It is now widely understood that achieving a sustained acceleration of GDP growth over the long term is a prerequisite for eradicating mass poverty. In most developing countries, fiscal policies, including expenditure and tax policies, provide some of the most feasible tools available to governments for achieving their development objectives. Hence the role of fiscal policies as instruments for promoting long term sustainable economic growth is of great importance, an issue that was discussed at the “Fiscal Policy, Equity and Long Term Growth” conference which took place at the IMF on April 21-22, 2013. What matters in this context is how fiscal policies are designed and implemented such that they affect the long term growth of the supply side of the economy, rather than as a tool of short run demand management. The quality of fiscal policy is of critical importance in this regard.
There is a large volume of academic research, both theoretical and empirical, on the effects of different aspects of fiscal policy on economic growth (Easterly and Rebelo, 1993; Gemmel, 2001; Moreno-Dodson, 2012; World Bank, 2007, etc to cite just a few). This research has yielded broad fiscal policy advice for developing countries. For example, governments should avoid excessive fiscal deficits and public debt, allocate budgets towards human capital development and public investment in infrastructure which provides “public goods and services” and levy taxes on as broad a base as possible without distorting incentives to save and invest.
While the academic literature provides broad guidance, the contribution it can make to fiscal policy formulation on the ground is inevitably somewhat circumscribed, for several reasons. First, the binding constraints to growth differ among developing countries and over time and this has important implications for priorities. Second, policymakers need to make budget decisions, for example choosing between competing spending demands, for which detailed country specific knowledge is required. Third, whether fiscal policy works in practice also depends on the implementation capacity in the public service; a project with a potentially high social rate of return may not deliver the expected benefits if the public investment management system is weak. Consequently, designing and implementing growth-promoting fiscal policies is very challenging; technically, institutionally and politically.
This suggests that the “knowledge agenda” needs to be extended to include issues pertaining to how governments in developing countries, especially in Africa, design and implement fiscal policies and the challenges which they face in doing so. For example, how do governments translate their strategic development objectives into a coherent fiscal strategy which addresses the binding constraints to growth? Are governments able to prioritize – technically and politically - between competing public investments projects on the basis of rigorous project analysis? How do governments create fiscal space for priority growth promoting policies? What are the reforms which are most useful for strengthening government’s capacities to design and implement growth promoting fiscal policies? The answers to such questions should prove valuable in enhancing the growth promoting impact of fiscal policies in poor countries, especially in Africa, and are likely to occupy an important space in our quest to find “transformational” solutions. In short, Africa needs more knowledge, not just more money and projects, to address these challenges.