Without adequate economic stabilizers, there would be consequences in the policies deployed in economic cycles. Inside lags from the delay of government fiscal intervention (long periods of legislation), and outside lags from the delay of government monetary invention -- typically because of the long economic integration. These unprecedented consequences would make it even harder for commodity exporters in bad times. This shows how political infrastructure plays a huge role in this continuous issue.Â
When it rains, it pours
Inevitably, commodity exporters' inability to manage abundance in good times, caused by factors like political and capital market infrastructure, explains why it is difficult to deploy countercyclical fiscal policy even until now. When it rains, it pours. When one negative thing happens, a worse effect follows. When commodity prices fall, governments -- that have fallen into the temptation of spending out of windfalls -- will ultimately suffer as it increases their inability to borrow during bad times. This fiscal procyclical trap amplifies an already volatile business cycle of commodity exporters. Governments should be more aware of the fluctuating economic cycles and increase the quality of political institutions to prevent structural crises. Integrity of decision makers in developing countries ought to be mended if this were to change. As Friedman once said, "Governments never learn; only people learn."
Michael Abimanyu Kaeng | Undergraduate Economics Student at the University of Indonesia | Staff of Economic Studies Division at Kanopi FEB UI
Bibliography:
ABDUROHMAN, & RESOSUDARMO, B. P. (2017). The behavior of fiscal policy in Indonesia in response to economic cycles. The Singapore Economic Review, 62(02), 377-401. https://doi.org/10.1142/s0217590816500041
Arroyo Marioli, F., & Vegh, C. A. (2023). Fiscal Procyclicality in commodity exporting countries: How much does it pour and why? World Bank Policy Research Working Papers. https://doi.org/10.1596/1813-9450-10428
Bauducco, S., & Caprioli, F. (2014). Optimal fiscal policy in a small open economy with limited commitment. Journal of International Economics, 93(2), 302-315. https://doi.org/10.1016/j.jinteco.2014.04.001
Cariolle, J. (2017). The voracity and scarcity effects of export shocks on bribery. SSRN Electronic Journal, fondation pour les tudes et recherches sur le dveloppement international . https://doi.org/10.2139/ssrn.3032914
Cuddington, J. (1989). Commodity export booms in developing countries. The World Bank Research Observer, 4(2), 143-165. https://doi.org/10.1093/wbro/4.2.143
Lane, P. R. (2003). The cyclical behaviour of fiscal policy: Evidence from the OECD. Journal of Public Economics, 87(12), 2661-2675. https://doi.org/10.1016/s0047-2727(02)00075-0
