Fiscal transparency and economic performance

Abstract

Recent research has shown a robust relation between institutions and the economic performance of countries. A less satisfactory conclusion, however, has been drawn on the link between measures of institutions quality and policy making tools. This paper is an initial attempt to present an institutions-related variable, fiscal transparency, which is connected with economic performance and also has a neat policy dimension. Although a measure of fiscal transparency can be regarded as an interesting alternative to other institutions measures in terms of its proxy potentiality, it can also be considered a direct measure of institutional quality. In this sense, Adam Smith’s development views provide a perspective where the absence of agents able to influence the justice paved the way to a “regular government”. This is precisely what fiscal transparency is about. By defining the scope and responsibilities of the government in a clear manner, making available the fiscal information for the population, openly preparing and executing the budget, and assuring the integrity of fiscal procedures, a transparent fiscal environment limits corruption and diversion and, therefore, facilitates development and the increase in living standards. This paper presents a new data set on fiscal transparency based on an IMF assessment of progress on the implementation of the Fiscal Transparency Code by 45 countries in the fiscal modules of Reports on Observance of Standards and Codes. Our empirical estimations show a strong link from fiscal transparency to per capita income. Standard steps on budget preparation and execution, and fiscal procedures are identified as a set of policy tools to improve the fiscal transparency of countries.