Helping Countries Develop
Front Matter

Front Matter

Benedict Clements, Sanjeev Gupta, and Gabriela Inchauste
Published Date:
September 2004
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    © 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 9781589063181

    • 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

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    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


    Emanuele BaldacciEconomist, Fiscal Affairs Department, IMF
    Rina BhattacharyaEconomist, Fiscal Affairs Department, IMF
    Aleš BulířSenior Economist, Policy Development and Review Department, IMF
    Shamit ChakravartiPrograms Officer, Asian Development Bank, New Delhi
    Stanley Sang-Wook ChoFormer summer intern, Fiscal Affairs Department, IMF
    Benedict ClementsDeputy Division Chief, Fiscal Affairs Department, IMF
    Ousmane DoréSenior Economist, African Department, IMF
    Kevin FletcherEconomist, Fiscal Affairs Department, IMF
    Sanjeev GuptaAssistant Director, Fiscal Affairs Department, IMF
    Peter S. HellerDeputy Director, Fiscal Affairs Department, IMF
    Arye L. HillmanWilliam Gittes Professor of Economics at Bar-Ilan University
    Gabriela InchausteEconomist, IMF Institute, IMF
    Eva JenknerEconomist, Western Hemisphere Department, IMF
    Michael KeenDivision Chief, Fiscal Affairs Department, IMF
    Naoko C. KojoEconomist, Fiscal Affairs Department, IMF
    Timothy LaneAssistant Director, Policy Development and Review Department, IMF
    Ian LienertSenior Economist, Fiscal Affairs Department, IMF
    Paul R. MassonFormer Senior Advisor, Research Department, IMF
    Carlos Mulas-GranadosEuropean Economy Group, Universidad Complutense de Madrid
    Sonia MuñozEconomist, Asia and Pacific Department, IMF
    Toan NguyenFormer summer intern, Fiscal Affairs Department, IMF
    Alexander PivovarskyEconomist, Fiscal Affairs Department, IMF
    Alejandro SimoneEconomist, Fiscal Affairs Department, IMF
    Erwin R. TiongsonEconomist, World Bank
    Marijn VerhoevenSenior Economist, Asia and Pacific Department, IMF


    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


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