Fiscal Policy for Growth and Development
7
in LICs are still a moderate 40 percent of GDP, they have risen by almost 10 percentage points since the start of the crisis in MICs, and so this is a trend worthy of ongoing scrutiny (figure O.3). Furthermore, not all developing economies are in a relatively benign position: public debt–to–GDP ratios remain over 55 percent in about one-quarter of developing countries (figure O.4). These observations do not mean that countercyclical fiscal policies cannot continue to be a useful instrument for short-term macroeconomic stabilization in developing countries if the appropriate macroeconomic and structural conditions are in place. What they do suggest is that shortterm stabilization should not be the only or primary lens through which developing countries assess the usefulness of fiscal policy. Its role in addressing key market failures, improving resource allocation and efficiency, increasing the long-run growth properties of the economy, and addressing issues of distributional equity and social inclusion is likely to have at least as large, if not a greater, influence on social welfare over the long haul.
Fiscal Policy for Growth and Development—A Framework It may be useful to start with a simple framework that helps to organize some of these issues. First, what are the development objectives to which Figure O.4 General Government Debt, All Developing Countries, 2002–11 120
% of GDP
100 80 60 40 20
03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11
20
20
02
0
75 percentile 25 percentile all developing countries, median Source: World Economic Outlook database, International Monetary Fund.