Fiscal solvency and sustainability in economic management

Fiscal policy is central to a country's economic and social objectives, from macroeconomic stability to sustainable growth and poverty reduction. But evaluations of a country's fiscal performance, over time or relative to other countries, are often conducted independent of other development objectives, disregarding the links between fiscal, monetary, and exchange rate policies. A budget deficit of 4 percent of GDP, for example, may be acceptable in one country but not in another, because of different initial conditions and policy priorities. In the same country, a level of fiscal deficit may be acceptable one year but not the next, depending on developments and changes in policy objectives. The author argues for assessing fiscal performance (1) as part of the entire framework of economic policy, (2) against a policy objective, (3) by taking into account both short- and long-term considerations, and (4) with an eye to the quality of adjustment (whether there are income inequalities or other social issues, for example) as well as its magnitude. The approach he proposes for assessing country fiscal performance requires a minimum of data and takes into account flow and stock variables on internal and external debt. The approach addresses the shortcomings of conventional analysis by incorporating the debt dynamics and other macroeconomic targets of growth, inflation, and external and internal debt. While its theoretical foundation is well known in the literature, this approach has not been adapted for assessing fiscal performance either over time or across countries, and he discusses practical issues arising from this adaptation. The author proposes two indicators to measure fiscal adjustment efforts: Fiscal solvency adjustment, which measures how far additional fiscal efforts must be taken to restore solvency to the fiscal sector. Fiscal sustainability adjustment, which measures how far additional fiscal efforts must be taken to maintain the ratios of internal and external debt to output. The author applies the proposed framework to evaluate recent fiscal performance in three countries-Argentina, India, and Zambia-each with a different income level and located on a different continent. The countries were selected on the basis of recent World Bank economic work using the proposed approach or an equivalent. The author finds the proposed approach useful for identifying key fiscal issues, for assessing the adequacy and pace of fiscal adjustment consistent with the overall economic and social objectives, and for highlighting the tradeoffs between policy initiatives. Sound fiscal policy is crucial for macroeconomic stability. When fiscal issues are under control, it is easier to coordinate other policies. When fiscal issues are part of the problem, the tradeoffs between policy outcomes become pronounced, and economic management, including the management of capital flows, becomes much more difficult.Strategic Debt Management,Economic Theory&Research,Payment Systems&Infrastructure,Banks&Banking Reform,Environmental Economics&Policies,Economic Stabilization,National Governance,Economic Theory&Research,Strategic Debt Management,Banks&Banking Reform

Inflation tax and deficit financing in Egypt

Although Egypt's budget deficit is far above the level found in other low-middle-income countries, the inflation rate in Egypt has never been very high. This is because the country has managed to finance these budget deficits by resorting to an inflation tax that, at 11 percent of GDP in 1987, constitutes a large share of total tax revenues. By contrast, conventional tax revenues come to only 17 percent of GDP. The authors report a large, underlying inflation-tax base - from which the Egyptian government has collected substantial revenues which exist because of money balances held by the private sector. The authors find that the private business sector, with anet borrowing position of 14 percent of GDP, has benefited from the inflation tax. Households, on the other hand, pay more of the inflation tax than other sectors, turning over 8 percent of GDP to the government. This compares with 0.5 percent of GDP that households pay in income tax. Although income tax in Egypt is fairly progressive, the greater reliance on the inflation tax makes Egypt's overall tax structure fairly regressive. The authors argue that : i) understanding the role and size of the inflation tax will help in determining the sequencing and equity aspects of any future reform program; and ii) the financial side cannot continue to bear the burden for the real side; Egypt must move swiftly to cut its budget deficit, the underlying cause of its dependence on the inflation tax.Economic Theory&Research,Public Sector Economics&Finance,Banks&Banking Reform,Environmental Economics&Policies,Macroeconomic Management

Money, inflation, and deficit in Egypt

Egypt has been able to escape high inflation by depleting its stocks of creditworthiness, money illusion, and enforceable foreign-exchange controls. These nonrecoverable assets are quickly becoming extinct and the economy is on an unsustainable path. The authors present a short- and medium-term dynamic model of the Egyptian economy and use it to simulate the effects on output and inflation of a stabilization-cum-adjustment program. Their conclusion is to make the public sector live within its means, and to do so at once. This is a demanding prescription; political and social pressure can become intolerable under adjustment. The authors show that both a slowdown in output and the initial rise in inflation associated with a tough reform program will be short-lived. And a do-nothing strategy will soon push the country into a serious crisis, the correction of which will certainly be more painful.Economic Theory&Research,Economic Stabilization,Environmental Economics&Policies,Banks&Banking Reform,Public Sector Economics&Finance

The practice of industrial policy - Lessons for Africa. Case studies of decentralized co-ordination in China

This paper draws on both successful and failing cases of industrialization in China to analyse the role of local governments in fostering the growth of light manufacturing. The broad spectrum of support types and the intimate knowledge of enterprise conditions by these local governments make their support effective particularly for the business expansion and cluster development. Local government policies toward enterprises are dynamic and tailor to the needs that arise at the various stages of the life cycles of firms, from start-up to growth and maturity. Government assistance has not always involved spending money. The successful outcome is a result of 'backing the winner' approach

The binding constraint on firms'growth in developing countries

Firms in developing countries face numerous and serious constraints on their growth, ranging from corruption to lack of infrastructure to inability to access finance. Countries lack the resources to remove all the constraints at once and so would be better off removing the most binding one first. This paper uses data from World Bank Enterprise Surveys in 2006-10 to identify the most binding constraints on firm operations in developing countries. While each country faces a different set of constraints, these constraints also vary by firm characteristics, especially firm size. Across all countries, access to finance is among the most binding constraints; other obstacles appear to matter much less. This result is robust for all regions. Smaller firms must rely more on their own funds to invest and would grow significantly faster if they had greater access to external funds. As a result, a low level of financial development skews the firm size distribution by increasing the relative share of small firms. The results suggest that financing constraints play a significant part in explaining the"missing middle"-- the failure of small firms in developing countries to grow into medium-size or large firms.Access to Finance,Environmental Economics&Policies,Microfinance,Debt Markets,Banks&Banking Reform

The insecticide resistance status of malaria vectors in the Mekong region

<p>Abstract</p> <p>Background</p> <p>Knowledge on insecticide resistance in target species is a basic requirement to guide insecticide use in malaria control programmes. Malaria transmission in the Mekong region is mainly concentrated in forested areas along the country borders, so that decisions on insecticide use should ideally be made at regional level. Consequently, cross-country monitoring of insecticide resistance is indispensable to acquire comparable baseline data on insecticide resistance.</p> <p>Methods</p> <p>A network for the monitoring of insecticide resistance, MALVECASIA, was set up in the Mekong region in order to assess the insecticide resistance status of the major malaria vectors in Cambodia, Laos, Thailand, and Vietnam. From 2003 till 2005, bioassays were performed on adult mosquitoes using the standard WHO susceptibility test with diagnostic concentrations of permethrin 0.75% and DDT 4%. Additional tests were done with pyrethroid insecticides applied by the different national malaria control programmes.</p> <p>Results</p> <p><it>Anopheles dirus s.s</it>., the main vector in forested malaria foci, was susceptible to permethrin. However, in central Vietnam, it showed possible resistance to type II pyrethroids. In the Mekong delta, <it>Anopheles epiroticus </it>was highly resistant to all pyrethroid insecticides tested. It was susceptible to DDT, except near Ho Chi Minh City where it showed possible DDT resistance. In Vietnam, pyrethroid susceptible and tolerant <it>Anopheles minimus s.l</it>. populations were found, whereas <it>An. minimus s.l</it>. from Cambodia, Laos and Thailand were susceptible. Only two <it>An. minimus s.l</it>. populations showed DDT tolerance. <it>Anopheles vagus </it>was found resistant to DDT and to several pyrethroids in Vietnam and Cambodia.</p> <p>Conclusion</p> <p>This is the first large scale, cross-country survey of insecticide resistance in <it>Anopheles </it>species in the Mekong Region. A unique baseline data on insecticide resistance for the Mekong region is now available, which enables the follow-up of trends in susceptibility status in the region and which will serve as the basis for further resistance management. Large differences in insecticide resistance status were observed among species and countries. In Vietnam, insecticide resistance was mainly observed in low or transmission-free areas, hence an immediate change of malaria vector control strategy is not required. Though, resistance management is important because the risk of migration of mosquitoes carrying resistance genes from non-endemic to endemic areas. Moreover, trends in resistance status should be carefully monitored and the impact of existing vector control tools on resistant populations should be assessed.</p