📈 economics

Evidence of the Existence and Significance of Political Business Cycles in South Africa

Using a quantile regression framework, this study finds that South Africa exhibits a fragmented political business cycle where fiscal authorities pursue expansionary policies during elections while monetary authorities adopt contractionary measures to maintain stability, with both effects being moderate, heterogeneous, and significantly constrained by institutional quality and government effectiveness.

Original authors: Khwazi Magubane

Published 2026-06-29

📖 4 min read☕ Coffee break read

CC BY 4.0

Original authors: Khwazi Magubane

Original paper licensed under CC BY 4.0 (https://creativecommons.org/licenses/by/4.0/). ✨ This is an AI-generated explanation of the paper below. It is not written or endorsed by the authors. For technical accuracy, refer to the original paper. Read full disclaimer

Imagine the South African economy as a large, busy household. This household has two main managers: the Budget Manager (the government's fiscal team) and the Money Guard (the central bank).

This research paper asks a simple question: Does the household change its spending habits just because an election is coming up? In political science, this is called a "Political Business Cycle." It's the idea that politicians might try to make the economy look good right before voters go to the polls to get re-elected, even if it causes problems later.

Here is what the study found, explained through simple analogies:

1. The Two Managers Don't Always Agree

The most surprising finding is that these two managers are pulling in opposite directions during election season. It's like a tug-of-war where one side is trying to loosen the belt, and the other is trying to tighten it.

The Budget Manager (Fiscal Policy): This team acts like a generous host at a party. As the election (the party) approaches, they start spending more money. They run up bigger "credit card bills" (budget deficits) to fund projects and programs that might make voters happy. They are trying to create a temporary boom, similar to a left-leaning party that prioritizes jobs and spending.
The Money Guard (Monetary Policy): This team acts like a strict safety inspector. While the Budget Manager is loosening the belt, the Money Guard is actually tightening it. They are reducing the amount of cash flowing into the economy. They aren't trying to make the economy look bad; they are trying to prevent the "party" from getting too wild and causing inflation (prices going up too fast). They are prioritizing stability and keeping investors calm, similar to a right-leaning party that prioritizes price stability.

The Result: Instead of a coordinated "party mode" where everyone spends freely, South Africa has a split personality during elections. One side wants to stimulate the economy, while the other side tries to cool it down to keep prices stable.

2. The "Party" Has Mixed Results

Because these two managers are fighting each other, the results for the average citizen (the household members) are a bit confusing:

Inflation (Prices): Because the Budget Manager is spending so much, prices do tend to go up a bit around election time. It's like when a host buys too much food for a party; the cost of groceries rises.
Unemployment (Jobs): You might think that spending more money would create more jobs. However, because the Money Guard is simultaneously restricting the flow of cash to stop inflation, the job market doesn't get the boost it needs. In fact, the study found that unemployment often stays high or even rises slightly during these periods. The "safety inspector" is essentially canceling out the "generous host's" attempts to create jobs.

3. The Rules of the House Matter

The study also looked at how "well-behaved" the household is. They found that when the household has strong rules (high Government Effectiveness and Democratic Quality):

The managers are less likely to go crazy with spending.
Unemployment tends to be lower.
The economy stays more disciplined.

Think of it like a household with a strict budget committee. Even if the host wants to throw a huge party, the committee steps in to ensure the bills don't get out of control.

4. It's Not the Same for Every Situation

The researchers used a special tool (called "Quantile Regression") to see if this happens when the economy is doing well, doing poorly, or just average. They found that the behavior changes depending on the situation:

If the household is already in deep debt, the Budget Manager is less likely to spend even more, because the "market" (the bank) would get scared.
If the economy is already struggling with high prices, the Money Guard gets even stricter to try to fix it.

The Bottom Line

The paper concludes that yes, political business cycles exist in South Africa, but they aren't the simple "fake a boom before the election" story we often hear about.

Instead, it's a complicated dance. The government tries to spend its way to victory, but the independent central bank steps in to say, "Whoa, slow down, we can't let prices spiral." This creates a fragmented system where the two sides of the government are working against each other, often leaving the average citizen with higher prices but not necessarily more jobs.

The study suggests that for the economy to truly improve, these two managers need to stop pulling the rope in opposite directions and start working together, rather than just reacting to the election calendar.

Technical Summary: Evidence of the Existence and Significance of Political Business Cycles in South Africa

Problem Statement and Research Gap
This study investigates the existence and significance of political business cycles (PBCs) within the South African economy, addressing critical gaps in the existing literature. While extensive research exists on PBCs in advanced economies, evidence regarding developing and African contexts remains limited and often relies on pooled cross-country estimations that obscure country-specific institutional dynamics. Furthermore, conventional empirical approaches predominantly utilize Ordinary Least Squares (OLS) and mean-based estimations, which assume homogeneous relationships across the conditional distribution of macroeconomic variables. This assumption fails to capture the potential heterogeneity and nonlinearity of political incentives, particularly in economies characterized by structural constraints, varying fiscal spaces, and evolving democratic institutions. The study posits that the effects of electoral cycles on macroeconomic policy and outcomes may vary significantly depending on the prevailing economic regime (e.g., low vs. high deficits, low vs. high inflation), necessitating a distribution-sensitive analytical framework.

Methodology
The study employs a quantile regression framework to analyze quarterly data spanning from 1960Q1 to 2025Q4 (with the primary analysis covering the period 1993Q1–2025Q4 in the results section). Unlike traditional mean-based estimators, quantile regression allows for the examination of how explanatory variables influence different points of the conditional distribution of the dependent variables, thereby capturing heterogeneous and state-dependent effects.

The empirical specification estimates four single-equation models where the dependent variables ( $V_t$ ) represent key macroeconomic indicators:

Budget Deficit (BD): Ratio of budget deficit to GDP (fiscal policy instrument).
Broad Money Supply (M3): Ratio of money supply to GDP (monetary policy instrument).
Inflation (INF): Inflation rate (macroeconomic outcome).
Unemployment (UE): Unemployment rate (macroeconomic outcome).

The core explanatory variables include:

Election Dummies: $ELEC_t$ (dummy for election quarters) and $PREELEC_t$ (dummy for preelection quarters).
Institutional Quality: The Electoral Democracy Index (EDI) and the Government Effectiveness (GE) index.
Control Variables: Log of real GDP ( $y_t$ ) and interaction terms between policy instruments and election dummies.

The study utilizes the least absolute deviation estimator to solve the quantile regression optimization problem, minimizing the weighted sum of absolute deviations. This approach is robust to outliers and non-normal error distributions, offering a more nuanced view of how political incentives operate under different macroeconomic conditions (e.g., high vs. low deficit regimes).

Key Contributions

Contextual Extension: The study extends PBC literature to an individual African economy, South Africa, providing empirical evidence in a setting characterized by a relatively advanced financial system, an independent inflation-targeting central bank, and a dominant-party system undergoing fragmentation.
Methodological Innovation: By applying quantile regression, the study moves beyond average-effect estimations to reveal how electoral dynamics influence macroeconomic variables across the entire conditional distribution, uncovering nonlinearities and regime-specific behaviors that OLS models would mask.
Contemporary Data: The analysis utilizes updated data reflecting contemporary political and economic conditions, including the post-1994 democratic era, addressing the temporal limitations of earlier studies that relied on historical datasets from the 1960s to early 2000s.

Results and Findings
The empirical results provide evidence of the existence of political business cycles in South Africa, though the structure is characterized by institutional divergence rather than coordinated expansion.

Fiscal Policy (Budget Deficit): The analysis reveals a moderate fiscal political business cycle. Election and preelection periods are associated with higher budget deficits, with the effect being more pronounced at lower quantiles of the deficit distribution. This suggests that fiscal authorities exhibit expansionary tendencies during electoral periods, consistent with opportunistic behavior and left-leaning developmental objectives. However, this expansion is constrained when deficits are already elevated, indicating market discipline or fiscal sustainability concerns.
Monetary Policy (Money Supply): Contrary to traditional opportunistic models predicting monetary expansion before elections, the study finds a consistently negative relationship between election periods and money supply growth (M3). This contractionary stance is stronger at higher quantiles of the money supply distribution. The authors interpret this not as the absence of a political business cycle, but as a "partisan" or institutional cycle where the central bank prioritizes price stability, inflation control, and investor confidence over short-term electoral stimulation.
Inflation and Unemployment:
- Inflation: Election periods are associated with higher inflation, particularly at the upper tail of the distribution. This suggests that fiscal expansion contributes to inflationary pressures, despite the central bank's contractionary stance.
- Unemployment: The results show a complex dynamic. While preelection periods show a modest decline in unemployment (consistent with fiscal stimulus), the overall election period is associated with higher unemployment. This is attributed to the central bank's restrictive monetary policy, which may dampen employment growth in an effort to curb inflation.
Institutional Constraints: Stronger democratic institutions (higher EDI) and government effectiveness are associated with improved macroeconomic discipline, lower budget deficits at high quantiles, and reduced unemployment. This indicates that institutional quality acts as a constraint on opportunistic manipulation.

Significance and Claims
The paper concludes that political business cycles in South Africa are institutionally constrained, state-dependent, and shaped by competing macroeconomic ideologies. The study challenges the traditional view of a unified PBC where both fiscal and monetary authorities expand simultaneously. Instead, it identifies a fragmented political business cycle structure:

Fiscal authorities pursue expansionary, developmental objectives aligned with left-leaning preferences, leading to higher deficits and inflationary pressures during elections.
Monetary authorities pursue conservative, anti-inflationary objectives aligned with right-leaning preferences, leading to contractionary policies to maintain credibility and stability.

The significance of these findings lies in demonstrating that PBCs in emerging democracies with independent central banks may manifest as a contest between institutional mandates rather than a coordinated manipulation of the economy. The study argues that this fragmentation implies that central bank independence does not equate to political neutrality; rather, the central bank's conservative stance during elections constitutes a form of political-economic intervention favoring stability over short-term employment gains. Consequently, the magnitude of PBC effects in South Africa is moderate and heterogeneous, varying significantly across different macroeconomic regimes and institutional contexts.

1. The Two Managers Don't Always Agree

2. The "Party" Has Mixed Results

3. The Rules of the House Matter

4. It's Not the Same for Every Situation

The Bottom Line

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