Front Matter

Front Matter

George Kopits
Published Date:
December 2004
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    Rules-Based Fiscal Policy in Emerging Markets

    Background, Analysis, and Prospects

    Edited by

    George Kopits

    © International Monetary Fund 2004

    All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission.

    No paragraph of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, 90 Tottenham Court Road, London W1T 4LP.

    Any person who does any unauthorized act in relation to this publication may be liable to criminal prosecution and civil claims for damages.

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    First published 2004 by


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    ISBN 1–4039–2085–0

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    Library of Congress Cataloging-in-Publication Data

    Rules-based fiscal policy in emerging markets: background, analysis, and prospects / edited by George Kopits.

    p. cm.

    Includes bibliographical references and index.

    ISBN 1–4039–2085–0 (cloth)

    1. Fiscal policy—Developing countries—Case studies. I. Kopits, George.

    HJ1620.R85 2004



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    Printed and bound in Great Britain by Antony Rowe Ltd, Chippenham and Eastbourne


    List of Tables

    List of Figures and Box

    List of Contributors

    • Fabrizio Balassone Bank of Italy

    • Olav Bjerkholt University of Oslo

    • Miguel Braun CIPPEC and University of San Andrés

    • Marco Buti European Commission

    • Andrés Conesa Secretariat of Finance, Mexico

    • Fabrizio Coricelli University of Siena and CEPR

    • Allan Drazen Tel Aviv University, University of Maryland, NBER, and CEPR

    • Valerio Ercolani University of Siena

    • Daniele Franco Bank of Italy

    • Gabriele Giudice European Commission

    • Ilan Goldfajn Central Bank of Brazil

    • Christian Y. Gonzalez Georgetown University

    • Eduardo R. Guardia State of Sao Paulo, Brazil

    • Ricardo Hausmann Harvard University

    • Kalpana Kochhar International Monetary Fund

    • George Kopits National Bank of Hungary

    • Irene Niculescu Central University of Venezuela

    • Guillermo Perry The World Bank

    • Catriona Purfield International Monetary Fund

    • David Rosenblatt The World Bank

    • Allen Schick Brookings Institution and University of Maryland

    • Moisés J. Schwartz Secretariat of Finance, Mexico

    • Alejandro Somuano Secretariat of Finance, Mexico

    • J. Alfredo Tijerina Secretariat of Finance, Mexico

    • Mariano Tommasi University of San Andrés and CEDI

    • Steven B. Webb The World Bank

    • Stefania Zotteri Bank of Italy


    The majority of the chapters contained in this volume were selected from papers presented and discussed at a conference held in Oaxaca, Mexico, February 14–16, 2002, under the auspices of the Government of Mexico, the International Monetary Fund, and the World Bank. Several chapters were commissioned subsequently for regional and thematic completeness. In addition to the presentations, senior government officials from Brazil, Colombia, Mexico, and Peru participated in a concluding panel discussion. This volume has been enriched by the views of participants from academic and research institutions, as well as policymakers from national and subnational governments, and staff from international financial institutions, who shared their considerable range of experience and analysis. The conference benefited from inspiration and support by Eduardo Aninat, Francisco Gil-Díaz, Vijay Kelkar, Guillermo Perry, and Teresa Ter-Minassian, and from organizational support by David Colmenares, Moisés Schwartz, Augusto de la Torre, and Jaime René Jiménez. The authors are grateful for comments from assigned discussants and other participants mentioned in an initial footnote in each chapter. Also, useful comments were provided by Max Alier, James Daniel, Hugo Juan-Ramón, and Paolo Manasse, in their capacity as anonymous referees on selected chapters. Editorial assistance by Carol Ann Robertson and administrative assistance by Elizabeth Handal-Kocis are gratefully acknowledged. The views expressed are solely those of the authors and should not be ascribed to their institutional affiliations.


    Emerging market economies are exposed to considerable macroeconomic volatility in tandem with a high level of capital mobility. The combination of this inherent volatility and failed discretionary macroeconomic policy management has often led to major capital account crises, with unfortunate consequences for activity, employment and overall welfare. Against this backdrop, in recent years, a number of emerging market economies have turned to a rules-based framework for the conduct of monetary and fiscal policies. In particular, given the endemic deficit bias as a major source of instability in many of these countries, the introduction of constraints on the budget balance, government expenditure growth or stock of public indebtedness has become rather appealing. These constraints are typically enacted in the context of comprehensive fiscal responsibility legislation.

    Increasingly, fiscal and monetary rules are seen as useful vehicles for cementing policy credibility, as well as for preventing rapid shifts in investor sentiment and attenuating vulnerability to financial crises. The International Monetary Fund welcomes the recent interest in fiscal policy rules and encourages member countries to consider their potential usefulness, whether introduced as part of an adjustment program, or more important, as part of a broader effort to strengthen key institutions and embrace internationally accepted good practices. However, experience shows that such rules can contribute to stability and growth only if they are properly designed and they take into account country-specific cultural, political, and economic conditions. Furthermore, their success hinges on the informed support of the authorities and the electorate.

    The studies collected in the present volume, authored by academic scholars and public officials from national and international institutions, represent a valuable contribution to the ongoing debate on the merits and drawbacks of fiscal policy rules in emerging market economies. They provide a thorough analysis of the volatile environment faced by authorities in these economies, taking into account a variety of key features that are present in some but not all of these economies: openness to capital movements, nonrenewable resource endowment, excessive fiscal decentralization, and other structural and behavioral characteristics. Beyond the broader issue-oriented chapters, each study focuses on a country or a group of countries in major regions: Latin America, Asia, and Central and Eastern Europe. Thus a rich variety of circumstances is brought under scrutiny, drawing insofar as possible lessons from the experience of some advanced economies, notably the European Union.

    The chapters explore a range of design features, along with various statutory provisions and operational arrangements. However, a major unifying theme in the volume is the sober tone and balanced assessment which helps counter the unrealistic view (popular in some quarters) that policy rules automatically insure fiscal sustainability and macroeconomic stability. A consensus emerges that fiscal policy rules can provide meaningful commitment technology only if supported by a robust institutional infrastructure, including a high degree of transparency in public finances. In all, this comprehensive and timely volume encompassing a major policy area will be useful for analysts and practitioners alike.

    Agustín Carstens

    Deputy Managing Director

    International Monetary Fund

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