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International Monetary Fund
Published Date:
April 1990
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    Occasional Papers of the International Monetary Fund

    69. International Comparisons of Government Expenditure Revisited: The Developing Countries, 1975–86, By Peter S. Heller and Jack Diamond. 1990.

    68. Debt Reduction and Economic Activity, by Michael P. Dooley, David Folkerts-Landau, Richard D. Haas, Steven A. Symansky, and Ralph W. Tryon. 1990.

    67. The Role of National Saving in the World Economy: Recent Trends and Prospects, by Bijan B. Aghevli, James M. Boughton, Peter J. Montiel, Delano Villanueva, and Geoffrey Woglom. 1990.

    66. The European Monetary System in the Context of the Integration of European Financial Markets, by David Folkerts-Landau and Donald J. Mathieson. 1989.

    65. Managing Financial Risks in Indebted Developing Countries, by Donald J. Mathieson, David Folkerts-Landau, Timothy Lane, and Iqbal Zaidi. 1989.

    64. The Federal Republic of Germany: Adjustment in a Surplus Country, by Leslie Lipschitz, Jeroen Kremers, Thomas Mayer, and Donogh McDonald. 1989.

    63. Issues and Developments in International Trade Policy, by Margaret Kelly, Naheed Kirmani, Miranda Xafa, Clemens Boonekamp, and Peter Winglee. 1988.

    62. The Common Agricultural Policy of the European Community: Principles and Consequences, by Julius Rosenblatt, Thomas Mayer, Kasper Bartholdy, Dimitrios Demekas, Sanjeev Gupta, and Leslie Lipschitz. 1988.

    61. Policy Coordination in the European Monetary System. Part I: The European Monetary System: A Balance Between Rules and Discretion, by Manuel Guitián. Part II: Monetary Coordination Within the European Monetary System: Is There a Rule? by Massimo Russo and Giuseppe Tullio. 1988.

    60. Policies for Developing Forward Foreign Exchange Markets, by Peter J. Quirk, Graham Hacche, Viktor Schoofs, and Lothar Weniger. 1988.

    59. Measurement of Fiscal Impact: Methodological Issues, edited by Mario I. Blejer and Ke-Young Chu. 1988.

    58. The Implications of Fund-Supported Adjustment Programs for Poverty: Experiences in Selected Countries, by Peter S. Heller, A. Lans Bovenberg, Thanos Catsambas, Ke-Young Chu, and Parthasarathi Shome. 1988.

    57. The Search for Efficiency in the Adjustment Process: Spain in the 1980s, by Augusto Lopez-Claros. 1988.

    56. Privatization and Public Enterprises, by Richard Hemming and Ali M. Mansoor. 1988.

    55. Theoretical Aspects of the Design of Fund-Supported Adjustment Programs: A Study by the Research Department of the International Monetary Fund. 1987.

    54. Protection and Liberalization: A Review of Analytical Issues, by W. Max Corden. 1987.

    53. Floating Exchange Rates in Developing Countries: Experience with Auction and Interbank Markets, by Peter J. Quirk, Benedicte Vibe Christensen, Kyung-Mo Huh, and Toshihiko Sasaki. 1987.

    52. Structural Reform, Stabilization, and Growth in Turkey, by George Kopits. 1987.

    51. The Role of the SDR in the International Monetary System: Studies by the Research and Treasurer’s Departments of the International Monetary Fund. 1987.

    50. Strengthening the International Monetary System: Exchange Rates, Surveillance, and Objective Indicators, by Andrew Crockett and Morris Goldstein. 1987.

    49. Islamic Banking, by Zubair Iqbal and Abbas Mirakhor. 1987.

    48. The European Monetary System: Recent Developments, by Horst Ungerer, Owen Evans, Thomas Mayer, and Philip Young. 1986.

    47. Aging and Social Expenditure in the Major Industrial Countries, 1980–2025, by Peter S. Heller, Richard Hemming, Peter W. Kohnert, and a Staff Team from the Fiscal Affairs Department. 1986.

    46. Fund-Supported Programs, Fiscal Policy, and Income Distribution: A Study by the Fiscal Affairs Department of the International Monetary Fund. 1986.

    45. Switzerland’s Role as an International Financial Center, by Benedicte Vibe Christensen. 1986.

    44. A Review of the Fiscal Impulse Measure, by Peter S. Heller, Richard D. Haas, and Ahsan H. Mansur. 1986.

    42. Global Effects of Fund-Supported Adjustment Programs, by Morris Goldstein. 1986.

    41. Fund-Supported Adjustment Programs and Economic Growth, by Mohsin S. Kahn and Malcolm D. Knight. 1985.

    39. A Case of Successful Adjustment: Korea’s Experience During 1980–84, by Bijan B. Aghevli and Jorge Márquez-Ruarte. 1985.

    38. Trade Policy Issues and Developments, by Shailendra J. Anjaria, Naheed Kirmani, and Arne B. Petersen. 1985.

    36. Formulation of Exchange Rate Policies in Adjustment Programs, by a Staff Team Headed by G.G. Johnson. 1985.

    35. The West African Monetary Union: An Analytical Review, by Rattan J. Bhatia. 1985.

    34. Adjustment Programs in Africa: The Recent Experience, by Justin B. Zulu and Saleh M. Nsouli. 1985.

    33. Foreign Private Investment in Developing Countries: A Study by the Research Department of the International Monetary Fund. 1985.

    30. The Exchange Rate System—Lessons of the Past and Options for the Future: A Study by the Research Department of the International Monetary Fund. 1984.

    29. Issues in the Assessment of the Exchange Rates of Industrial Countries: A Study by the Research Department of the International Monetary Fund. 1984.

    28. Exchange Rate Volatility and World Trade: A Study by the Research Department of the International Monetary Fund. 1984.

    26. The Fund, Commercial Banks, and Member Countries, by Paul Mentré. 1984.

    24. Government Employment and Pay: Some International Comparisons, by Peter S. Heller and Alan A. Tait. 1983. Revised 1984.

    22. Interest Rate Policies in Developing Countries: A Study by the Research Department of the International Monetary Fund. 1983.

    20. Alternatives to the Central Bank in the Developing World, by Charles Collyns. 1983.

    19. The European Monetary System: The Experience, 1979–82, by Horst Ungerer, with Owen Evans and Peter Nyberg. 1983.

    Note: For information on the title and availability of Occasional Papers not listed, please consult the IMF Publications Catalog or contact IMF Publications Services. Occasional Papers Nos. 5–26 are $5.00 a copy (academic rate: $3.00); Nos. 27–74 are $7.50 a copy (academic rate: $4.50); and from No. 65 on, the price is $10.00 a copy (academic rate: $7.50).

    It thus excludes Australia, Austria, Belgium, Canada, Denmark, Finland, France, the Federal Republic of Germany, Iceland, Ireland, Italy, Japan, Luxemburg, the Netherlands, New Zealand, Norway, Spain, Sweden, Switzerland, the United Kingdom, and the United States. Also excluded, owing to the lack of data on expenditure at lower levels of government, are countries with decentralized federal systems, such as Brazil, India, and Nigeria.

    A country is defined to attach higher priority to a category of expenditure over time if there is an increase in the ratio of actual-to-predicted expenditure (holding the underlying estimating equation constant over the period of comparison).

    The bias in the change in the structural relationship over time may be discerned from an examination of the impact of alternative estimation years on the predicted expenditure share, holding the values of the explanatory variable set constant. The hazards in this analysis are discussed more fully in Section II.

    In situations where data on a variable are available for less than three years of a period, the average is calculated on two years (and if necessary, only on a single year’s data).

    For any variable Z, two dummy terms D1 and D2 were used, with D1 = 1 for countries with per capita income above $400 and D1 = 0 otherwise; D2 = 1 for countries with per capita income equal to or below $400 and D2 = 0 otherwise. In estimating the equations, two variables were entered, namely, D1*Z and D2 *Z.

    In situations where the denominator is either negative or very small, an upper limit of 200 is set for the IEC index.

    One should note that if line t0 represents the estimated linear relationship between the share of expenditure yi in GDP and its underlying determinant xi, the ratio of the actual expenditure share at point A to its predicted value (at A′) may differ from that observed at point D (relative to D′), primarily reflecting that the implicit behavioral relationship between x and y for country j is not likely to be exactly the same as the linear relationship estimated for the entire sample of countries.

    For interested readers, the authors can also supply the changes in the IEC indices over time, holding the comparator line at its 1980 level.

    They will be provided on request to the authors.

    Where data are not available for 1986, the most recent data available are used in Table 2.

    The European countries that are deemed nondeveloped primarily include Southern and Eastern European countries (namely, Cyprus, Greece, Poland, Turkey, Yugoslavia), countries where, for a variety of reasons, one finds higher-than-normal military outlays.

    In Africa, the results obtained by holding the 1980 data constant and by varying the structure suggest a clear negative structural shift against expenditures on social security and welfare. Yet the 1986 data base does not support this result, suggesting that this is one of the cases discussed in Section II where the position on the curve matters for the interpretation of the bias of structural change.

    This result totally abstracts from the obvious policy problem of how one might cut employment (e.g., in education) and redirect the budget savings toward higher wage and salary rates.

    The only exception is the Western Hemisphere region in the period 1984–86, where there appears to be a slight shift against this category of spending.

    For example, Goffman and Mahar (1971) consider the age structure of the population to have been a dominant factor in public expenditure growth in six Caribbean countries during the postwar period.

    The consequences of urbanization have been stressed in various studies (Williamson (1961); Deutsch (1961); Thorn (1967); Goffman and Mahar (1971)). The consequences of suburbanization, however, have generally been overlooked.

    For example, Williamson (1961) would argue that along with urbanization has gone the submergence of the informal security of the village and extended family and the emergence of formal state security. While Andic and Veverka (1964) see the crucial change in economic organization as a secular decline in the size of the consumption unit, so that “[a]s economic growth tends to reduce its size as well as dissolve many collective organisations, i.e., family interposed between the consumption unit and the state, this leads to a general demand on the public authorities to protect the economic status of the individual members of the community” (p. 221).

    This argument is in line with J.K. Galbraith’s emphasis on “market failure” as necessitating increasing public intervention (Galbraith (1967), p. 296 ff.).

    It is difficult to decide whether its impact on public spending has occurred directly through, for instance, increasing demand for road construction and complementary services, or more indirectly through the subsequent greater mobility of the population and the exodus from the town to the suburbs, with resulting heavy social capital requirements.

    An idea first advanced by Adolph Wagner and supported by later writers (e.g., Baumol (1967); Williamson (1961); Martin and Lewis (1956); Baumol and Oates (1975), Chapter 17); although Gupta (1967) takes a dissenting view.

    For example, Morss, Fredland, and Hymans (1967) conclude, “…our results suggest that more detailed work on political variables will undoubtedly support the conclusion that political factors exert important and predictable pressures on government expenditure behaviour.”

    These writers resort to the prevailing notion of the role of the state as a causal explanation of public spending. Musgrave (1969, p. 85) is also inclined to stress the “changes in cultural values and philosophy” as an influential conditioning factor.

    Or as Bird (1970, p. 61) puts it, “creating a supply of bureaucrats tends to create a demand for services of bureaucrats.”

    Peacock and Wiseman (1961) coined the term “inspection process” to describe this effect, which also played a prominent part in Parkinson’s Law (Parkinson, (1957)). Aaron (1966) has advanced the thesis that the size of social insurance schemes in the United States depends on the length of time they have been in operation. More recently, attempts to deal with the optimal size of the public sector have focused on the role of the bureaucracy (Borcherding (1977); Niskanen (1983)).

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