Counter-cyclical financing can be used to smooth out unanticipated revenue shocks. Countries tend to do this better when they have high per-capita incomes. Low capacity countries, measured by small expenditure shares for their civil service, small populations, or very young populations tend to underspend in the face of unanticipated revenue gains.

**Table 14—Summary of Preferred Regression Equations**

||**Preferred Eq **|**uation 9c**|**Preferred Eq **|**uation 10c**|**Preferred Equ**|**ation 11c**|
|---|---|---|---|---|---|---|
||**Coeff.**|**Prob.**|**Coeff.**|**Prob.**|**Coeff.**|**Prob.**|
|**Constant**|15.602|**0.000**|..|**..**|25.978|**0.001**|
|**Expenditure Deviations**,_ln_|_e_||..|**..**|..|**..**|-6.062|**0.000**|
|**Debt Service Burden**|||||||
|_PCT_INT_|-0.119|**0.076**|0.135|**0.052**|..|**..**|
|_rpos _∙_Z(%INT)_|..|**..**|0.564|**0.000**|..|**..**|
|**Common Pool**|||||||
|H02_DRO_|..|**..**|0.642|**0.000**|..|**..**|
|_H09 lnPOP_|..|**..**|..|**..**|..|**..**|
|_H04 POLITY_|..|**..**|0.219|**0.072**|..|**..**|
|H01_FCTN_ETHN_|..|**..**|..|**..**|-0.202|**0.000**|
|**Political Institutions**|||||||
|H06_Rp_∙ Z(_SYSTEM_)|43.099|**0.000**|..|**..**|..|**..**|
|H05_MPP_|..|**..**|..|**..**|0.138|**0.010**|
|**PFM Capacity**|||||||
|H08_Rp_∙ Z(_PEFA_)|90.765|**0.000**|..|**..**|..|**..**|
|H08_r_∙_Z(PEFA)_|..|**..**|1.241|**0.000**|..|**..**|
|H02_DRY_|-0.150|**0.000**|-0.133|**0.000**|..|**..**|
|H09_r_∙_Z(lnPOP)_|..|**..**|-1.431|**0.000**|..|**..**|
|H03_r_∙_Z(PCT_CSE)_|..|**..**|..|**..**|..|**..**|
|H08_PEFA_|..|**..**|..|**..**|8.471|**0.002**|
|Burundi 2005|..|**..**|..|**..**|49.233|**0.000**|
|Georgia 2004|19.441|**0.000**|..|**..**|..|**..**|
|Ghana 2006|-44.308|**0.000**|..|**..**|..|**..**|
|Ghana 2008|22.851|**0.003**|25.782|**0.001**|..|**..**|
|India 2007/08|..|**..**|37.554|**0.000**|..|**..**|
|Pakistan 2007/08|..|**..**|23.563|**0.003**|..|**..**|
|Peru 2006|36.004|**0.000**|..|**..**|..|**..**|
|Solomon Isl. 2004|35.226|**0.000**|..|**..**|..|**..**|
|Uganda 2006/07|..|**..**|..|**..**|51.891|**0.000**|
|<br>Zambia 2003|..|**..**|25.721|**0.001**|..|**..**|
|Observations|144||144||144||
|R-squared|0.712||0.581||0.505||
|Adjusted R-squared|0.692||0.550||0.484||
|<br>S.E. of regression|7.607||7.358||12.769||
|<br>Sum squared resid|7,755||7,200||22,336||
|<br>Log likelihood|<br>-491||<br>-486||<br>-567||
|F-statistic|36.749|**0.000**|..|**..**|23.323|**0.000**|
|Normal error term 1/|0.438||0.834||0.518||
|Heteroskedasticity 2/|0.624||0.971||0.636||
|Omitted Variables 3/|0.571||0.531||0.426||

1. Jarque-Bera probability.

2. White n∙R<sup>2</sup> probability (without cross terms).

3. Ramsey RESET F-statistic probability (1 term).

There is a positive role for PFM capacity measured by the PEFA index in compositional accuracy. While this is good news, the econometric procedures outlined in Sections VI.B and VI.C above rejected any role for the PEFA index in minimizing aggregate revenue and expenditure deviations, favoring instead _lnGNIPC_ . Yet, it is obvious that wealthier governments can procure better capacity if they want to – and it seems they often do. de Renzio (2007) found that PFM capacity, as measured by the PEFA index, is highly correlated with the natural log of income per capita.<sup>46</sup> This

> 46 In the author’s recreation of de Renzio’s results, income per-capita had a t-statistic of 7.5.  The next highest t-statistic was 4.2 for population.

38