Helping countries develop: the role of fiscal policy

• Pages: 10-11

Page 10

With the 2015 deadline for achieving the Millennium Development Goals (MDGs) looming, the role of government tax, expenditure, and financing policies in promoting development is commanding increasing attention.

A new IMF book, Helping Countries Develop: The Role of Fiscal Policy (see box), offers insight into how developing countries can better manage their scarce public resources.

The book's editors-Sanjeev Gupta, Benedict Clements, and Gabriela Inchauste-told the IMF Survey that among the main messages for policymakers are that fiscal discipline is key to pro-poor growth; that social spending financed by foreign aid should be targeted to the poor; and that where governance is still weak, there is a likely trade-off between aid and domestic revenue mobilization.

The purpose of the book, explained Gupta-now Assistant Director in the IMF's African Department; then, head of the Expenditure Policy Division in the IMF's Fiscal Affairs Department-was to collect and disseminate recent in-house empirical research on the role of fiscal policy in promoting economic growth in developing countries. He added that the book demonstrated, as well, that the IMF was making a concerted effort to grapple with several policy issues of particular concern to low-income countries.

"We wanted to tackle some of the controversial issues put on the table by the critics of IMF," Clements added. These controversies include the suggestion that, by cutting deficits and reducing outlays, IMF-supported programs hurt growth and thus reduce countries' ability to reduce poverty and meet the MDGs. Controversy also surrounds the effectiveness of government spending. Many critics, said Clements, charge that government spending is wasteful and corrupt. It is fruitless, they argue, for governments to be spending more money and increase budget deficits in an attempt to improve social indicators or living standards of the poor. Inchauste noted that another controversial issue is that of user charges for education and health services, which many scholars have argued limit the poor's access to them.

What happens in the short run?

There is widespread agreement that fiscal discipline can promote economic growth, and therefore reduce poverty and positively affect human development over the longer term. Fiscal policy's appropriate role in the short term is more complicated.

Most economists argue that in the...