The Web edition of the IMF Survey is updated several times a week, and contains a wealth of articles about topical policy and economic issues in the news. Access the latest IMF research, read interviews, and listen to podcasts given by top IMF economists on important issues in the global economy. www.imf.org/external/pubs/ft/survey/so/home.aspx
The Web edition of the IMF Survey is updated several times a week, and contains a wealth of articles about topical policy and economic issues in the news. Access the latest IMF research, read interviews, and listen to podcasts given by top IMF economists on important issues in the global economy. www.imf.org/external/pubs/ft/survey/so/home.aspx
Securing Europe’s Place in the Global Financial World
Following are excerpts from an address by IMF Managing Director Michel Camdessus, scheduled for delivery on March 19, at the European Banking and Financial Forum 1996, in Prague:
I see many opportunities—for Europe and the world. Will Europe be able to seize these opportunities? Given that the future is always uncertain—not the least in matters of economics and finance—I should be cautious in my remarks. But, in fact, I am quite hopeful about what could be achieved in Europe—and the rest of the world—with good policies, more effective international coordination, and, of course, a lot of persistence and hard work.
What the Future Holds
First, there is every reason to expect that the international capital markets will continue to grow larger, more complex, and more closely integrated. Further advances in technology, the continued removal of capital controls, the scope for additional portfolio diversification, and the availability of increasing amounts of investment capital as industrial countries, in particular, reduce their fiscal deficits—all of these factors should contribute to the further development of the international capital markets.
Moreover, once European Union (EU) members move to a single currency—and this, I believe, is both desirable and feasible within the Maastricht [treaty] timetable for European economic and monetary union (EMU)—we can expect to see a broader and deeper European financial market. Many factors will work in this direction, not least of which will be the use of one very strong currency to anchor macroeconomic policy and to denominate European trade and investment; the development of a unified market for government securities issued by EMU members; a large and increasingly dynamic internal market; expanding trade with the rest of the world; and, thanks to further fiscal consolidation, larger amounts of European savings available for investment in Europe and abroad, lower interest rates, and lower risk premia.
These same developments should help Europe return to the solid growth and higher employment of earlier years. Brighter prospects in the EU should, in turn, provide further incentives for other European countries—notably those in central and eastern Europe—to complete the structural adjustments required for them to join the EU as well. Hence, I would not be surprised to see—demanding as the challenge may be—both a “wider” and a “closer” EU.
Second, with more countries pursuing sound policies and with markets continuing to channel capital into promising investments around the globe, we can expect to see a number of major new players in the international economy. This will be a very positive development, since, with more engines of growth, the world economy could become increasingly resilient. Indeed, there has already been a major shift in the relative economic size of the United States and Asia. Between 1966 and 1988, the relative size of the U.S. economy (measured in terms of purchasing power parities) declined from 27 percent of total world output to 21 percent; while the share of Asia (including Japan) rose from 18 percent to 32 percent. Such shifts are likely to continue during the next century, making today’s rankings of country economic strength seem as anachronistic as yesterday’s debates of “North” versus “South.”
I would venture that among the next countries to burst upon the global economy will be a number of the transition economies—countries like the Czech Republic, whose early and determined start on stabilization and reform under the leadership of President Havel and Prime Minister Klaus has paid off in the early resumption of growth and strong capital inflows. In many cases, we will no longer think of these countries as “transition economies,” for the “transition,” as such, will be over. Russia, too, has enormous potential, assuming that it perseveres with its strong adjustment program.
Risks on the Horizon
Of course, as positive as these developments will be for global prosperity, the world economy will not be risk-free. As Mexico illustrated just last year, markets are sensitive to changes in economic fundamentals. Any significant relaxation of policy discipline—and other events that might trigger a shift in market sentiment—will continue to have potentially costly effects. True, the world is now more aware of these risks, and precautions are being taken by the IMF and its members to minimize them. Nevertheless, I think that we can safely warn you that Mexico will not be the last crisis.
In fact, with larger and more closely integrated capital markets, future crises may be still more destabilizing—both for the country immediately concerned and for the world economy at large. This has implications both for Europe and for us in the IMF. As regards Europe, I would not be surprised if its more prominent role in global financial markets made it feel such crises more keenly in the future than it has in the past. For the IMF, it means we must continue to strengthen our surveillance over country policies and performance, so that emerging problems can be addressed before they become full-blown crises. It also means that we must ensure that we have adequate resources to continue fulfilling our mandate: “to give confidence to members by making the general resources of the Fund temporarily available to them under adequate safeguards.…”
Europe’s more prominent role in global financial markets could increase its sensitivity to financial crises.
A second risk is that of greater protectionism. As developing countries increase their exports—especially in agriculture and basic industry, where many of these countries have, or are likely to develop, a comparative advantage—trade competition will surely intensify. In many industrial countries, the prospect of increased competition, reduced employment in some sectors, and declines in their shares of global output will prompt some to think of globalization in terms of “winners” and “losers.” But this will be a very short-sighted—and ultimately self-defeating—point of view. The inevitable changes in relative economic size will not necessarily be detrimental to the countries whose economic weights decline; on the contrary, as long as the global economy continues to expand, even countries with a decreasing share of the total can still enjoy rising levels of domestic income. Of course, the way to achieve this is to ensure that trade continues to be an essential engine of growth. By encouraging countries to specialize in production according to comparative advantage, trade will promote a virtuous circle of increased investment and productivity, leading to a further expansion of world output and trade. It is clear, however, that increasing trade competition will call for permanent structural changes in industrial countries, including more flexible labor markets, better worker training and retraining, and more effective social safety nets.
Finally, you may wonder what kind of international currency arrangements I envision for the next century. To begin with, the continued expansion of world trade, direct foreign investment, and other international capital flows should make the costs of exchange rate misalignments and the benefits of exchange rate stability all the more apparent. Let us hope that the success of EMU will provide the world with some useful lessons on the merits of working hard and paying the necessary price for international monetary stability. At the same time, however, the emergence of many new players in the international system will probably make policy coordination all the more necessary and demanding, requiring more effective cooperation among the major countries and groups of countries. This latter trend will reinforce the need for the IMF to play a central role in promot[ing] international monetary cooperation and providing] the machinery for consultation and collaboration on international monetary problems. And, however strong the world’s main currencies turn out to be, perhaps the world will see the need for an even stronger central monetary asset—such as the SDR—to help anchor the international monetary system.
These are broad outlines of my vision for the future: a more dynamic global economy based on free trade and a high degree of capital mobility; a more dynamic European economy and a more prominent role for Europe in the global financial markets and in the international monetary system following EMU; and greater international monetary cooperation leading to a more stable international financial system.
No doubt, some of you will find this vision too optimistic. In any event, I assure you—and this we will agree upon—that I have no illusions about the amount of effort that will be required to turn these aspirations into reality.
First, all countries will need to pursue “high-quality” policies. As I indicated earlier, I see great benefits in a single European currency—for Europe and the world—but EMU is neither a panacea for Europe’s problems nor a substitute for fundamental reform. Irrespective of EMU, European countries need to reduce their fiscal deficits—both to ensure a reasonable degree of price stability without overburdening monetary policy and to allow for adequate levels of investment and growth. Moreover, deficit reduction must be long lasting—both for the health of European economies and for the sustainability of EMU. Accordingly, European governments need to address, among other issues, the problems of health care and pension costs—an additional structural burden on public finances that will become increasingly onerous with the aging of Europe’s population.
At the same time, Europe needs to rethink its present labor market policies. It has become increasingly apparent that the current impediments to job search and job creation not only complicate deficit reduction, they also aggravate the problems of unemployment and low growth and even undermine the social welfare that these policies were supposed to help protect. Clearly, reform is needed. Moreover, in order for EMU to work well over the longer term, EU members will need to increase both domestic labor market flexibility and international labor mobility within Europe, since exchange rate flexibility will no longer be available to correct competitiveness problems. Tackling these problems now would help boost market confidence, lower interest premia, and thereby facilitate adjustment and convergence.
I have also mentioned my hope for wider European integration. So far, the EU has negotiated “Europe Agreements” with ten transition economies. All of these countries have made progress in liberalizing, opening, stabilizing, and reforming their economies. But challenges remain, including the need to reduce inflation, reform budgets and social security systems, strengthen the financial sector, and accelerate progress on privatization and enterprise reform. With or without EU membership, these reforms will need to be made. But the prospect of EU membership can help support the transition—by providing a road map, a cooperative framework, and a boost to confidence.
I think enlargement can also help bring positive changes on the other side of the partnership—by acting as a catalyst for the reform of European institutions, including the Common Agricultural Policy. The world must also hope that as the EU evolves and lowers trade barriers vis-à-vis associated countries, it—and its non-EU trading partners—will also lower barriers on a multilateral basis and thereby contribute to freer world trade.
The development of the financial markets also calls for action to strengthen the soundness of domestic banking systems by reinforcing internal controls and prudential supervision. At the same time, however, more could be done to strengthen the role of the market in ensuring the soundness of financial systems—for example, by encouraging the market to provide high-quality and standardized information on financial sector operations and by governments adopting appropriate “exit” policies vis-à-vis financial institutions.
Finally, a few words on the requirements for greater international financial stability—not just in Europe, but among all the major currencies. If countries want to achieve greater stability, they must work for it. Thus, in addition to pursuing firm domestic policies, countries must also coordinate their policies more effectively. This will entail countries making a greater effort to understand the interests and policies of others. It will involve countries listening more carefully to the judgments of others about their own economic policies. And finally, it will require countries to take a more enlightened view of their own national interests—they will have to recognize that taking the interests of other countries into account is in their own self-interest. I hope these remarks will provoke you to think—not of what is, but of what should be. I think you will agree that the opportunities are great—both for Europe and the world.
New Techniques Could Enhance Tax Revenues in Africa The Scope for Presumptive Taxation in Africa
A recent IMF Working Paper, by Cumber Taube and Helaway Tadesse of the IMF’s African Department, argues that an effective resolution of sub-Saharan Africa’s fiscal difficulties increasingly depends on its ability to devise and implement more flexible and broadly based revenue-collection systems. One means for achieving this end, according to the Working Paper, is the increased adoption of “presumptive taxation,” a collection of relatively simple and cost-effective techniques designed to tap the incomes of businesses and individuals that have so far escaped taxation, either by not reporting or by underreporting actual incomes. Broadening the tax base and, in turn, increasing government revenue is necessary to reduce fiscal imbalances and achieve macroeconomic stability in many African countries.
Difficulties in Tax Collection
Tax collection in most African countries is a frustrating business. Part of the reason is that most of these countries lack effective taxing authority and requisite personnel for the task. The problem is worsened by the large number of people unable or unwilling to keep proper accounts and who, as a result, fail to file tax returns. These difficulties are compounded by a general refusal to accept the right of government to collect revenue from its citizens and a corresponding tendency to engage in extensive tax evasion. Common instances of such behavior include concealing key income from illegal sources, underreporting or nonreporting of sales declarations, inflating expenses, claiming fictitious capital expenditures or nonexistent dependents, and maintaining two sets of accounts.
Even among large enterprises and self-employed professionals, record-keeping practices necessary for effective tax assessment are frequently not followed. Even if books are kept, they may consist of only rudimentary accounts or be unreliable and largely fabricated. Tax evasion is especially common where tax rates are high and where investigative auditing is rarely undertaken, or susceptible to corruption, or not sufficiently supported by strong penalties. As a result, many firms and individuals are able to avoid paying taxes altogether. In light of the weak fiscal position of most African countries, resulting losses of revenue pose major threats to their fiscal integrity, according to the Working Paper.
The tax base of the formal sector is too limited in many African countries, since only a small share of the overall population is on the payroll of formal sector enterprises and the government, where recorded profits, wages, and sales are readily observable and easily taxable. An even more serious problem, according to the Working Paper, is to be found in Africa’s large and growing informal sector—constituting more than 30 percent of GDP in many cases. In this sector, the untaxed activities of farmers, traders, self-employed professionals, and small businesses in the service and manufacturing areas have reached serious levels.
Presumptive taxation captures domestic transactions that escape identification under conventional means.
Tax authorities in most African countries face serious difficulties identifying informal sector activities. This is not only because these activities are sometimes illicit, but also because even legitimate undertakings are hard to identify when they are mobile (traders), small-scale (basic services), or elusive (artisans doing small jobs for cash). As a result, many undertakings fall through the tax net. The authors suggest a more targeted approach—one that is capable of mobilizing more revenue from Africa’s informal sector. The ultimate goal in this context is to tighten the tax net in the most efficient, equitable, and cost-effective manner possible.
Given the challenges posed by Africa’s informal sector to tax collection, the IMF paper lists two major reasons why presumptive taxation techniques merit greater attention than they have so far been given:
• Traditional tax assessment methods in Africa have been found wanting in the absence of necessary accounting, auditing, and technical skills. Even if these skills were more abundant, however, inadequate legal structures would make the tasks of enforcement and collection frustrating.
• Judicious use of presumptive taxation techniques has already demonstrated an impressive capacity to expand significantly the tax net—by as much as 20 times in certain countries. Thus, given the right circumstances, resorting to presumptive taxation can provide a cost-effective way to increase the number of taxpayers while broadening the revenue base.
What Is Presumptive Taxation?
Presumptive taxation, as mentioned above, consists of simple and cost-effective techniques to capture domestic transactions and sources of income that frequently escape identification under conventional means. Older techniques include lump-sum levies on small-scale business activities (standard assessments), taxes levied through indicators or proxies to determine a taxpayer’s income (estimated assessments), and minimum taxes collected irrespective of a taxpayer’s actual level of business activity (presumptive minimum taxes). Newer techniques include presumptive taxes on imports, withholding schemes to capture incomes of unregistered businesses, and graduated business license fees.
Based on country experiences, the Working Paper concludes that, in general, there is further potential for the use of presumptive taxation techniques in Africa. The following newer presumptive taxation techniques are considered best adapted to address Africa’s fiscal challenges:
• Presumptive import taxes capture the incomes of both registered and unregistered importers. For the former, such taxes represent a down payment on their final tax liability; for unregistered groups, payment can constitute a final profit tax on presumed income. In response to IMF advice, several African countries have already begun to levy presumptive taxes on imports in order to capture incomes derived from these transactions. Generally, the tax carries a low rate (with the import value as the tax base); for example, the rate is 1 percent in Senegal, 3 percent in Benin, and 5 percent in Côte d’Ivoire. The Comoros levies a 5 percent presumptive tax on the value of all goods brought in by unregistered importers, while a 1 percent levy is applied for registered importers as an advance tax payment. In Ethiopia, a similar tax is levied at the country’s major airport customs office; registered importers are exempt from it, while unregistered importers are taxed according to the rate schedule for individuals. Easily collected, revenues derived from this source have reportedly jumped threefold since being introduced three years ago.
Photo Credits: Denio Zara and Padraic Hughes for the IMF, pages 102 and 104.
• Withholding schemes tap incomes of unregistered businesses and individuals, thus constituting a form of down payment for the actual tax liability. For example, government departments renting office space, houses, or other facilities could be requested to withhold specified amounts of money. Rather than going to the landlord, such funds would be sent directly to the tax authorities. Similarly, the incomes of building contractors, professionals, or others engaging in transactions with the government could be made subject to a withholding scheme. A case in point is Côte d’Ivoire, which applies a 5 percent withholding tax on purchases of a wide range of consumer and industrial goods. Tax payments under this system are then credited toward an enterprise’s final income tax liability if the business is registered; otherwise, payments constitute a final tax on the incomes of unregistered firms. Benin and Senegal have introduced similar withholding taxes on purchases from wholesalers, with rates in both cases set at 3 percent.
New presumptive tax techniques promise to be big revenue raisers in Africa.
• Graduated business license fees are charges placed on businesses. Most African countries already apply such fees, but only a few rely on them as an income tax instrument. In the latter case, such fees are usually graduated on the basis of indicators—such as the firm’s floor space, rental value, or number of employees. As a means of capturing taxable incomes, such fees have the dual advantage of being both cost-effective and easy to administer. Where license fees are used, as in Guinea and Benin, the tax is calculated on the rental value of a firm’s premises. In Benin’s case, the use of such fees has been particularly successful, since they were implemented in tandem with a computerization program of the urban property register.
According to the Working Paper, the newer presumptive taxation methods are superior to the older ones for the following reasons:
• They are especially appropriate in countries with weak administrative capacities. Applying such techniques requires a limited degree of additional administrative effort.
• They are geared to work within existing institutions, such as customs and business registration bureaus. Based on historical tax collection systems, these institutions are comparatively strong and well established. Presumptive import levies, for example, can be applied relatively easily by customs offices, while business license levies may be collected by existing government departments. Similarly, the application of withholding tax schemes is simply “an extension of what such firms already do effectively with respect to employees’ wages.”
• They are targeted toward activities where informal sector operators are frequently involved, such as bulk purchasing from domestic wholesalers or importing. For example, the imposition of presumptive import taxes has helped generate new revenues from importers who earn significant incomes from the sale and distribution of imported goods.
• The new presumptive taxes are designed to specifically address the collection and arrears problems of revenue authorities by imposing a prepayment for tax liabilities even on registered taxpayers, thereby remedying the delinquency problem. On a larger canvas, by reducing long collection lags and ensuring greater compliance, presumptive import taxes and withholding schemes are able to significantly reduce tax administration costs.
• They are applied with an eye toward making the presumptive tax a bridge to the conventional tax system by providing a strong incentive for evaders to register with the tax authorities in order to become subject to the lower tax rate.
Judiciously applied, these three newer presumptive taxation techniques promise to be substantial additional revenue earners. To ensure success, however, such efforts must be accompanied by longer-term initiatives to strengthen the capacity of tax administrations.
Presumptive Taxation in Sub-Saharan Africa: Experiences and Prospects, by Günther Taube and Helaway Tadesse, is No. 96/5 in the IMF’s Working Paper series. Copies are available for $7.00 from Publication Services, Box XS600, International Monetary Fund, Washington, DC 20431 U.S.A. Telephone: (202) 623-7430; fax: (202) 623-7201; Internet: email@example.com.
Selected IMF Rates
SDR Interest Rate
Rata of Remuneration
Rate of Charge
SDR Interest Rate
Rata of Remuneration
Rate of Charge
The SDR interest rate, and the rate of remuneration, are equal to a weighted average of interest rates on specified short-term domestic obligations in the money markets of the five countries whose currencies constitute the SDR valuation basket (the U.S. dollar, weighted 39 percent; deutsche mark, 21 percent; Japanese yen, 18 percent; French franc, 11 percent; and U.K. pound, 11 percent). The rate of remuneration is the rate of return on members’ remunerated reserve tranche positions. The rate of charge, a proportion (currently 102.5 percent) of the SDR interest rate, is the cost of using the IMF’s financial resources. All three rates are computed each Friday for the following week. The basic rates of remuneration and charge are further adjusted to reflect burden-sharing arrangements. For the latest rates, call (202) 623-7171.
Data: IMF Treasurer’s Department
Government Finance Statistics Yearbook: 1993 Data Reveal Mixed Fiscal Performance and Divergent Spending Patterns
The recession that bogged down the economies of most industrial countries between 1990 and 1992 began to release its grip in 1993 and 1994. But the road to recovery was rockier for some countries than for others. Two divergent trends emerged in 1993. For most European countries, the deteriorating fiscal deficits that accompanied the 1990–92 recession continued in 1993, reflecting the deepening of the recession in those countries. In contrast, for other (generally non-European) countries, fiscal balances improved as their economies began to recover. For developing countries, the fiscal picture was mixed. In addition, the data show higher spending by developing countries on economic services and defense, relative to industrial countries.
The IMF’s recently published 1995 Government Finance Statistics (GFS) Yearbook highlights these and other trends in data on government operations in 115 countries.
Fiscal Picture Is Mixed
Among industrial countries, overall fiscal performance in 1993—the most recent year for which data are available for most countries—was mixed. Most European industrial countries experienced a marked fiscal deterioration, partly mirroring the deepening of the 1990–92 recession. In contrast, with the exception of Australia and Japan, the fiscal balances of most non-European industrial countries improved, signaling the beginning of a recovery. Among all industrial countries, Greece had the highest fiscal deficit-to-GDP ratio (16 percent), followed by Sweden (15 percent), and Finland (13 percent).
The fiscal performance of developing countries was also mixed, both across and within regions. Only a handful of countries reported surpluses in 1993: in Asia, only the ‘Asian Tigers” (Indonesia, Korea, Malaysia, Singapore, and Thailand); in Europe, the Czech Republic; in the Middle East, Egypt, Jordan, and Syria; in the Western Hemisphere, Chile, Ecuador, Panama, and Paraguay; and in Africa, Mauritius.
Most industrial country fiscal revenue derives from taxes on income and profits and from social security contributions.
With the exception of Africa, where the deficits of nearly all countries reporting data for 1992 and 1993 shrank as a percent of GDP, there was no discernible regional trend for the 41 developing countries for which 1993 data are available.
Revenue Sources Differ
For industrial countries, most government revenue traditionally derives from two components:
• taxes on income and profits, which normally represent over 50 percent of tax revenue for countries outside Europe and between 15 and 35 percent for those within Europe; and
• social security contributions.
In only five industrial countries—Denmark, Finland, Greece, Iceland, and Sweden—was the share of taxes on income and profits and social security contributions equivalent to less than half of total revenue in 1993. (The same five countries, together with the United Kingdom, reported the highest shares of taxes on domestic goods and services of all industrial countries—over one third of total revenue.) The United States relied most heavily on taxes on income and profits and social security contributions—revenue from these sources accounted for 85 percent of the total in 1993.
The relative weights of the two main components of industrial country revenue differ substantially between Europe and the United States, with the United States reporting a much higher share of revenue from income and profits than from social security contributions. The heavy reliance in the United States on taxes on income and profits reflects the absence of a national sales tax. In Europe, Germany and France are the most dependent on social security contributions, reporting shares of 46 percent and 44 percent, respectively, in total revenue from this source.
Taxes on domestic goods and services—including value-added, sales, and excise taxes—continued to be a substantial source of government revenue for most industrial countries in 1993, averaging about 20 percent of total revenue. Such taxes were considerably less important in Japan (14 percent) and, more notably, in the United States (4 percent), where these taxes are levied predominantly by state and local governments.
Taxes on international trade and transactions were negligible sources of revenue for industrial countries (less than 5 percent in 1993). In Iceland, where previously some 10 percent of revenues were derived from these taxes, their share during 1988–94 fell to 5 percent in 1993 and to less than 2 percent in 1994.
In contrast to industrial countries, developing countries derive their main revenue from taxes on domestic and international goods and services. In 1993, these taxes continued to be the most important revenue source for most developing countries, although there were some variations across regions. Of the 63 developing countries for which 1993 data are available, 40 reported that at least 40 percent of their total revenue came from these taxes. This was the case for all African countries, for 15 of 19 countries in the Western Hemisphere, and for 9 of 15 countries of Asia. In contrast, developing countries in Europe and the Middle East relied less heavily on these taxes.
Developing countries rely much less heavily than industrial countries on revenue from taxes on income and profits and social security contributions. Revenue from these sources accounted for more than 40 percent in only 14 of the 63 developing countries for which 1993 data are available: Bulgaria, Croatia, the Czech Republic, Ecuador, Estonia, Indonesia, Israel, Lithuania, Malta, Mongolia, Poland, Papua New Guinea, South Africa, and Venezuela. For six of the European countries, the higher revenue from these sources reflects the high level of social security contributions inherited from former centrally planned systems.
The industrial countries’ share of nontax revenue in total revenues increased in 1993—except in New Zealand and Luxembourg. These shares, however, remained below 9 percent—except in the four Nordic countries and Japan. In contrast, nontax revenue was a significant source of income for several developing countries: it accounted for at least 10 percent of total revenue for all Middle East countries for which 1993 data are available and for most Asian, African, European, and Western Hemisphere countries.
Countries for which more complete data are available.
Subsequent data do not form a consistent series with those for earlier years.
Data: Government Finance Statistics Yearbook
Spending Patterns Reflect Differing Priorities
Spending patterns of industrial and developing countries differed both by economic type and by function, according to data in the GFS Yearbook.
Expenditure by Economic Type. In 1993, data on central government expenditure by economic type show that subsidies and other current transfers accounted for at least 50 percent of industrial country outlays; the only exceptions were New Zealand (46 percent), and Ireland and Greece (both 29 percent). In contrast, 34 of 55 developing countries reported a ratio below 25 percent, and in only 5 countries was the ratio above 50 percent: Bulgaria (51 percent), Chile (51 percent), the Czech Republic (68 percent), Romania (53 percent), and Uruguay (61 percent). Excluding the former centrally planned economies of Europe, the number of developing countries with a ratio of spending on subsidies and transfers as a percent of total spending below 25 percent rises to 41.
For all industrial countries except Greece and Iceland, spending on wages and salaries as a share of total expenditure and lending minus repayments was less than 20 percent. In contrast, more than 43 percent of developing countries reported a ratio above 30 percent, and 68 percent had a ratio above 20 percent.
GFS Yearbook Provides Comprehensive Data on Central Government Operations
The 1995 edition of the Government Finance Statistics Yearbook contains detailed financial information on the government operations of 115 countries, including some state and local data. Providing a common framework for international comparisons of data on government operations, GFS Yearbook data point to trends, shed light on economic developments, and identify links between economic indicators that can prove useful in formulating policy. Data are presented by country on consolidated central government revenue, grants, expenditure, lending, financing, and debt; for some countries, separate details are provided on budgetary and extrabudgetary accounts of central government and social security funds.
The GFS Yearbook also provides similar, though less detailed, data for the state and local governments of many countries. Preliminary, provisional, and forecasted data are included whenever possible. To facilitate international comparisons of central government operations, the GFS Yearbook provides country data on selected topics grouped by region rather than by country. These tables show—both as a percent of GDP and by major category—total central government revenue, total expenditure, and total expenditure and lending minus repayments, as well as data on financing and on the overall deficit/surplus. As in previous editions, expenditure data on a functional basis include those on defense.
The 1995 GFS Yearbook was prepared by the Government Finance Division of the IMF’s Statistics Department. Copies are available for $58.00. Computer tape subscriptions, which provide more current data and data for earlier years, are also available. For copies, please write to Publication Services, Box XS600, International Monetary Fund, Washington, DC 20431 U.S.A. Telephone: (202) 623-7430; fax: (202) 623-7201; Internet: firstname.lastname@example.org.
Interest payments are the only main expenditure component where GFS Yearbook data show similar trends in both industrial and developing countries. For all except 3 of the 72 countries for which 1993 data are available, interest payments as a share of total outlays were below the 25 percent mark; the exceptions were Kenya (32 percent), Greece (29 percent), and Sierra Leone (25 percent).
Capital expenditure was below 10 percent of total spending in all industrial countries in 1993, except Luxembourg (12 percent) and Greece (10 percent). In nearly all developing countries, the share of capital expenditure exceeded 10 percent.
Expenditure by Function. The differences between industrial and developing country spending are even more striking when examined on a functional basis, according to the 1993 data in the GFS Yearbook. For all but three industrial countries, the share of spending on social security and welfare in total expenditure was more than 30 percent in 1993; the exceptions were Greece (13 percent), Iceland (23 percent), and the United States (29 percent). In contrast, in most developing countries, this share was less than 15 percent; and for Africa, it averaged less than 8 percent. By region, the countries exceeding 15 percent included Mongolia (18 percent) and Sri Lanka (16 percent) in Asia; Israel (22 percent) and Jordan (15 percent) in the Middle East; and Brazil (29 percent), Chile (33 percent), the Netherlands Antilles (34 percent), Panama (21 percent), Paraguay (16 percent), and Uruguay (56 percent) in the Western Hemisphere. Europe was the only geographical area at variance with other developing countries, with all countries except Turkey reporting a share above 20 percent.
In developing countries, two important spending categories are economic services and defense. In 1993, the share of spending on economic services of most reporting countries was above 15 percent. The exceptions were countries in the Middle East and Europe; in these countries, the share of spending on economic services was similar to that of industrial countries, and generally less than 15 percent.
Defense spending ratios by the majority of industrial countries have been declining steadily in the past few years (except in Greece). The 10 countries of the Middle East for which 1993 data on defense are available (with the exceptions of Bahrain, Egypt, and Iran) stand out, with ratios of defense spending to total outlays above 20 percent. Other developing countries with ratios in excess of 20 percent include Croatia (21 percent), Myanmar (39 percent), Singapore (25 percent), and Zaïre (26 percent).
K. Wabel Abdallah
IMF Statistics Department
From the Executive Board
The IMF approved a three-year loan for the Republic of Georgia totaling the equivalent of SDR 166.5 million (about $246 million) under the enhanced structural adjustment facility (ESAF), in support of the government’s economic and structural reform program during the period 1996-98.
Recent IMF Publications
Working Papers ($7.00)
96/1: Central Bank Independence: A Free Lunch?
96/2: Institutional Investors and Asset Pricing in Emerging Markets
96/3: Aspects of the Swiss Labor Market
96/4: Dollarization in Latin America: Recent Evidence and Some Policy Issues
96/5: Presumptive Taxation in Sub-Saharan Africa: Experiences and Prospects
96/6: The Mexican Peso Crisis: Overview and Analysis of Credibility Factors
96/7: Effects of the Uruguay Round on Egypt and Morocco
96/8: Implications of the Uruguay Round for Kenya
96/9: The Economic Content of Indicators of Developing Country Creditworthiness
96/10: Internal Currency Convertibility: Survey of Issues and Practices
96/11: Private Bond Restructurings: Lessons for the Case of Sovereign Debtors
96/12: Banking Sector Fragility and Systemic Sources of Fragility
96/13: An Analysis of the Optimal Provision of Public Infrastructure: A Computational Model Using Mexican Data
96/17: Should the IMF Become More Adaptive?
IMF Staff Country Reports: 1996 ($15.00)
No. 1: Mauritius
No. 2: Tanzania
No. 3: Peru
No. 4: Swaziland
No. 5: Burkina Faso
No. 6: Côte d’Ivoire
No. 7: Guinea
No. 8: Pakistan
No. 9: Romania
No. 10: Romania (Statistical Appendix)
No. 11: Sierra Leone
No. 12: Togo
No. 13: Bulgaria
No. 14: New Zealand
World Economic and Financial Surveys
Official Financing for Developing Countries ($20.00; academic rate $12.00)
Occasional Papers ($15.00; academic rate $12.00)
No. 134: India: Economic Reform and Growth
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Georgia: Selected Economic Indicators
Data: Georgian authorities and IMF staff estimates
External current account balance (excluding grants)
(months of Imports)
Data: Georgian authorities and IMF staff estimates
Following its independence in 1991, Georgia faced severe disruptions in its trade and payments operations and sharply increased energy import costs. The economy also suffered from civil conflicts, a war in the Abkhazia region, and the disruption of trade by hostilities in neighboring countries. By 1994, these shocks had caused economic activity to decline to less than one third of its 1990 level, while an unsustainable fiscal stance and accommodating monetary policy fueled hyperinflation.
As political stability improved in early 1994, the government launched an IMF-supported reform program that was successful in halting hyperinflation, stabilizing the exchange rate, reversing chronic currency substitution, and introducing important structural changes. The stabilization program laid the groundwork for the successful introduction of a new national currency, the lari, in September 1995. The government of Georgia is determined to consolidate its recent economic achievements in order to establish the necessary conditions for the resumption of economic growth, and to accelerate the transition to a market economy while improving social protection.
Medium-Term Strategy And 1996–98 Program
Under Georgia’s medium-term strategy, the main macroeconomic objectives of the 1996–98 program are an average annual growth rate of between 8 and 10 percent; reduction of inflation to less than 10 percent by the end of 1998; reduction of the external current account deficit to 4.2 percent in 1998 from 15.3 percent in 1995; and strengthening of the country’s international reserves position. To these ends, fiscal policy will seek to reduce the overall deficit of the general government to about 3 percent of GDP in 1998 from about 6 percent in 1995. Tax revenues will be raised in order to finance essential current government expenditures, while the financing of capital investment will rely mainly on external resources. To improve revenue performance, the government will limit tax exemptions, expand the tax base, and strengthen tax and customs administration. A tight monetary program will remain in place to attain the inflation objectives of the program. The program also envisages a number of structural reforms to facilitate the complete transition to a market economy.
Within this medium-term strategy, the program for 1996 aims at an annual growth rate of 8 percent; an inflation rate of 20-25 percent by year-end; an external current account deficit of 7.1 percent of GDP; and international reserves of nearly 2.7 months of projected 1996 imports. To attain these objectives, the overall deficit of the general government is targeted to decline to 3.4 percent of GDP, as tax revenues for 1996 are expected to increase to 6.7 percent of GDP from an estimated 3.7 percent of GDP in 1995.
The structural reforms to be implemented under the program include elaboration of an adequate legal framework for a market economy, reform of commercial banks, acceleration of privatization, further progress toward the full liberalization of prices and of the exchange system, continued restructuring and downsizing of the government, and a broad range of sectoral policies. A program currently under way comprises the privatization of 325 medium- and large-scale enterprises and a reduction of the number of enterprises exempted from privatization.
Agricultural land laws will set the stage for full ownership rights, thereby creating a market for land, and will allow land to be used as collateral for bank loans. The block on government subsidies to the energy sector will continue. Financial balance in the sector will be sought through improvements in revenue collection and the restructuring of the state gas and electricity companies. A bank restructuring strategy developed by the authorities aims at limiting the growth of banks that do not meet certain capital and prudential banking standards and at facilitating the establishment of reputable foreign banks.
Addressing Social Costs
The limited resources available for the social safety net have led the government to target the most vulnerable households in order to maximize benefits. Since late 1994, a number of non-targeted programs have been limited or eliminated. The process will continue in 1996 while the government improves its poverty-monitoring capacity. A national household survey is planned for 1996 and will be used as the main source of information for a detailed poverty assessment study. In the 1996 budget, the government has raised the retirement age by five years, which will allow pensions to be gradually increased from their currently low levels.
The Challenge Ahead
Notwithstanding the important strides made so far, Georgia still faces daunting economic challenges that need urgent attention in the next few years. Acceleration of reforms in the areas of public finances, government restructuring, privatization, and energy will enhance prospects for economic growth and reverse the steep decline in living standards that has occurred since 1991.
The Republic of Georgia joined the IMF on May 5, 1992, and its quota is SDR 111.0 million (about $164 million). Georgia’s outstanding use of IMF credit currently totals SDR 77.7 million (about $115 million).
Press Release No. 96/7, February 28
The IMF approved the second annual loan for Vietnam in an amount equivalent to SDR 120.8 million (about $178 million) under the three-year enhanced structural adjustment facility (ESAF). A total of SDR 362.4 million (about $535 million) was approved on November 11, 1994 (see Press Release No. 94/79, IMF Survey, November 28, 1994). The loan will support the government’s 1996 macroeconomic and structural reform program and will be disbursed in two equal semiannual installments, the first of which is available immediately.
The Vietnamese economy performed well under the 1994–95 program supported by the first annual ESAF loan, and economic growth has been sustained at about 9 percent a year, fueled by rapidly rising exports and growing foreign direct investment. The authorities have maintained tight financial policies. Inflation has declined, while the exchange rate has stabilized, and international reserves have strengthened. However, the implementation of structural policies has been mixed, with some delays occurring in several important areas.
The Program for 1996
Vietnam’s 1996 economic program is based on an annual GDP growth rate of 9.5 percent and seeks to lower the annual rate of inflation from 13 percent in 1995 to 9 percent by year-end. The external current account deficit is expected to widen to 8.9 percent of GDP from 8 percent in the previous year, primarily reflecting increased foreign aid disbursements. Financial policies are expected to remain tight. Fiscal policy will rely on a restrictive government budget that aims to reduce the overall deficit to 1.5 percent of GDP in 1996, from 1.7 percent in 1995. Current outlays and nonproductive expenditures are to be reduced, but spending in the areas of primary education and basic health care, as well as in infrastructure and human capital development, will be protected in real terms. Monetary and credit policies will also remain restrained in line with the inflation and growth objectives of the program.
Vietnam: Selected Economic Indicators
Data: Vietnamese authorities and IMF staff estimates and projections
External current account balance (excluding grants)
(weeks of imports)
Foreign exchange reserves
Data: Vietnamese authorities and IMF staff estimates and projections
To enhance the effectiveness of their program, the Vietnamese authorities are moving forward with a wide range of structural reforms. The basic strategy is to promote efficient investment through increased competition from domestic and external sources, while raising domestic savings by improving the efficiency of financial intermediation and increasing confidence in domestic financial institutions. To these ends, the structural reform agenda emphasizes exchange and trade liberalization, state enterprise and legal reforms, and financial sector reform. In addition, fiscal measures include unification of corporate income tax rates, rationalization of the personal income tax system, and preparation for the introduction, by 1998, of a value-added tax.
The provision of basic health care and education, which is a priority of the government, focuses resources on preventive and primary health care and on primary education. The government will continue its poverty alleviation efforts in rural areas, where over half the population lives, stressing agricultural diversification and off-farm investments. Rural infrastructure and basic education and health care will be improved and measures will be taken to promote savings mobilization and expand access to credit for the poor.
The Challenge Ahead
To secure external viability over the medium term, rescheduling of past external debt arrears on appropriately concessional terms is required. In this regard, the authorities are actively seeking to reach an early agreement with commercial bank creditors and with holders of transferable ruble debt. New external commercial borrowing will need to be strictly limited both in 1996 and over the medium term.
Vietnam joined the IMF on September 21, 1956. Its quota is SDR 241.6 million (about $357 million), and its outstanding use of IMF credit currently totals SDR 254 million (about $375 million).
Press Release No. 96/8, March 1
The IMF approved a stand-by credit for Uruguay authorizing drawings up to the equivalent of SDR 100 million (about $148 million) over the next 13 months, in support of the government’s 1996 economic program. The authorities of Uruguay intend to treat the stand-by as precautionary.
Between 1990 and 1994, the government of Uruguay implemented policies aimed at reducing inflation and fostering output growth, which were supported by IMF stand-by arrangements approved in 1990 and 1992 and included IMF monitoring of Uruguay’s economic program in 1994. The annual growth rate of real GDP averaged 4 percent in 1990–94. compared with a historic annual trend of about 2 percent; inflation was reduced to 44 percent in 1994 from 130 percent in 1990; and the investment/GDP ratio rose to 14 percent in 1994 from 11 percent in 1990. Progress also was made in strengthening public finances, reducing wage indexation, opening up the economy, and curtailing government intervention in the economy.
Uruguay: Selected Economic Indicators
Data: Uruguayan authorities and IMF staff estimates
Data: Uruguayan authorities and IMF staff estimates
In early 1995, Uruguay’s external environment deteriorated following the financial crisis in Mexico, and the risk of significant shortfalls in export earnings and large capital outflows increased substantially. As a result, the government that took office in March 1995 promptly implemented a macroeconomic program to ensure that confidence was maintained and that Uruguay’s external vulnerability was reduced. While economic activity declined by 2.5 percent in 1995, the external current account deficit narrowed to 2 percent of GDP from 2.5 percent of GDP in 1994, gross international reserves strengthened to over 5½ months of imports of goods and services, and inflation was reduced further to 35 percent by the end of 1995.
The 1996 Program
The government’s 1996 economic program seeks to consolidate the progress that has been made in recent years in macroeconomic stabilization, to increase the economy’s resilience to external shocks, and to promote sustainable economic growth. It has been framed in the context of a medium-term strategy to lower inflation gradually to industrial country levels, to improve resource allocation, and to raise national saving and investment. The program aims at real GDP growth of 1 percent, reducing the external current account balance, lowering the annual rate of inflation to 20 percent by year- end, and maintaining international reserves at the equivalent of 5½ months of imports, while lengthening the average maturity of public debt. To these ends, fiscal policy envisages a lowering of the public sector deficit to 0.5 percent of GDP in 1996 from 1.7 percent in 1995, reflecting mainly a strengthening of public sector saving. Incomes policy will support the program’s fiscal and inflation objectives. Credit policy will be geared toward achieving the inflation and balance of payments targets of the program. The rate of crawl of the exchange rate band will be consistent with the targeted lowering of inflation, while tax measures and structural reforms are being implemented to strengthen external competitiveness.
Structural reforms under the program include implementation of the recently enacted reform of the social security system. The operations of the main social security system will be modernized and decentralized, and the system of tracking down individual contributions, which is essential for improving the administration of social security contributions and pension benefits, will be fully established in the first half of 1996. Also, the government will propose legislation to reform the pension plans of the military, the police, and remaining private sector plans. The authorities plan to reform the central administration in an effort to reduce current government expenditure in the medium term, while increasing public sector efficiency in delivering essential services. Private sector participation is envisaged in areas such as electricity generation and transmission, natural gas transportation and distribution, railways and roads, ports, water and sewage collection, and telecommunications. Steps are also being taken to increase the efficiency of domestic financial intermediation to help raise domestic saving and investment and promote Montevideo as a financial center within MERCOSUR.
Addressing Social Needs
A comprehensive reform program is being designed to improve the quality and provision of public education services. The reform will cover primary and secondary education and includes improved teacher training, restructuring of teachers’ salaries, modifications of curricula, supplying of teaching materials, and construction of schools and other infrastructure.
The Challenge Ahead
Uruguay is making significant progress in strengthening its public finances and promoting solvency through comprehensive reforms of the social security system and the central administration. In order to achieve the program’s objectives, firm control will be required over central administration and public enterprise expenditure.
Uruguay joined the IMF on March 11, 1946; its quota is SDR 225.3 million (about $333 million). Its outstanding use of IMF credit currently totals the equivalent of SDR 12 million (about $18 million).
Press Release No. 96/9, March 1
Fiscal Issues Are a Growing Concern Of the IMF
On March 6, Vito Tanzi, Director of the IMF’s Fiscal Affairs Department (FAD) since 1981, was interviewed by the Editor of the IMF Survey. Mr. Tanzi holds a Ph.D. in economics from Harvard University. Before joining the IMF in 1974, he was Professor and Chairman of the Economics Department at American University in Washington, DC.
IMF Survey: Fiscal discipline is a vital element of the IMF’s macroeconomic policy advice to member countries. How would you describe your department’s role in IMF surveillance and policy advice?
Tanzi: The Fiscal Affairs Department was created together with many other departments of the IMF in 1964. The idea was to have a department largely involved with technical assistance, with helping new countries in Africa and elsewhere create fiscal institutions. For a while, FAD’s involvement with surveillance was very limited. This began changing about fifteen years ago when fiscal problems on a larger scale began appearing in many industrial countries and the link between fiscal and macroeconomic problems—especially balance of payments problems—became increasingly evident. The IMF realized that one could not talk about balance of payments problems or how inflation came about without first looking at the fiscal situation of a country.
Fiscal problems became increasingly important after the first oil shock in the mid-1970s, partly as a consequence of macroeconomic policies pursued at the time and the growing role of the public sector. Deficits became widespread, especially in the early 1980s. Thus, concern for fiscal issues grew and, inevitably, so did FAD’s role in the IMF.
IMF Survey: FAD provides considerable technical assistance to IMF members. What is the nature of this assistance and how has it evolved?
Tanzi: In the mid-1960s, this department was involved in helping some new IMF member countries create fiscal institutions. As time passed, we moved from institutions to policy. But the role of the department was limited mainly to tax policy, tax administration, and, to some extent, budgetary policy. Since then, the role of technical assistance has broadened—especially with the accession of the economies in transition to market-oriented systems, which has revived the need to create institutions as well as to reform policies. In the transition economies, we have been much involved in setting up tax administrations, treasuries, and budget offices, and creating and reforming customs policies.
Another trend has been the reform of existing institutions and policies. We play a large role in trying to make tax systems more efficient and somewhat more equitable. And we have been much involved in improving “public expenditure management systems,” which encompass systems ranging from the budget, to the treasury, to cash accounting, and to all the activities that allow a country to gain better control over its expenditure. More recently, some fiscal problems have become significant in industrial countries, which have gotten more involved in such areas as pension systems and their role in macroeconomic developments.
Work on social safety nets has also been an important activity of FAD, for two reasons. The first is because of the major economic policy changes in the transition economies, which were accompanied by very high inflation that sometimes dramatically reduced the income of some groups, such as pensioners. Also, people in these countries had benefited considerably from large subsidies on bread or transportation, and when these subsidies were removed, their disposable incomes fell dramatically. So, it was necessary to reform policies to protect these people and provide them with at least a minimum income. The other reason we became more active in the safety net area was to provide some sort of targeted protection for particularly vulnerable population groups in countries engaged in major macroeconomic adjustment efforts that were accompanied by large devaluations or large withdrawals of subsidies.
IMF Survey: What implications does the prevailing global theme of fiscal discipline have for the traditional countercyclical role of fiscal policy? Do you expect the latter role for fiscal policy to re-emerge at some point?
Tanzi: The countercyclical role of fiscal policy was popularized by Keynesian economics. It assumed that when aggregate demand was deficient, government could inject additional demand either by cutting taxes or increasing spending, or vice versa in a boom environment. This thesis, however, rested on many theoretical assumptions about expectations, some of which have been challenged in the literature. Robert Lucas, for example, won this year’s Nobel Prize for challenging some of these assumptions. We have now come to see that once people learn the trick, or anticipate such government actions under certain circumstances, they react quickly and accordingly.
The other assumption was that under the Keynesian model, individual consumption depended on that individual’s current income, so if somebody’s measurable income was very high in a particular year, and the stock market subsequently fell and his or her income dropped to zero, you would expect this person to consume much less. We now know this is not so. People’s consumption does not change much from year to year; rather, it depends on their permanent income or total wealth. So, you have all these theoretical challenges to the traditional role of countercyclical fiscal policy. An additional challenge is important from the IMF’s point of view. While Keynes was never specific about this, an implicit assumption was that the fiscal deficit over the cycle was close to zero as a percent of GDP; a country would therefore have a deficit when it got into a recession and a surplus when it got into a boom. But now we find more and more countries in which the fiscal deficit is never zero. In Italy, for example, it has been around 8, 9, or 10 percent of GDP regardless of whether the country was in a boom or recession; similarly, the U.S. deficit has remained at 3, 4, or 5 percent of GDP regardless of the cycle. This has been true for most industrial countries and for many countries in the world. When you have a structural deficit of these magnitudes, you often have a buildup of debt, which creates different problems. This means we now have to distinguish between fiscal policy that is for fiscal reasons—correcting all the problems that accumulate over the years—and fiscal policy that is of a stabilizing or countercyclical nature.
In many cases now, fiscal policy related to structural problems has become more important than fiscal policy related to countercyclical objectives. So, the net effect in recent years has been to shift the attention of policymakers and economists in general away from countercyclical fiscal policy toward a fiscal policy that is aimed at correcting the imbalances created over many years. The IMF has been a party to this. We have been telling the U.S. and Italian governments each year, for example, to reduce their structural fiscal deficits regardless of their point in the cycle. On the other hand, we have been willing to accommodate countercyclical policy in particular cases. When the long-run fiscal situation is not in too bad a shape and if the cycle is more severe than anticipated—as in Japan last year—we have not completely shied away from recommending countercyclical fiscal action. Overall, however, the IMF has been more oriented in recent years to helping correct fiscal imbalances that are more permanent in nature.
IMF Survey: FAD has become involved in several new areas: poverty, social safety nets, income distribution, military expenditures, and the environment. What is the nature of its work in these areas, and how would you assess its relevance of the IMF’s main macroeconomic work and its value to members?
Tanzi: There are different reasons and justifications for this work, which is very limited in nature. Some of the work we have done on military expenditures is very much tied to macroeconomic problems. If a country has a macroeconomic problem, it is often because it has a large fiscal deficit; it has a large fiscal deficit, in turn, because it either took in too little taxes or spent too much. When a country wants to correct this situation, it tries either to increase the level of taxation, or revenue, or to cut the level of spending. When cutting, it is important to reduce spending that is less productive and less essential to society. Although one can make the case that military expenditure is important for a country, it sets in motion a demonstration effect, where if one of two neighboring countries increases military spending because it wants more security, the other will feel the need do the same. In this instance, neither country wins, since both are spending more money and not receiving additional protection. This is one reason we have wanted to go after military spending, hoping that in the process the whole world would spend less on its military.
Our interest in poverty has much to do with strengthening the political sustainability of reform. When a country undertakes a major reform, the distribution of income often deteriorates in the short run. If it deteriorates too much and large groups become impoverished in the process, they may become vocal supporters of populist policies that would defy the reform. Thus, we pay attention to poverty, not as an end in itself—because it is not a main or explicit objective of the IMF and other institutions have a more direct mandate to alleviate poverty then we—but to help sustain reform and achieve macroeconomic stability and thereby to expand economic activity and income.
Our involvement in the environment area is limited; at most, two IMF staff members in our department work on this issue, and then not even full-time. The purpose of their work is mainly to raise the sensitivity in the IMF and make staff more aware of the links between macroeconomic development and environmental deterioration. For example, if a country possessing a lot of forestation experiences a devaluation and begins to export the wood from its forests at a fast pace, it may run out of forest resources in a few years. This becomes a macroeconomic problem with environmental implications, which in time may worsen future macroeconomic problems. We do not do basic research in the environment area. We simply borrow what other institutions do and bring this information to the attention of the IMF staff so that staff can take into account major environmental considerations in designing programs or recommending policies.
IMF Survey: As you implied, adequate social safety nets are important for many countries, especially transition economies. Which countries have effective safety nets and what main features do they share?
Tanzi: Effectiveness is identified by two characteristics. The first is that the safety net should not be too expensive in fiscal terms. If a safety net consumes 20 percent of GDP, it may be doing a good job in protecting some groups, but it is likely to create problems on the macroeconomic front. The other characteristic is that it has to be efficient in achieving the basic objective of helping the people it is supposed to help. Our work on safety net issues has been directed mainly toward these two objectives. In some countries, safety nets were too expensive for countries to sustain over the long run. Our objective has been to help reduce their cost. At the same time, we are aware that in many cases subsidies are too generalized and too costly because everyone receives them—indeed, sometimes the richer groups receive, in absolute terms, more subsidies than the poor.
In terms of protecting the poor, the more effective safety nets are clearly those in western Europe—in such countries as Italy, France, and Sweden. These countries have largely eliminated extreme poverty by creating a wide range of support programs, such as minimum pensions and generalized pensions. But this has come at a substantial fiscal cost, and many of these countries are now rethinking their programs. If one thinks of effectiveness in terms of targeting safety nets, two countries come to mind: Chile and Jordan. We assisted Jordan in modifying its safety net, but we were not involved with Chile. Both of these countries have reduced generalized subsidies dramatically and are saving several percentage points of GDP for their government budgets. At the same time, their remaining spending has been directed more precisely toward the group that should really be receiving it—the bottom 20-30 percent of the population.
IMF Survey: You have written about political corruption and its implications for countries’ adjustment efforts. In your view, how can corruption best be tackled, and what should the IMF’s role be?
Tanzi: Corruption prospers on ground made fertile by all sorts of government regulations and activities. It is not just the size of government as measured in terms of taxes and expenditure to GDP but the magnitude of the government’s overall involvement in the economy. Let me give some examples. Suppose a country has a policy subjecting all imports to control or quantitative restrictions, whereby licenses are required to obtain foreign exchange; this type of situation breeds corruption. Another example is where a tax system is full of loopholes and incentives that are to some extent discretionary. This also breeds corruption because the people who make the decisions have the power to make money by doing favors, and the people on the other side have a strong interest in requesting favors. Credit is another case in point. In many countries, one cannot just go to a bank and borrow at whatever interest rate exists; rather, credit is allocated according to policy, again, in some cases, through connections. So, when you have such programs and public enterprises and all these government controls, the inevitable result is corruption.
The IMF has been involved indirectly in the fight against corruption through the policies it has tried to promote. It has, for example, encouraged the creation of tax systems that are simple and transparent, or a tax administration that is more efficient—by paying tax administrators well, through better control of those who administer taxes, changing quantitative restrictions on imports and replacing them with flat tariffs, or improving the work of customs. All of these are ways to narrow the scope for corruption dramatically. One can make a strong case that such IMF work will make corruption much more difficult. This does not mean that it will disappear. People were writing about corruption 3,000 years ago and will keep writing about it in the future. But the scope for corruption can be curtailed by making changes that are clearly within the context of what the IMF does. Beyond these, other actions can be taken to reduce corruption—such as increasing penalties when you catch people, reforming social services, or improving the judiciary—but these are outside the scope of the IMF’s work.
IMF Survey: What future directions and roles do you envisage for FAD?
Tanzi: FAD has been a demand-driven department to a large extent. The pressures on this department are enormous and, to a large extent, the department will remain demand driven. We will try to accommodate the needs of our member countries as they are channeled through the IMF, either directly to us or through area departments. At the same time, I take pride in this department’s role as one of the world’s main fiscal observatories. We have one of the best concentrations of fiscal economists in the world. We are alert to developing problems in the fiscal area and we have occasionally drawn the attention of the IMF’s Executive Board to some of these problems. We did a study of aging and its impact on social expenditure and on health about seven or eight years ago before it became an issue. And our work on public pension plans is also quite current.
We are increasingly interested in the implications of globalization on fiscal activities. It works both ways. We are influenced by what goes on in our member countries, whose interests are channeled to us through the area departments. At the same time, we alert both the area departments and the Research Department and other departments of emerging fiscal developments. So FAD is responsive but also proactive in the sense that we try to anticipate fiscal problems and provide intellectual leadership in this area. Our day-to-day problems require much of our attention. But at the same time, it is important for an institution like the IMF—and for each department within the IMF—to keep an eye on developments and try to anticipate, and not just react to, problems.
David M. Cheney, Editor
Sara Kane • John Starrels
Sheila Meehan • Sharon Metzger
Assistant Editor Editorial Assistant
Philip Torsani • In-Ok Yoon
Art Editor Graphic Artist
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