Political budget cycles and capture in transition economies

This paper presents a stylized theoretical framework of fiscal policymaking in transition in an attempt to bridge the gap between the literatures on political economy (PE) of transition and political business cycles (PBC). It is argued that post-Communist political liberalization has generated political business cycles, warranting the application of the PBC approach, which has surprisingly scarcely been the case in the voluminous academic work on transition. Peculiarities of a transition country setting, however, may have bred cycles different in nature from those observed and theorized in developed democracies, inviting the insights of the PE of transition camp. Marrying the two literatures in a state-centric model, therefore, electoral fiscal cycles are argued to emerge as a confluence of political opportunism of the incumbent on the one hand, and conflicting demand-side transition-induced pressures by voters and interest groups on the other. Model is tested on alternative samples of transition countries by use of dynamic panel estimation methods.