Educational Insights into the Political Business Cycles in Ghana: Empirical Overview from 1990-2020

Abstract

In view of the inability of incumbent governments to curb overspending in election years in the last three decades in Ghana and in the wake of COVID-19 pandemic in the 2020 elections where the government was determined to maintain some fiscal discipline but failed, there is a growing concern that excessive spending in election years could be counterproductive to the economic performance in the long and short runs. Going into election 2024 which is scheduled for December 07 in Ghana, this paper sets out to provide educational insights by ascertaining: (1) evidence of political business cycle in Ghana, and (2) the implications of loose monetary and fiscal choices in election years on economic performance within the context of Autoregression modeling framework and time series data from 1990-2020. One insight is that, the error correction results provide evidence of political business cycles driven by excessive spending which negatively affect the economy in the short-run. Another insight is that, Cointegration analysis points to loose fiscal and monetary habits in election years that do have negative long- and short- run implications for economic performance. In fact, results show that, holding other factors constant, 1 percent increase in budget deficits in election years significantly decreases the rate of GDP growth by 0.23 and 0.49 percent in the long- and short-runs respectively. Another finding is that, the growing national debt and exchange rate volatility have negative effects on economic performance. While, 1 percent increase in national debt driven by overspending in election years decreases the rate of GDP growth by 0.15 percent, 1 percent increase in the rate of cedi depreciation decreases the rate of GDP growth by 0.40 percent in the long run respectively, all things being equal.  Based on these insights, the paper therefore recommends strict adherence to fiscal responsibility law enacted in 2018 and other policies aimed at ensuring prudent fiscal and monetary decisions in election periods