economy factors can affect fiscal procyclicality (Tornell and Lane 1999). As the intensity of such fiscal competition increases in good times, the rise in government spending could be greater than the windfall gains in revenues, resulting in procyclical fiscal expansion. The more claimants there are (that is, the more dispersed the power), the higher government spending may tend to be in good times.

**_Quality of institutions_** _._ The quality of institutions plays an important role in the ability of countries to conduct countercyclical fiscal policy.<sup>10</sup> Indeed, institutional factors, such as law and order, have been found to play a larger role than financial variables, such as financial openness and domestic credit to the private sector, in explaining differences in fiscal cyclicality between advanced and developing economies (Calderón and Schmidt-Hebbel 2008). Government stability and law and order can help reduce fiscal procyclicality by shrinking government discretion and extending the horizon of policy decision-making.

To analyze the linkages between fiscal cyclicality and institutional quality, five country-specific indicators of institutional quality from the PRS Group database are used: political risk, quality of bureaucracy, control of corruption, government stability, and law and order (Table 2.A). The association between procyclicality and the presence of fiscal rules is also examined here because these rules are a significant part of the fiscal institutions in many commodity-exporting countries.

The results indicate that in commodity exporters that rank higher on political risk, fiscal policies have tended to be more procyclical, with a correlation of 0.49 between the cyclical component of real GDP and real government spending, compared with a correlation of 0.28 for countries with lower political risk. The difference between the average correlations for the two country groups is statistically significant (Figure 4.A). Part of the explanation could be that governments in countries with higher political risk may be more focused on short-term outcomes to stay in power.

Likewise, commodity-exporting countries with lower-quality bureaucracy have often implemented more procyclical fiscal policies than those with higher-quality bureaucracies, although the difference between the two country groups is not statistically significant (Figure 4.B). Better bureaucracy may be expected to allow for better, rules-based, policy management and to limit unproductive discretionary spending.

Commodity exporters with better control of corruption have demonstrated lower fiscal procyclicality than those with weaker corruption control, and the difference between the procyclicality measures for the two country groups is statistically significant (Figure 4.C). Weaker control of corruption makes it easier to capture rents. Likewise, countries with more government stability have tended to demonstrate less fiscal procyclicality than those with less government stability—although the difference in cyclicality measures is not statistically significant (Figure 4.D). A more stable government allows for the formulation of fiscal policy with a longer horizon, weakening the incentive for procyclical policy. Better law and order has been associated with less procyclical fiscal policy (Figure 4.E). The difference between the procyclicality measures for countries ranked lower in the law-and-order index and countries ranked higher is statistically significant.

<mark>Many commodity exporters have enacted fiscal rules, often in conjunction with stabilization funds—which essentially put aside revenue in good times that can be tapped in bad times. Fiscal rules may signal the intent of the government to dampen, if not eliminate, fiscal procyclicality as well as to safeguard longterm fiscal sustainability. Over the past 40 years, t</mark> he presence of fiscal rules has been associated with lower procyclicality across the full sample of countries, although results are less clear for commodity exporters (Figure 4.F). Increased use of fiscal rules has not shielded EMDEs or commodity exporters from fiscal procyclicality, as evidenced by the continued procyclicality of fiscal policies in these countries after

> 10 See, for example, Calderón, Duncan, and Schmidt-Hebbel (2016); Carneiro and Garrido (2016); Céspedes and Velasco (2014); Frankel, Végh, and Vuletin (2013); and Jalles et al. (2023).

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