Fiscal Transparency, Measurement and Determinants: Evidence from 27 Developing Countries

Abstract

Fiscal transparency has been consistently identified as a key feature of efficient fiscal policy and a prerequisite for good public governance. However, measuring fiscal transparency remains an empirical challenge, and extant literature on developing countries is still sparse. To that end, this paper examines the determinants of fiscal transparency in developing countries. We add to the existing literature by proposing a new replicable index of fiscal transparency that is consistent with the definition provided by the International Monetary Fund (IMF) and the World Bank. Additional determinants of fiscal transparency, which are exclusively relevant in the study of developing countries, are also examined. In particular, we introduce such factors as natural resources, openness of the economy, the literacy rate of the population, and the quality of institutions. Because of possible endogeneity arising from interdependence among some variables, two-stage least squares (2SLS) is used to ensure that the estimators are consistent. As a robustness check, the same estimation procedure was replicated by replacing our index of fiscal transparency with respectively the index of Andreula et al. (2009) and the Open Budget Index, both of which use a significant similar number of developing countries of our selected sample. The results provide additional credence to our suggested procedure. The paper found that the level of natural resources and the openness of the capital account negatively affect fiscal transparency. However, the quality of institutions and literacy were found to positively affect fiscal transparency. The findings of this paper provide an explanation of why, after a decade of fiscal transparency programs, many developing countries are still lagging behind, thereby losing the potential benefits mentioned in the literature. These findings could help guide policies directed at improving fiscal transparency in the case of developing countries.