Title Page
Helping Countries Develop
The Role of Fiscal Policy
Editors
Sanjeev Gupta, Benedict Clements, Gabriela Inchauste
MONETARY AND FINANCIAL SYSTEMS DEPARTMENT
Copyright Page
© 2004 International Monetary Fund
Production: IMF Multimedia Services Division
Cover design: Martina Vortmeyer
Cataloging-in-Publication Data
Helping countries develop : the role of fiscal policy / editors, Sanjeev Gupta, Benedict Clements, and Gabriela Inchauste — [Washington, D.C. : International Monetary Fund, 2004]
p. cm.
Includes bibliographical references.
ISBN 1-58906-318-X
1. Fiscal policy — Developing countries. 2. Expenditures, Public. 3. Government spending policy. I. Gupta, Sanjeev. II. Clements, Benedict J. III. Inchauste, Gabriela.
HJ192.5.H34 2004
Price: $40.00
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Contents
Foreword
Contributors
Acknowledgments
1. Fiscal Policy for Economic Development: An Overview
Benedict Clements, Sanjeev Gupta, and Gabriela Inchauste
I. Macroeconomic Policy in Developing Countries
2. Fiscal Policy, Expenditure Composition, and Growth in Low-Income Countries
Sanjeev Gupta, Benedict Clements, Emanuele Baldacci, and Carlos Mulas-Granados
3. Persistence of Fiscal Adjustments and Expenditure Composition in Low-Income Countries
Emanuele Baldacci, Benedict Clements, Sanjeev Gupta, and Carlos Mulas-Granados
4. Growth, Governance, and Fiscal Policy Transmission Channels in Low-Income Countries
Emanuele Baldacci, Arye L. Hillman, and Naoko Kojo
5. External Debt, Public Investment and Growth in Low-Income Countries
Benedict Clements, Rina Bhattacharya, and Tuan Quoc Nguyen
6. A Framework for Fiscal Debt Sustainability Analysis in Low-Income Countries
Emanuele Baldacci and Kevin Fletcher
7. Experience with Budgetary Convergence in the WAEMU
Ousmane Doré and Paul R. Masson
II. Public Spending and the Millennium Development Goals
8. The Effectiveness of Government Spending on Education and Health Care in Developing and Transition Economies
Sanjeev Gupta, Marijn Verhoeven, and Erwin R. Tiongson
9. Public Spending on Health Care and the Poor
Sanjeev Gupta, Marijn Verhoeven, and Erwin R. Tiongson
10. User Payments for Basic Education in Low-Income Countries
Arye L. Hillman and Eva Jenkner
11. The Efficiency of Government Expenditure: Experiences from Africa
Sanjeev Gupta and Marijn Verhoeven
III. Revenues and Growth
12. Tax Policy in Developing Countries: Some Lessons from the 1990s and Some Challenges Ahead
Michael Keen and Alejandro Simone
13. Social Impact of a Tax Reform: The Case of Ethiopia
Sònia Muñoz and Stanley Sang-Wook Cho
14. Foreign Aid and Revenue Response: Does the Composition of Aid Matter?
Sanjeev Gupta, Benedict Clements, Alexander Pivovarsky, and Erwin R. Tiongson
IV. Fiscal Policy and Aid
15. More Aid—Making It Work for the Poor
Peter S. Heller and Sanjeev Gupta
16. Aid and Fiscal Management
Aleš Bulíř and Timothy Lane
17. Foreign Aid and Consumption Smoothing: Evidence from Global Food Aid
Sanjeev Gupta, Benedict Clements, and Erwin R. Tiongson
V. Special Topics
18. Fiscal Consequences of Armed Conflict and Terrorism in Low- and Middle-Income Countries
Sanjeev Gupta, Benedict Clements, Rina Bhattacharya, and Shamit Chakravarti
19. A Comparison Between Two Public Expenditure Management Systems in Africa
Ian Lienert
Foreword
The role of fiscal policy in catalyzing economic development continues to attract the attention of policymakers and academics alike. The macroeconomic role of fiscal policy, as well as its impact on economic efficiency and the supply side of the economy, remain at the center of the debate. The increased focus of the international community on helping countries achieve the Millennium Development Goals (MDGs) has further sharpened interest in what governments should (and should not) do with fiscal instruments to foster economic development.
The role of fiscal policy in promoting development can be seen both through its effects on growth and, more broadly, through its impact on human development. There is widespread agreement in the economics profession that over the longer term, a prudent fiscal position, comprising low budget deficits and low levels of public debt, promotes economic growth, which is essential for reducing poverty and improving social outcomes. There is much less consensus, however, regarding the appropriate role of fiscal policy in the short run. Some economists have argued that—just as in industrial countries—fiscal policy can be an effective tool to stimulate aggregate demand and revive a stagnant economy. Others have argued that activist fiscal policy may not have its intended salutary effects in developing countries, given their high and often unsustainable levels of public debt.
The long-term effects of tax, expenditure, and financing policies are also of keen interest to policymakers as they design strategies to help achieve the MDGs. On the expenditure side, the question is whether increased spending on education, health, and infrastructure are effective in boosting long-term growth and improving human development outcomes, given the weaknesses in public administration that plague these countries. On the revenue side, a key issue is whether the existing structure of taxation and the underlying tax policies in developing countries are sufficient to yield the necessary revenue to finance poverty-reducing spending. Finally, on the financing side, there is an ongoing and lively debate over the benefits of foreign assistance (both loans and grants), and whether international aid is effective in reducing poverty and spurring economic growth. The question is not only how much aid should be delivered, but also how to improve the quality of aid.
These issues are important for the IMF, particularly after the transformation of the Enhanced Structural Adjustment Facility—a concessional financing window for low-income countries—into the Poverty Reduction and Growth Facility in November 1999. The new facility places the goal of poverty reduction at the center of policy formulation and requires countries to articulate their macroeconomic, structural, and social policies in a poverty reduction strategy paper (PRSP). With the implementation of the new approach, questions have been raised regarding how fiscal policy can be used to help achieve the policy goals countries describe in their PRSPs, and the precise channels through which fiscal policy affects economic activity and social outcomes. This volume seeks to answer some of these questions.
The Fiscal Affairs Department is playing an important role in taking forward the research agenda on macroeconomic and microeconomic aspects of fiscal policy. This is being done by (1) drawing lessons and best practices from its experiences in different countries, and (2) conducting research on different aspects of fiscal policy, including in developing countries. This volume compiles a significant amount of the research on developing countries undertaken in the past few years, with the hope that it will stimulate further research and wider discussion, both within and outside the IMF.
Horst Köhler
Managing Director
International Monetary Fund
March 1, 2004
Contributors
| Emanuele Baldacci | Economist, Fiscal Affairs Department, IMF |
| Rina Bhattacharya | Economist, Fiscal Affairs Department, IMF |
| Aleš Bulíř | Senior Economist, Policy Development and Review Department, IMF |
| Shamit Chakravarti | Programs Officer, Asian Development Bank, New Delhi |
| Stanley Sang-Wook Cho | Former summer intern, Fiscal Affairs Department, IMF |
| Benedict Clements | Deputy Division Chief, Fiscal Affairs Department, IMF |
| Ousmane Doré | Senior Economist, African Department, IMF |
| Kevin Fletcher | Economist, Fiscal Affairs Department, IMF |
| Sanjeev Gupta | Assistant Director, Fiscal Affairs Department, IMF |
| Peter S. Heller | Deputy Director, Fiscal Affairs Department, IMF |
| Arye L. Hillman | William Gittes Professor of Economics at Bar-Ilan University |
| Gabriela Inchauste | Economist, IMF Institute, IMF |
| Eva Jenkner | Economist, Western Hemisphere Department, IMF |
| Michael Keen | Division Chief, Fiscal Affairs Department, IMF |
| Naoko C. Kojo | Economist, Fiscal Affairs Department, IMF |
| Timothy Lane | Assistant Director, Policy Development and Review Department, IMF |
| Ian Lienert | Senior Economist, Fiscal Affairs Department, IMF |
| Paul R. Masson | Former Senior Advisor, Research Department, IMF |
| Carlos Mulas-Granados | European Economy Group, Universidad Complutense de Madrid |
| Sonia Muñoz | Economist, Asia and Pacific Department, IMF |
| Toan Nguyen | Former summer intern, Fiscal Affairs Department, IMF |
| Alexander Pivovarsky | Economist, Fiscal Affairs Department, IMF |
| Alejandro Simone | Economist, Fiscal Affairs Department, IMF |
| Erwin R. Tiongson | Economist, World Bank |
| Marijn Verhoeven | Senior Economist, Asia and Pacific Department, IMF |
| Emanuele Baldacci | Economist, Fiscal Affairs Department, IMF |
| Rina Bhattacharya | Economist, Fiscal Affairs Department, IMF |
| Aleš Bulíř | Senior Economist, Policy Development and Review Department, IMF |
| Shamit Chakravarti | Programs Officer, Asian Development Bank, New Delhi |
| Stanley Sang-Wook Cho | Former summer intern, Fiscal Affairs Department, IMF |
| Benedict Clements | Deputy Division Chief, Fiscal Affairs Department, IMF |
| Ousmane Doré | Senior Economist, African Department, IMF |
| Kevin Fletcher | Economist, Fiscal Affairs Department, IMF |
| Sanjeev Gupta | Assistant Director, Fiscal Affairs Department, IMF |
| Peter S. Heller | Deputy Director, Fiscal Affairs Department, IMF |
| Arye L. Hillman | William Gittes Professor of Economics at Bar-Ilan University |
| Gabriela Inchauste | Economist, IMF Institute, IMF |
| Eva Jenkner | Economist, Western Hemisphere Department, IMF |
| Michael Keen | Division Chief, Fiscal Affairs Department, IMF |
| Naoko C. Kojo | Economist, Fiscal Affairs Department, IMF |
| Timothy Lane | Assistant Director, Policy Development and Review Department, IMF |
| Ian Lienert | Senior Economist, Fiscal Affairs Department, IMF |
| Paul R. Masson | Former Senior Advisor, Research Department, IMF |
| Carlos Mulas-Granados | European Economy Group, Universidad Complutense de Madrid |
| Sonia Muñoz | Economist, Asia and Pacific Department, IMF |
| Toan Nguyen | Former summer intern, Fiscal Affairs Department, IMF |
| Alexander Pivovarsky | Economist, Fiscal Affairs Department, IMF |
| Alejandro Simone | Economist, Fiscal Affairs Department, IMF |
| Erwin R. Tiongson | Economist, World Bank |
| Marijn Verhoeven | Senior Economist, Asia and Pacific Department, IMF |
Acknowledgments
This volume is the product of the collective effort of many individuals. In particular, we are grateful to the contributing authors for their papers. Most papers were originally issued as IMF Working Papers and the revised versions of many of these papers were published in journals. Thanks are due to Elsevier Science, Ltd.; John Wiley & Sons, Ltd.; Blackwell Publishing; and NTC Economic and Financial Publishing for allowing us to reprint these articles.
We are grateful to Teresa Ter-Minassian for supporting this effort, as well as to the staff of the Fiscal Affairs Department’s Expenditure Policy Division, who provided valuable assistance. We are particularly grateful to Emanuele Baldacci, Erwin Tiongson, Larry Cui, and Chris Wu for their assistance and advice in compiling this volume. Special thanks are due to Meike Gretemann, Merceditas San Pedro-Pribram, and Viswanathan Krishnamoorthy, who managed the correspondence with publishers and prepared the volume for publication. Marina Primorac of the IMF’s External Relations Department edited the manuscript and coordinated production of the book.
The views expressed are those of the authors and do not necessarily reflect those of the IMF.
Sanjeev Gupta
Benedict Clements
Gabriela Inchauste
Editors