How to measure compliance?

Following the research of Ulloa-Suarez, C., & Valencia, O. (2022), the compliance rate by rule (r) and by country (i) is defined as follows:

In this equation, ${\mathrm{<b><em>Compliant</em></b>}}_{\mathrm{<b><em>r,i</em></b>}}$ represents the total number of years a country (i) complied with rule (r), and nr,i stands for the total number of years the rule was in place in the country (excluding years when escape clauses were invoked).

To compute a country's compliance rate, we must consider the various rules it has implemented and the duration of each one. Therefore, a country's compliance rate is an averaged value, considering each rule's compliance rate over the period it was in place. We assume that the implementation periods of each rule are independent. Thus, the average compliance rate for each country (i) is defined as follows:

Here R represents the total number of fiscal rules that the country (i) has implemented.

Finally, the average compliance with fiscal rules in LAC countries is calculated by weighing each rule's compliance against its years in effect in each country.

What is the
Multidimensional Compliance Indicator (MCI)?

1. The Fiscal Resilience and Tax Efficiency dimension evaluates a country's ability to maintain financial stability, handle revenue fluctuations, and efficiently manage taxes. It considers three key aspects: the effectiveness of tax administration, the impact of revenue volatility (especially in commodities), and tax productivity. Higher scores in this category indicate superior financial management and tax efficiency.
2. The Optimal Resource Allocation dimension focuses on how well a country allocates resources, emphasizing expenditure efficiency, total expenditure, and spending (in)flexibility. It evaluates a country's ability to maximize resources, aiming for lower total expenditure and reduced spending inflexibilities. Higher scores in this category signify a more effective allocation of resources, which is critical for achieving an optimal balance in expenditure.
3. The Sustainable Debt Practices/ Debt Management dimension focuses on a country's approach to managing its debt. This category evaluates the country's commitment to maintaining a sustainable and manageable debt burden. Higher scores in this category indicate prudent debt management practices that safeguard the country's financial stability and fiscal health.
4. The Macroeconomic Stability and Growth dimension captures variations in the economic landscape that can affect compliance with fiscal rules, helping identify whether (non)compliance results from transitory or permanent factors. This assessment considers multiple factors, including economic growth, inflation, the output gap, and financial market reactions. Higher scores in this category indicate a more stable and growth-oriented macroeconomic environment.
5. The Risk Management and Economic Stability dimension assesses a country's capacity to handle various risks and maintain economic stability. This category considers factors such as credit ratings, the EMBI, economic crises, and debt spikes to evaluate a country's preparedness to manage risks while sustaining economic stability. Higher scores in this category indicate better risk management practices and a more resilient economic environment.
6. The Institutional Governance dimension evaluates the quality and effectiveness of a country's institutions, including government quality, legislative elections, and the degree of autonomy granted to sub-national governments. This category provides insights into the governance structure and institutional autonomy within the nation. Higher scores in this category indicate more robust institutional governance and greater autonomy for sub-national entities.
7. The Optimized Fiscal Rule Design dimension focuses on the positive aspects of how fiscal rules are structured to enhance compliance and effectiveness. This category focuses on various design characteristics, including the presence of a fiscal council, escape clauses, legal basis, monitoring and enforcement procedures, independent oversight, and the treatment of public investment in rule targets. Higher scores in this category indicate a well-crafted fiscal rule framework that promotes better fiscal rule compliance and overall fiscal health.
8. The Climate Change and Disaster Preparedness dimension evaluates a country's readiness to address the challenges of climate change and natural disasters. This category considers various indicators, including vulnerability and readiness assessments and data from sources like EM-DAT. It assesses a country's capacity to manage and recover from climate-related shocks and natural disasters while maintaining fiscal rule compliance. Higher scores in this category signify better preparedness to mitigate the impact of such events on fiscal health.