In the same case of the 1970 coffee boom, Colombia and Cameroon experienced a different outcome from the other 3 developing countries mentioned. Â The 2 countries managed to avoid large increases in fiscal revenues and government expenditures, hence lifting their feet just in time from long term structural problems. Â Colombia and Cameroon won at one game to escape this fiscal crisis as a commodity producer: the game of managing abundance. Policymakers and economic analysts in commodity dependent countries frequently have serious concerns about this notion of managing abundance (World Bank, 1989).Â
Managing abundance is obviously the mirror image of fiscal cyclicality. A nation that successfully avoids spending more of its resources than it gains will be pursuing a countercyclical fiscal policy, and vice versa. Cameroon's government spending associated with the coffee boom was modest, but whether this policy moderates the spending effect of the boom depends on how the government uses the additional resources. In the case of Cameroon, government spending was restrained in order to generate significant public savings. A big portion of the windfall was then invested in domestic capital production, reducing the need for external borrowing in bad times -- which is key to explain why Cameroon survived while others didn't.
Frictions in international capital market
One of the most well-known macroeconomic elaborations of procyclicality is to assess the different imperfections that may cause inability for commodity exporters to borrow during difficult times. The Lack of access to foreign credit markets during recessions will give fiscal policy a procyclical bias since the fiscal authority will be forced to cut spending or raise taxes in order to finance a primary deficit.
The macroeconomic application of capital controls over the business cycle is a policy-induced friction. As well known, the IMF supports adopting capital controls as a last resort. If they are used in good economic times, capital controls are most likely to be used in bad economic times as well. Binding capital controls in difficult times will inevitably make it difficult for the fiscal authority to maintain consistent tax rates or government spending over the course of the business cycle, which will result in procyclical fiscal policy.
Political economy factors: Closer than we think
Another key factor to explain this phenomenon is by taking account of political economic frictions in commodity dependent countries. Certain fiscal claimants (ministries, provinces, unions, etc) strive to seize resources in good times without seeing its impacts on other claimants, known as the voracity effect. This voracity effect, combined with the institutional problems surrounding developing countries, brings massive impact on its fiscal cyclicality.
Looking at Indonesia's situation, it is increasingly difficult to deal with its weakening budget executions. This is explained by seeing the large gap between the planned budget and the realized budget in Indonesia in Figure 3. A poor ability to carry out the budget will make fiscal policy less effective at supporting aggregate demand. Â If we examine closer, the figure also reflects a weak budget financing capacity, Â especially during recessionary times like the late 1990s (the AFC) and late 2000s (the GFC).Â
This clearly shows how difficult it is for developing countries like Indonesia to borrow during difficult times. Indonesia experiences liquidity problems, which make it more difficult for the government to expand the budget during economic downturns. According to an IMF report (IMF, 2009), during the GFC in late 2008, Indonesia's borrowing costs, as measured by the Emerging Market Bond Index (EMBI) and Credit Default Swap (CDS), spiked to nearly 1,200 basis points (bps), significantly higher than those of its peers Malaysia, the Philippines, and Thailand. The Indonesian government is discouraged from using the international financial market to finance fiscal expansion during downturns due to higher borrowing costs.
Essentially, the cyclical components (automatic stabilizers) of developing countries' budget structure is very limited compared to many advanced economies. The absence of transfer schemes in response to changing economic cycles contributes to this factor. Earned Income Tax Credit (EITC), a refundable tax credit for low-wage workers in recessionary times, is one of these transfer schemes deployed by developed countries as a fiscal stabilization tool. This kind of scheme is rarely seen in developing countries, definitely not in Indonesia. Indeed, there was a cash transfer program (Bantuan Langsung Tunai) in Indonesia during the COVID-19 pandemic that was similar in the sense that it subsidizes wages for workers that were laid off. However, it was a transitory and short-term initiative with the primary goal of compensating civil servants that were affected, which was too little too late to deal with the fluctuating economic cycle -- also ultimately revealed to be corrupted.
