papers and Proceedings, Vol. 66, pp. 1–19.
- 
- - 16 -
- Moyo, Dambisa, 1999. “The Determinants of Public Savings in Developing Countries,” Working Paper, Oxford University.
- Nordhaus, William., 1975. “The Political Business Cycle,” Review of Economic Studies, Vol. 42, pp. 169–90.
- Okole, Henry, 2004. “Westminster Practices in Papua New Guinea: Governance in a Melanesian State,” Paper presented at the Political Culture, Representation, and Electoral Systems Conference, Port Vila, Vanuatu. July 2004.
- Okole, Henry, 2005. “Papua New Guinea’s Brand of Westminster: Democratic Traditions Overlaying Melanesian Cultures,” Westminster Legacies: Democracy and Responsible Government in Asia, Australasia, and the Pacific, Haig Patapan, John Wanna, and Patrick Weller, eds. (UNSW Press, Sydney).
- Persson, Torsten, Gerard Roland and Guido Tabellini, 2004. “How Do Electoral Rules Shape Party Structures, Government Coalitions, and Economic Policies,” CEPR Discussion Paper No. 4226.
- Persson, Torsten and Guido Tabellini, 2003. “Do Electoral Cycles Differ Across Political Systems?” Working Paper 232, IGIER, University of Bocconi.
- Reilly, Ben, 2000. “Democracy, Ethnic Fragmentation, and Internal Conflict: Confused Theories, Faulty Data, and the ‘Crucial Case’ of Papua New Guinea,” International Security, Vol. 25, pp.162–85.
- Rogoff, Kenneth, 1990.“Equilibrium Political Budget Cycles,” American Economic Review, Vol. 80, pp. 21–36.
- Rogoff, Kenneth and Anne Sibert, 1988. “Elections and Macroeconomic Policy Cycles,” Review of Economic Studies, Vol. 55, pp.1–16.
- Shi, Min and Jakob Svensson, 2000. “Political Business Cycles in Developed and Developing Countries,” Development Research Group, (World Bank, Washington D.C.).

*Source: _wp07219 - REFERENCES (source PDF content provided).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2007/_wp07219.pdf_