# **3.1.2 Patterns of Cyclicality**

According to Keynesian principles, counter-cyclical fiscal policy provides a means of smoothing out trends in economic fluctuations over time. Most studies in the literature support the economic cyclicality of fiscal policies, but the patterns differ according to a country’s stage of development. Government spending has typically been countercyclical in industrial countries and procyclical in developing economies (e.g. Alesina et al, 2008; Gavin and Perotti, 1997; Kaminsky et al., 2004). One strand of the literature relates this phenomenon to the lack of access to international credit markets (Calderón and Schmidt-Hebbel, 2008) by developing countries (especially during recessions) that might constrain their ability to spend during economic downturns. While another strand of the literature attributes this to restrictions on access to domestic markets (Caballero and Khrisnamurthy, 2004) and institutional and political structures (Alesina et al., 2008; Lane, 2003; Talvi & Végh, 2005). In addition, empirical studies indicate the differences in fiscal cyclicality between regions (Gavin and Perotti, 1997), between countries in different income groups (Ilzetzki & Végh, 2008; Kaminsky et al, 2004; Talvi & Végh, 2005), and across time (Fatás & Mihov, 2009; Thornton, 2008).

Evidence on the cyclicality of infrastructure spending specifically has been thin due to data limitations. The purpose of this section is to fill this gap with recourse to the BOOST database, which provides data on public investment on infrastructure in the form of capital formation by central and general government. One important limitation of the database for this type of analysis is that it only covers a 13-year time period, which is relatively short for the study of economic cycles. The cyclicality of infrastructure spending patterns is first explored visually, with more sophisticated statistical analysis subsequently applied to examine the evidence on cyclicality. In particular, this shifts the primary focus from the relationship between the business cycle and associated fiscal responses to a dynamic relationship between output growth and government expenditures on infrastructure, which helps to address concerns about endogeneity.

To begin with, the bivariate correlation coefficient is reported as a simple way of capturing how government expenditure on infrastructure per capita responds to changes in GDP per capita, without delving into underlying drivers. Figure 8 visually illustrates the cyclical movements between total spending on transport and energy per capita, and GDP in per capita terms for both developing and high-income countries. The visual evidence clearly suggests a countercyclical pattern for high-income countries, with infrastructure expenditure (blue) increasing relative to the expected trend when economic output (red) declines. On the other hand, GDP and infrastructure expenditure cycles seem to follow a procyclical pattern in developing countries. Procyclicality is particularly accentuated following the Global Financial Crisis of 2008–10, perhaps reflecting the depth of the crisis.

The nature of this relationship between GDP and infrastructure spending also varies across developing regions, but emerges as procyclical in most cases (Figure 9). Dependence of natural resources in many countries in these regions limits economic diversification and hence the ability to run countercyclical policies. Oil price fluctuations and volatility seem to lead to particularly large changes in infrastructure spending in oil-dependent MENA countries. However, this impact is not immediate (exhibiting a one to two year lag). For instance, world crude oil prices declined from USD 97.2 per barrel in 2008 to USD 61.5 10