What Sustains Fiscal Consolidations in Emerging Market Countries? Sanjeev Gupta International Monetary Fund.

Slides:



Advertisements
Similar presentations
Debt Sustainability and Debt Composition UNCTAD Paper by Heiner Flassbeck and Ugo Panizza.
Advertisements

1 Macroeconomic and Policy Challenges International Monetary Fund Disclaimer: The views expressed in this paper are those of the authors and should not.
Research Proposal PIDE and Iran. Prudent economic management is essential for putting the economies on the path of sustainable economic growth. Over the.
A Macroeconomic Theory of the Open-Economy. Outline:  Develop a model to study forces that determine the open economy variables (NX, NFI, RER)  How.
School District Consolidation William Duncombe and John Yinger The Maxwell School, Syracuse University February 2013.
Monetary Policy Challenges March 2010 International Monetary Fund Nicholas Staines IMF, African Department
Rebalancing in a low growth environment Prof. Dr. Júlia Király October 30th, 2012 PhD of economics, honorary professor, deputy governor of the Magyar Nemzeti.
Philip Arestis and Malcolm Sawyer University of Cambridge and University of Leeds.
MDBS Underlying Principles MACRO-ECONOMICS 11 May 2010.
Chapter Fifteen1 A PowerPoint  Tutorial to Accompany macroeconomics, 5th ed. N. Gregory Mankiw Mannig J. Simidian ® CHAPTER FIFTEEN Government Debt.
Saving, growth and the current account Daan Steenkamp ERSA / SASI Savings workshop August 2009.
Revision of the macroeconomic projections for 2011 Dimitar Bogov Governor August, 2011.
1 Fiscal Policies for Sustainable Economic Growth: Challenges for Slovenia Gerd Schwartz Deputy Director, Fiscal Affairs Department, IMF Conference on.
1 A New Fiscal Rule Karnit Flug Research department The Bank of Israel May, 2009.
Lesson 12-1 Fiscal Policy.
Lusaka, 1 December 2010 Public Expenditure Review Workshop.
Chapter 12 Managing the Macroeconomy. Stagflation: it occurs when recession and inflation takes place simultaneously in the economy.
Copyright © 2006 Pearson Education Canada Fiscal Policy 24 CHAPTER.
Chapter 22 Five Debates Over Macroeconomic Policy
0 Brazil Economic Outlook Alexandre Bassoli May, 2007.
The fiscal impact of pension reform: economic effects and strategy Ewa Lewicka Kiev – May 27, 2004.
Ch. 14: Fiscal Policy Federal budget process and recent history of outlays, tax revenues, deficits, and debts Supply-Side Economics Controversies on effects.
To view a full-screen figure during a class, click the red “expand” button.
C A U S E S International factors: -Increased Access to Capital at Low Interest Rates -Heavily borrow -Access to artificially cheap credit -Global finance.
Macroeconomic Policy and Floating Exchange Rates
Fiscal Policy and Economic Growth: Lessons for Eastern Europe and Central Asia.
Fiscal Policy. The Government Budget Constraint The Arithmetic of Deficits and Debt –The budget deficit in year t equals: is the government debt at.
The Economy of Jordan: Problems and Solutions Presented by Dr. Ohan Balian May 03, 2010 Amman.
World Economic Outlook World Economic Outlook Fall 2010.
Copyright © 2008 Pearson Addison-Wesley. All rights reserved. Chapter 32 Government Debt and Deficits.
NATIONAL CONSULTATION ON THE ECONOMY Theme: “The Architecture of an Efficient and Sustainable Public Sector in Support of our Economic Growth Agenda” St.
Fiscal Policy & Aggregate Demand
The Role of Fiscal Institutions in Managing the Oil Revenue Boom CEPAL XIX Regional Seminar on Fiscal Policy January 2007 Rolando Ossowski Fiscal Affairs.
NS4053 Winter Term 2014 Latin American Growth Momentum.
Centre for Market and Public Organisation Using difference-in-difference methods to evaluate the effect of policy reform on fertility: The Working Families.
Debt Management, Fiscal Vulnerability and Fiscal Solvency: The Recent Mexican Experience XXII Meeting of the Latin American Network of Central Banks and.
NS3040 Winter Term 2015 Latin American Challenges.
Copyright © 2010 Pearson Education Canada. In 2007, the federal government spent 15 cents of each dollar Canadians earned and collected 16 cents of.
Government budget Budget deficits and debt 1.  Recall, when we talked about national savings:  T – G is not a budget surplus  Because it is missing.
1 Stability and Growth Economic recovery and fiscal adjustment in Italy Tommaso Padoa-Schioppa Italian Economy and Finance Minister London, July 25, 2007.
1 Labor taxes and fiscal policy in Croatia Sandra Švaljek, The Institute of Economics, Zagreb Conference on Labor Markets, Growth and Powerty Reduction.
Discussant Comments on “Revisiting Economic Growth in Colombia: A Microeconomic Perspective” Ben Clements International Monetary Fund IADB Project on Competitiveness.
PRSPs, Macroeconomic Constraints and Fiscal Policy Humberto Lopez (PRMPR)
Debt Sustainability Analysis March 2010 IMF and World Bank Nicholas StainesAntonio Nucifora IMF, African DepartmentWorld Bank, Africa Region
124 Aggregate Supply and Aggregate Demand. 125  What is the purpose of the aggregate supply-aggregate demand model?  What determines aggregate supply.
THE LINKS BETWEEN ECONOMIC AND SOCIAL POLICIES JOSÉ ANTONIO OCAMPO UNDER-SECRETARY GENERAL ECONOMIC AND SOCIAL AFFAIRS.
Inter-American Development Bank April 23, 2009 The opinions expressed in these comments are the responsibility of the author and do not necessarily represent.
Overview of Recent Economic and Social Conditions in Africa Economic Commission for Africa Addis Ababa.
29-1 Economics: Theory Through Applications This work is licensed under the Creative Commons Attribution-Noncommercial-Share Alike 3.0 Unported.
20 CHAPTER Social Security PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe.
Introduction to the UK Economy. What are the key objectives of macroeconomic policy? Price Stability (CPI Inflation of 2%) Growth of Real GDP (National.
July 2010 Regular Economic Report CROATIA Supporting Recovery.
Kyrgyzstan at the Cross-Roads The Economic Situation in the Kyrgyz Republic Chris Lovelace Country Manager The World Bank March 3, 2006 Oxford, UK.
INTERNATIONAL MONETARY FUND JANUARY 2014 The Mauritanian Economy: Performance and Outlook.
PowerPoint Presentations for Principles of Macroeconomics Sixth Canadian Edition by Mankiw/Kneebone/McKenzie Adapted for the Sixth Canadian Edition by.
Economic Challenges of Bulgaria Lecture at the Military Academy of Sofia, July 17, 2003 by Piritta Sorsa, IMF representative in Bulgaria.
State of the States Brian Sigritz Director of State Fiscal Studies NASBO NASACT Middle Management April 12, 2016.
ESNA Economic Outlook 2016: Alberta’s Fiscal and Environmental Challenges “It could be worse…..” Mike Percy Ph.D. December 3,
Fiscal Rules for Subnational Governments Teresa Ter-Minassian Director, Fiscal Affairs Department International Monetary Fund Contact:
SYMPOSIUM | Greece, Out of The Crisis: Debt-End or Dead-End
Should Developing Countries Adopt Accrual Accounting?
Background Submission is made in terms of Section 4 (4c) of the Money Bills Amendment Procedure and Related Matters Act (Act 9 of 2009) 2010 first year.
2005/06 National Budget BUSA submission.
Fiscal Space And Public Spending on Children in Burkina Faso
Fiscal Sustainability
A New Fiscal Rule Karnit Flug Research department The Bank of Israel
The 2007 MTBPS: short on detail
KOREA Econoic survey 김태용 한요셉 심준현
The Future of Public Debt: Prospects and Implications
Presentation transcript:

What Sustains Fiscal Consolidations in Emerging Market Countries? Sanjeev Gupta International Monetary Fund

Outline What are the factors affecting the persistence of fiscal consolidation in emerging markets? New approach proposed for defining spells of fiscal consolidation. Empirical application of the new approach to a sample of emerging market countries. The results indicate that the probability of ending a fiscal adjustment is affected by the legacy of previous fiscal failures, the size of the deficit, the composition of spending, and level of total revenues.

Background Controlling public debt and implementing durable fiscal adjustments remain major challenges. Public debt in emerging markets has risen sharply in the mid-90s, now it exceeds 70 percent of GDP. There potential risks of increasing public debt in emerging market countries, including to macro stability. Importance of safeguarding fiscal sustainability (quasi fiscal activities; contingent liabilities).

Background There are many benefits of fiscal consolidation: For countries with unsustainable debt burdens, the benefits of sustained fiscal reforms are largest. Fiscal adjustment can reduce interest rates and expectations of larger future tax liabilities, generating a positive wealth effect in the private sector. Fiscal consolidation can signal that policymakers are committed to long-term fiscal sustainability with positive effects on private investment.

Background The persistence of fiscal consolidation is also important: Fiscal consolidations that are short lived can be harmful for growth. Persistent fiscal imbalances reduce national savings, leading to lower private investment and more tepid economic growth.

Methodology What determines the persistence of fiscal adjustment? Alesina and Perotti proposed a two-step procedure to answer this question (Traditional Approach) : –Identify episodes of large fiscal consolidation. Successful consolidation is defined as the maintenance of fiscal control over a specified period of time. –A comparison of the main characteristics of “successful” and “unsuccessful” episodes is provided.

Methodology Studies employing this approach to a sample of industrial countries during the 1980s and 1990s find that: Fiscal adjustments that rely primarily on reducing outlays on transfers and the wage bill are more likely to be sustainable. Revenue increases are easily reversed and lead to short-lived adjustments.

Methodology Critics of this approach have noted the following: The classification of episodes (into successful and unsuccessful consolidations) is arbitrary. Causal inferences cannot be made on the basis of the simple comparison of group averages. This approach does not provide a description of how long adjustments typically last. It does not assess the factors that influence the duration of fiscal consolidation episodes.

Methodology Alternative methodologies have been proposed to address the last shortcoming However none of the methods deals with the first three problems of the traditional approach

Methodology A new approach to has been used: duration analysis. A number of recent papers have tackled the issue of how to model the duration of fiscal adjustment. In these studies, the duration of fiscal consolidations over time is endogenous to the covariates of sustained fiscal consolidation determined through survival analysis. This new method makes use of all the information available in the data, rather than constraining the analysis to episodes of large fiscal consolidation.

Duration Analysis Assess the factors affecting the probability of ending a fiscal consolidation period; A fiscal consolidation ends when the deficit reductions falls below a given threshold; The duration of fiscal adjustment is based on fiscal consolidation spells; The probability of ending the adjustment is mathematically linked to the duration.

Duration Analysis Fiscal adjustment spells can have different durations. For example one spell lasting three years means a continuous reduction of the fiscal deficit over this period. Three spells lasting each one year are periods in which the fiscal consolidation is interrupted and then restarted.

Duration Analysis Two functions are critical to duration analysis. Hazard rate. This is equivalent to the mortality rate in human population. Survival function. Proportion of individuals surviving at the end of the period over individuals at risk at the beginning of the period.

Duration Analysis Model specification: The hazard rate is a function of country’s characteristics similar to ordinary regression. The regressors rescale the baseline hazard function. The baseline hazard function does not need to be specified (Cox proportional hazard model).

Duration Analysis Adam and Bevan provide a useful typology of the definition of “fiscal consolidation and persistence”: (1) the “level” approach, which provides a specified threshold for the deficit; 2) the “gradient” approach, under which a fiscal consolidation is considered ongoing in year t as long as the deficit falls in year t relative to t-1 (e.g., by ½ percentage point of GDP); and (3) the composite approach or a combination of (1) and (2).

Duration Analysis The level and gradient approaches both have methodological weaknesses. First, the level approach imposes a common threshold on a diverse group of countries facing different policy environments. Second, the level approach classifies as a “failure” instances where significant fiscal adjustments may have already taken place. Weaknesses in the gradient approach as well.

Duration Analysis A more suitable approach seems to be a “composite” approach. This approach recognizes that further reductions in the fiscal deficit are difficult as an economy moves closer to sustainable deficit levels. The distance from sustainable deficit levels may signal the commitment (or lack thereof) to fiscal sustainability. Moving closer to sustainable levels may therefore reinforce government credibility.

Duration Analysis We use two definitions of sustained fiscal consolidation. First, the baseline model defines the persistence of fiscal consolidation on the basis of the gradient approach, but conditions the estimates of the probability of ending the fiscal consolidation effort on the existing level of budget deficit. Second, an alternative estimate is presented in the robustness section, where the definition of sustained fiscal consolidation is based explicitly on both a specified minimum rate of reduction of the fiscal deficit and a specified threshold for the targeted level of the deficit.

Data This paper examines fiscal adjustment in a sample of 25 emerging markets over the period Periods of fiscal adjustment are identified by the observed change in the overall fiscal deficit as a share of GDP. (above 1 percentage point of GDP). The results of the nonparametric analysis suggest that 56 percent of the episodes of fiscal consolidation end within a year. Also use primary surplus to check robustness (it reduces the sample size)

The Model The probability of interrupting a spell of fiscal consolidation is regressed on fiscal and macroeconomics variables that are likely determinants of the duration of the adjustment. The fiscal variables include: (1) fiscal history, measured as the number of previous failures at fiscal consolidation; (2) the composition of spending and (3) the level of total revenue in percent of GDP. The model also controls for: (4) the stock of initial debt in percent of GDP; (5) increases in oil prices; (6) exchange rate depreciation; (7) unemployment rate; (8) corruption; and (9) the interaction between corruption and capital spending.

Baseline Results The probability of ending a spell of fiscal adjustment is positively and significantly affected by fiscal history, or the number of previous failures at fiscal reform. Exchange rate depreciation and corruption are also positively associated with failure, though this result is weaker and much less robust. The level of public debt is negatively associated with the risk of ending a spell of consolidation. Expenditure composition matters. Buoyant tax revenues support fiscal adjustment in emerging markets.

Baseline Results The distance from the deficit threshold is positively associated with the probability of ending fiscal adjustment. Sustained fiscal consolidation becomes easier as the fiscal policy stance moves closer to the deficit threshold.

Robustness The results are robust to alternative specifications. The dummies for IMF-supported programs and capital accounts crises are all insignificant The negative impact of debt and the distance variable increases with duration of the spell. The positive impact of capital spending on fiscal consolidation is offset by the adverse impact of increased corruption.

Alternative Definition We generate a new dummy variable called “failure,” which takes a value of one when the annual variation of the budget deficit is equal to or lower than 1 percentage point of GDP and the deficit is more than 2 percentage points of GDP (lack of adjustment), and takes a value of zero otherwise (years of fiscal consolidation). Using this definition, the average survival rate after one year of fiscal consolidation increases from 44 percent in the baseline model to 52 percent in the current model.

Results The new regression results are similar to the baseline results. In contrast to the baseline results, the change in exchange rate and the level of spending on goods and services are no longer significant. One important departure from the baseline results is the insignificance of the initial stock of debt.

Conclusions and Policy Implications The reallocation of public expenditure toward more productive uses is important for achieving more sustained fiscal adjustments. Revenue increases are also found to be critical to the persistence of fiscal consolidation. Poor governance and high unemployment are obstacles to achieving sustained fiscal adjustments.

Conclusions and Policy Implications These results imply that: Strong institutions and a good policy track record are critical to achieve fiscal sustainability. Fiscal deficit reductions should be based on cuts in wasteful spending and revenue mobilization efforts. Revenue increases are associated with more durable fiscal adjustments. Enhancing revenue collection also helps minimize fiscal vulnerability stemming from low and volatile revenue bases. In view of the adverse effects of unemployment on the persistence of adjustment, there is an important role for social safety nets in ensuring there is a social consensus in favor of fiscal consolidation.