Fiscal space and fiscal priorities: Infrastructure, trade and poverty

Speakers:

Nancy Alexander, Globalization Challenge Initiative, USA
Shefali Sharma, Bank Information Center
Carlos Tautz, IBASE, Brazil
Marijn Verhoeven, IMF fiscal affairs department, deputy division chief
Anand Rajaram, World Bank PREM
Moderator: Aldo Caliari, Center of Concern

Presentations

Anand Rajaram:

• Fiscal policy must be designed on country conditions
• Interim Report on fiscal policy to the development committee:
  • Fiscal policy has neglected growth in the past
  • Arguing about deficits is too narrow – need to focus on fiscal diamond: borrowing, aid and revenue
• New report on fiscal policy:
  • Propose a growth oriented perspective
  • Use the fiscal diamond to assess all options
  • Assess the domestic policy constraints

Marijn Verhoeven:

• Define fiscal space as room to manoeuvre in the budget
• The does not only worry about short-term fiscal space but also considers long-term and future fiscal space
• Concern over how to use additional fiscal space – what is the money used for
  • Infrastructure is not always the right answer
  • You have to look at country-specific priorities
• Public-private partnerships should have a very limited role, they are not the best way to create fiscal space because they don’t really create any space
• How does the IMF contribute to fiscal space?
  • Programme design – helping countries weigh up tradeoffs between fiscal space and macrostability
  • Inflation: the IMF no longer forces 1-2% inflation targets, we are more flexible now; PRGFs do allow > 5% inflation; the Fund starts to worry when inflation is > 12%
    • Greater than 12% inflation has effects on growth, the poor and fiscal space
  • Higher inflation does increase fiscal space, but we have to consider the costs
• A needs analysis should be used in deciding where to invest extra fiscal resources – think of the bottle necks in the economy, they aren’t always infrastructure

Carlos Tautz:

• Brazil is committing huge funds to infrastructure through the BNDS – but this is not a social concern, it is economic concern only; The focus is on exports, not poverty
• ILSA is the infrastructure package in the region; but its goal is only the export of raw materials/commodities
• Infrastructure investment is focused on productive sectors only, not social demands
• The new left governments in Brazil and elsewhere have continued policies from the previous right governments; they are not concerned with social equality or the demands of ordinary people, only market-based growth
• Conclusions: the government’s proposals are not enough for real development; the government is using the methods and policies of the previous right-wing governments; we need to search for new paradigms for development

Shefali Sharma:

• Losses from trade from the Doha round are potentially quite large for some countries; the gains have been overstated
• The winners and losers need to be identified and compensated
• There is a link between trade policy and development policy

Nancy Alexander:

• There are many constraints to fiscal space that are not being considered:
  • Overly tight inflation targets
  • IMF role in curtailing the use of aid
  • The advice given by the IFIs to push trade liberalisation – tariff revenue reductions, etc

Responses and Discussion

• Anand – different governments have different priorities for expenditure, and there are consequences of these; but this is a domestic political consideration not an international problem. At best we need error correction mechanisms to help the governments when expenditure allocation becomes unbalanced
• Nancy – Services liberalisation conditionality in IFI policy effects trade policy and trade negotiations. IE the Bank’s work against national level water regulation. Also PPP have resulted in lawsuits at ICSID – the risk of these lawsuits and contractual problems were not included in the cost-benefit-analysis of PPPs
• Carlos – there are differences between right and left governments, but they are using similar policies. However, Argentina is an example, Miceli talked about creating 9% economic growth with social inclusion; but this requires political will
• Shefali – IFI lending constricts developing country policy space as well, thus negating the importance of trade negotiations. The lending conditions have already done the work. The examples of urban renewal projects and SEZs in India show this problem. There is little or no public discourse on these projects.
• Marijn – PPPs are problematic and we are acting on this topic to advise people. The IMF must work with countries rather than make prescriptions. On aid absorption – the aid might be used for spending that isn’t efficient or that we don’t want, plus countries don’t want exchange rate appreciation, so we have to look at country-specific options
• Molly McCoy of ITUC – interested in the impacts of sub-national lending for infrastructure
• Nancy – the WB has a new facility for sub-national loans, this is vulnerable to problems because of risks in relation to national-level guarantees for loans
• Marijn – decentralisation can create problems; the IMF is rethinking the role of the state in development. It is also talking to stakeholders
• John Panzer (World Bank trade team) – We should avoid discussing the pendulum of social versus infrastructure  spending – we need balance. There are real questions about how to use fiscal space because of the low quality of project evaluation. It is unclear where the best place to spend money is. We should try to avoid ideologisation of development thinking and really focus on measuring project impacts.
• Roberto Bissio of Social Watch – there are concerns about the coherence of Bank and Fund policy on fiscal space
• Marijn – we don’t intend to have “rules” as found by the IEO, we don’t want a 5% limit. The three-year framework in IMF programmes is for category-by-category budgeting. But the IMF’s debt sustainability analysis (DSF) works with an essentially “infinite” time horizon. It is hard to do long-term analysis of the effects of education spending because of poor correlation and data problems.