Front Matter

Editor(s):
Mario Monti
Published Date:
June 1989
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    FISCAL POLICY, ECONOMIC ADJUSTMENT, AND FINANCIAL MARKETS

    Edited by Mario Monti

    Papers presented at a seminar sponsored by the International Monetary Fund and Centro di Economia monetaria e finanziaria, Università Bocconi, held in Milan on January 28-30, 1988

    International Monetary Fund, Washington, D.C.

    Centro di Economia monetaria e finanziaria, Milan

    1989

    © 1989 International Monetary Fund

    Cover design by IMF Graphics Section

    Library of Congress Cataloging-in-Publication Data

    Fiscal policy, economic adjustment, and financial markets.

    Includes bibliographical references.

    ISBN 1-55775-118-8

    1. Fiscal policy. 2. Debts, Public. 3. Finance.

    I. Monti, Mario. II. International Monetary Fund.

    HJ236.F556 1989 336.3 89-19934

    Price: US$16.00

    Address orders to:

    International Monetary Fund, Publication Services

    700 19th Street, N.W., Washington, D.C. 20431, USA

    Telephone: (202) 623-7430

    Telefax: (202)623-7491

    Cable: Interfund

    The following symbols have been used throughout this book:

    … to indicate that data are not available;

    — to indicate that the figure is zero or less than half the digit shown, or that the item does not exist;

    - between years or months (e.g., 1988–89 or January–June) to indicate the years or months covered, including the beginning and ending years or months;

    / between years (e.g., 1987/88) to indicate a crop or fiscal (financial) year.

    “Billion” means a thousand million.

    Details may not add to totals shown because of rounding.

    Foreword

    As the papers presented here make clear, the three topics that served as the theme for this seminar—fiscal policy, economic adjustment, and financial markets—cannot be considered only in isolation; an understanding of the relationships between them, leading to an informed approach to policy coordination, is essential not only in the conduct of domestic economic policy, but in the coordination of international economic policy. This volume, which contains the proceedings of a seminar held in Milan in January 1988, includes papers on all three topics viewed from various perspectives: individual country studies; international policy coordination; and the role of the international financial institutions.

    In the panel discussion that followed the formal presentation of the papers, these topics were examined in closer detail, in particular the coordination (and possible conflicts) between various policy tools—especially monetary and fiscal policy—in containing inflation and public expenditure.

    This seminar, which was co-sponsored by the Centro di Economia monetaria e finanziaria of the Università Commerciale Luigi Bocconi, is one of several such seminars the Fund has helped to organize in an effort to widen the dialogue between academics, government officials, and professional economists and to provide a forum for an open exchange of views on economic adjustment and the role of international financial institutions in the adjustment process.

    Michel Camdessus

    Managing Director

    International Monetary Fund

    Acknowledgments

    The Centro di Economia monetaria e finanziaria of Università Commerciale Luigi Bocconi is honored to have had the opportunity to sponsor jointly with the International Monetary Fund this seminar on Fiscal Policy, Economic Adjustment, and Financial Markets. As director of the Centro and editor of this volume, I wish to express my appreciation to the Fund and, in particular, to Salvatore Zecchini, Vito Tanzi, and Manuel Guitian for their support and their active participation in the seminar. Special thanks are due to Hellmut Hartmann, coordinator of the seminar, who personally did so much for its success.

    The Italian authorities also lent their support, and I wish to thank Giovanni Spadolini, President of the Senate and of Università Bocconi; Giuliano Amato, Deputy Prime Minister and Treasury Minister; and the Banca d’Italia for their valuable contributions to the proceedings.

    Università Bocconi hosted the seminar, which was open to students—a welcome departure from the tradition of Fund seminars. The Rector, Luigi Guatri, opened the proceedings and was generous in encouraging this initiative from the beginning. Organization of the seminar was considerably smoothed by Mirka Giacoletto Papas and her colleagues of Bocconi Communicazione. Within the Centro di Economia monetaria e finanziaria, I owe a special acknowledgment to the Deputy Director, Angelo Porta. Marina Grandi and other members of the staff were generous in providing their assistance.

    The greatest debt of an editor, of course, is to the contributors to the volume. This case is no exception, given the thorough and perceptive contributions provided by the authors, discussants, the chairmen of the various sessions, and the members of the concluding panel discussion.

    Finally, I would like to thank Sara Kane of the Editorial Division of the International Monetary Fund for her valuable help in the editing of this volume. Thanks are also due to the Graphics Section of the International Monetary Fund, which was responsible for the production and design.

    Mario Monti

    Milan

    Opening Remarks

    Giovanni Spadolini

    President of the Italian Senate and President of Università Bocconi

    Monetary and fiscal authorities, officials, and scholars from many countries are assembled here for three days to debate important and exacting issues. I wish them a pleasant stay and a successful outcome to the meeting, which will certainly produce rich results for scientific research and policies. Economic policies should never be devoid of or severed from the progress of research.

    The topic of the conference is very important: the role of budgetary policies in macroeconomic equilibrium and their relation to the financial markets. It is a central issue for both the international economy and for the economy of each individual country. But I would like to stress that it is particularly important in the Italian case, where for many years the public sector deficit and debt have profoundly conditioned the real and financial development of the economy. May I say that few other problems commanded so much of my attention and concern when I served as Prime Minister in 1981–83.

    In my present role as President of the Senate, I confront the same harsh and unyielding problem on the legislative front. I do so at a time when tensions and contradictions not intrinsic to constitutional questions are besieging the political institutions and when there is a great risk of confusing the need to change worn-out mechanisms with the carrying out of the many constitutional principles and imperatives that, so far, have been impeded or blocked. The two issues are connected, though different.

    The role of Parliament becomes increasingly delicate and crucial in the drawing up of the government budget and in determining its level of consistency and rigor. This role will be reinforced and will become more reliable once parliamentary regulations and work procedures of the Houses are revised. The revision of Article 81 of the Italian Constitution is at the center of these institutional debates. The provisions of this article have been too often eluded or avoided, causing—in both recent and less recent times—a runaway, ever increasing public deficit.

    I am thinking, in particular, about the last subsection of Article 81: “Every law issued which entails new and increased expenses must indicate the means with which these expenses are to be met.” And I am also thinking about the constitutional provision that links the legislative function with the duty to impede the kinds of increases in public spending that would compromise the governance of the economy.

    This last subsection originated at the Constituent Assembly, thanks to the courageous initiative of Luigi Einaudi, the future President of the Republic. The initiative was undertaken to prevent members of Parliament—whose object was “becoming popular,” in the words of Einaudi—from proposing expenditures “without even considering the necessary means to meet them.”

    Now, forty years after the drafting of the Republican Constitution, fulfilling and applying the provisions of Article 81 mean recovering that sense of the state and that consciousness of public duties that have been handed down uncorrupted by “our founding fathers,” so that we do not lose the principle of good governing and administration of our country.

    The topic of public spending control is in itself a theme that justifies a conference. But this particular conference is also important because it has been organized in collaboration with the International Monetary Fund. It is superfluous to remind everyone of the prestige of this institution, its contributions to the planning and management of economic and financial policies of industrialized and developing countries, to the compilation of statistical information, to analyses of economic trends, and, in general, to economic research.

    With Italy, the International Monetary Fund has always played the important role of stimulating budget adjustments, and in this meeting, the Fund again provides this impetus.

    Italy today holds an important position within the international community serviced by the Fund. This position allows us to join with the other several countries that are engaged in a coordinated effort to manage international economic policies. This conference will certainly produce useful ideas and suggestions that will be useful to us in this endeavor.

    It is well known that there are controversial issues in the international debate. In recent years, these issues have related specifically to budget policies; and policymakers look to the scientific community and to conferences like the one taking place here for a clear and precise analysis that can help guide them when they are preparing agreements.

    I cannot—specifically because of my constitutional role—fail to underline what an honor we consider it that an Italian location has been chosen for this worthy initiative. At the same time, as President of Università Bocconi, I express my greatest satisfaction in having our University host this conference.

    Vito Tanzi

    Director, Fiscal Affairs Department International Monetary Fund

    It is indeed a great honor and a pleasure for me and my colleagues from the International Monetary Fund to be here with you today. It is extremely valuable for us to join such an illustrious group of scholars, senior officials, bankers, and economic writers for an unencumbered discussion of vital international issues. We are particularly honored today by the presence of Signor Giovanni Spadolini and Signor Giuliano Amato.

    This conference, organized jointly by the Centro di Economia monetaria e finanziaria of the Università Bocconi and the Fund, is part of a series of regional seminars started in 1981 by the Fund’s External Relations Department as a channel for the exchange of ideas with academics, bankers, businessmen, and opinion makers in the media. The objective of these seminars is to evoke interest and debate among academics and other professionals in current economic and financial issues, to garner outside ideas in the areas of Fund competence, and to contribute to a better understanding of the role of the Fund in the international monetary system. Seventeen such seminars have been held worldwide, and the proceedings of most have been published by the Fund in several languages.

    The theme of today’s conference, “Fiscal Policy, Economic Adjustment, and Financial Markets,” could not have been more timely. Considering the fact that planning for this seminar started about a year ago, one could say that the choice of this theme was very prophetic, and that the organizers might have been privy to some insider information! In view of the fact that Professor Monti proposed it well before the October crash, I cannot resist the temptation to paraphrase a Wall Street line and say that “when Professor Monti talks, we should all listen!”

    On a more serious note, the overall theme addresses the central issue of international economic policy coordination. The relatively recent concerted efforts to foster international economic policy coordination can be traced to the Rambouillet Summit of 1975, which was followed by several meetings, the latest of which was held in Venice last year. While not enough time has elapsed to pass final judgment on these efforts, it seems clear that economic policy coordination is not an easy task and that it is complicated by almost instantaneous perceptions and reactions in world financial markets.

    As stated in the conclusion of the paper I will be presenting to you shortly, those who were skeptical in the past about attempts by some countries to fine-tune their economies are likely to be even more skeptical about the proposed internationalization of these policies. In my view, this is particularly pertinent with respect to fiscal policy coordination among the industrial countries. But the complexity of the issues at hand should not prevent us from having a constructive discussion and from examining and evaluating the many issues related to economic policy coordination without the cumbersome constraints confronting the decision makers. By the end of this seminar, we hope that we shall have a sharper awareness of the issues at stake, the difficulties that lie ahead, and the perils that could befall the world economy in the absence of improved policy coordination among the industrial countries.

    I would like to conclude these brief remarks by expressing my own special and personal thanks to the Director and the staff of the Centro di Economia monetaria e finanziaria, and to the Università Bocconi and its Rector, Signor Luigi Guatri, for the excellent arrangements and the warm hospitality extended to us in this beautiful city of Milan.

    Thank you.

    Giuliano Amato

    Italian Deputy Prime Minister and Treasury Minister

    The topics that will be discussed during the three days of this conference are of great interest to all persons involved in the analysis, formulation, and implementation of economic policies in all countries with close, interdependent economies. The increasingly strong ties that bind the economies of the industrialized countries force those who are responsible for economic policies in every country to be very attentive to the consequences their decisions can have on the economies of other countries. Decisions taken independently to pursue legitimate national objectives can lead to severe inequalities in economic and financial relations. In these cases, it is necessary to find effective ways of coordination.

    The experience of international economic coordination has helped nations avoid taking the kind of unilateral action that could have damaged the orderly development of international commercial and financial relations. It has also contributed to various forms of cooperation between different countries in order to pursue common objectives. Many international economic institutions have contributed to this process, including the International Monetary Fund, which has played a fundamental role.

    International economic cooperation becomes more effective, although more difficult, when it extends even further than mere currency relations and demand management in the short term. It is particularly effective when it extends to structural aspects of the economy and examines ways to reconcile the medium-term development of individual countries.

    The internationalization of markets for goods and factors of production imposed by modern technology must be confronted. A solution must be found to those problems created by a progressive liberalization and integration of the markets themselves. At the same time, in order for liberalization to be beneficial in terms of increased efficiency, but without causing imbalances and dangerous instabilities, it is necessary to find forms of harmonizing the regulations and the institutions that preside over economic and financial activities. This will lead, in the future, to the unification of some of them and is particularly important and pressing for the financial markets.

    Liberalization and integration of international markets, along with the adoption of common regulations and reliable institutions, favor fiscal adjustments required by domestic demand and the public deficit in some countries. In fact, a large deficit can be supported—or in some cases required—for some time in an economy with a marked tendency toward saving, such as the Italian economy. But it can also become a factor of potential instability and an increasing constraint to growth possibilities, the more rapidly the economy proceeds on the path of international financial integration and currency liberalization in a context of relative exchange rate stability between countries bound by exchange agreements.

    In 1987 Italy chose to accelerate the process of financial liberalization. Other steps in this direction will be taken in the near future in the form of programs for the liberalization of monetary assets and of financial services, in view of the creation of the unified European Common Market. At the same time, with the decision made in September 1987, Italy has confirmed its participation in the European Monetary System, thus contributing to the strengthening of the system.

    Within this context, the adjustment process cannot be confined only to a positive differential between the growth rate of gross domestic product and the rate of interest, which is to be hoped for but is not yet a reality, or to an unwelcome and avoidable resumption of inflation. The adjustment must be based on the control of public spending and an increase in tax receipts, the latter to be obtained not by increasing tax rates but by extending the taxable base. The qualitative aspect, along with the quantitative aspect of the fiscal adjustment process is particularly important for its successful outcome, as several papers to be discussed at this conference will no doubt point out.

    The results of these discussions will certainly contain new and interesting proposals, and I will be waiting to hear these proposals with great interest. In the meantime, I express my warmest appreciation to the International Monetary Fund and to Università Bocconi for organizing this conference, and my wishes to all participants for a successful and stimulating meeting.

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