Political Business Cycles and Macroeconomic Performance in the East African Community

Abstract

Despite the economic policies employed in the East African Community (EAC) countries, their public debt, fiscal deficits, and external balance accounts are deteriorating. Budget deficit excluding grants is over 5%, overall inflation over 5%, GDP annual growth rate lower than 7% and in some of the countries public debt is almost surpassing the set threshold. This is contrary to the set development goals as defined in the EAC development strategies and vision 2050. Leading up to and during an election, there is often an increase in public spending and budget deficits, followed by a subsequent decline. The question is whether East African countries exhibit this trend. Utilizing yearly panel data for the period 2000-2021, the study examined the prevalence of political business cycles and their effect on macroeconomic variables in the East African Community. The period marks both single-party political dispensation and competitive politics of the multi-party era in these countries. The data was sourced from various databases, including the World Bank's World Governance Indicators, the African Development Bank's socioeconomic database, World Development Indicators, the African Elections Database (AED), the International Monetary Fund's International Financial Statistics, and the East African Community Facts and Figures (2019). The analytical technique involved use of Pooled Mean Group, Differenced GMM, and System GMM estimation approaches. The findings demonstrated that political business cycles exist both at the level of EAC as a block, and in individual countries. The pre-polls election and election years were found to have high fiscal deficits, while years following an election did not. Election years exhibit lower output growth and higher inflation rate attributable to politically driven budget deficits. Therefore, there is need for governments in the EAC to adopt strict fiscal management policies including fiscal rules, fiscal consolidation, and fiscal discipline in budgeting around election periods for macroeconomic stability. Moreover, it is crucial for EAC governments to adopt strict monetary policy reforms to stabilize prices. There is also need for increased voter education programs by election bodies as well as civil society to reduce information asymmetry between voters and politicians in an effort to minimize manipulation of budgets and political business cycles.