The Economics of “Fiscal Space” Shanta Devarajan World Bank

Two tautologies Increasing the fiscal deficit to spend on productive expenditures may lower the debt- to-GDP ratio

Two tautologies (cont’d)

Two questions Which components of K 1,K 2,K 3,G 1,G 2 are “productive”? –Empirically estimate (Barro, Easterly and Rebelo, Devarajan-Swaroop-Zou) –A priori classification (infrastructure, health, education are productive, defense is not) Problem: Public spending on some components (such as health, education) are not necessarily aimed at growth

Bigger problem: Public spending does not even achieve health and education * Percent deviation from rate predicted by GDP per capita Source: Spending and GDP from World Development Indicators database. School completion from Bruns, Mingat and Rakatomalala 2003

Bigger problem: Public spending does not even achieve health and education * Percent deviation from rate predicted by GDP per capita Source: Spending and GDP from World Development Indicators database. Under-5 mortality from Unicef 2002

Determinants of infant mortality in Malaysia

Primary Education in Uganda (PETS) US$ per Student Intended Grant Amount Received by School (mean) 1999 Grants for Primary Education in Uganda In 1995, survey of 250 primary schools in 19 of 39 districts;

9 All India Teacher Absence Map (Public Schools) State Teacher Absence (%) Maharashtra14.6 Gujarat17.0 Madhya Pradesh17.6 Kerala21.2 Himachal Pradesh21.2 Tamil Nadu21.3 Haryana21.7 Karnataka21.7 Orissa23.4 Rajasthan23.7 West Bengal24.7 Andhra Pradesh25.3 Uttar Pradesh26.3 Chhatisgarh30.6 Uttaranchal32.8 Assam33.8 Punjab34.4 Bihar37.8 Jharkhand41.9 Delhi- All India Weighted24.8% Source: Kremer, Muralidharan, Chaudhury, Hammer, and Rogers “Teacher Absence in India.”

India 2003: Doctor absence from primary health clinics by state and reason

Two questions (cont’d) Is an appropriate rule-of-thumb? (Agenor, IMF) Rules v. Discretion

Implications for modeling exercise Analytical models –Incorporate government failure (time- inconsistency) Empirical estimates of public sector inefficiency –What to do about it?