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Abstract: The 1990s ushered the world not only into a democracy wave, following the collapse of the former Soviet Union, but also a wave of fiscal rules, where the number of countries adopting this fiscal regime steadily rose from only 10 in 1990 to reach 97 in 2009. Countries that depend on hydrocarbons tend to suffer from fiscal policies that are highly susceptible to energy price shocks. This provides incentives for implementing fiscal stabilization instruments in the form of ‘fiscal rules’. However, the resource-rich but largely democracy-deficit MENA region has been a fiscal rules-free region. Against this backdrop, this paper asks two fundamental questions: why has MENA chose not to adopt fiscal rules? And what role, if any, resources dependence and political institutions might have played in this outcome? We find that lack of democracy and weak systems of political checks and balances that characterize MENA countries appear to have outweighed the positive impacts of oil resources so that fiscal instability persists despite ample oil revenues. The nascent Arab ‘democracy spring’ might tip the scale in favor of the adoption of fiscal rules by emerging democratic governments in the region. However, stronger systems of political checks and balances are also needed and, unfortunately, not necessarily a certain outcome. A move toward inflation targeting regimes, as proposed for Tunisia and Egypt, might also provide additional impetus for adoption of fiscal rules as the evidence of Chile and other inflation targeters suggests.

Keywords: Fiscal regimes, fiscal stabilization, discrete-choice panel-data models
JEL Code: E61, E62, E63