Table Of ContentRules-Based Fiscal Policy in Emerging Markets
Rules-Based Fiscal Policy in
Emerging Markets
Background, Analysis, and
Prospects
Edited by
George Kopits
© International Monetary Fund 2004
Softcover reprint of the hardcover 1st edition 2004 978-1-4039-2085-0
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Library of Congress Cataloging-in-Publication Data
Rules-based fiscal policy in emerging markets:background,analysis,and
prospects / edited by George Kopits.
p.cm.
Includes bibliographical references and index.
ISBN 978-1-349-51512-7
1.Fiscal policy—Developing countries—Case studies.I.Kopits,George.
HJ1620.R85 2004
339.5(cid:1)2(cid:1)091724—dc22 2004046490
10 9 8 7 6 5 4 3 2 1
13 12 11 10 09 08 07 06 05 04
Contents
List of Tables vii
List of Figures and Box ix
List of Contributors x
Acknowledgments xi
Foreword xii
1 Overview of Fiscal Policy Rules in Emerging Markets 1
George Kopits
Part I Political Economy and Macroeconomic Setting 13
2 Fiscal Rules from a Political Economy Perspective 15
Allan Drazen
3 Good Credit Ratios, Bad Credit Ratings: The Role of Debt Structure 30
Ricardo Hausmann
4 Can Fiscal Rules Help Reduce Macroeconomic Volatility? 53
Guillermo Perry
5 Fiscal Policy and High Capital Mobility 66
George Kopits
6 Fiscal Institutions versus Political Will 81
Allen Schick
Part II Design Issues at the National Level 95
7 EMU Fiscal Rules: What Can and Cannot be Exported 97
Marco Buti and Gabriele Giudice
8 Fiscal Rules and Debt Sustainability in Brazil 114
Ilan Goldfajn and Eduardo Refinetti Guardia
9 Fiscal Rules in Mexico: Evolution and Prospects 131
Andrés Conesa, Moisés J. Schwartz, Alejandro Somuano,
and J. Alfredo Tijerina
10 Fiscal Rules on the Road to an Enlarged European Union 146
Fabrizio Coricelli and Valerio Ercolani
v
vi Contents
11 Fiscal Rules for Economies with Nonrenewable Resources:
Norway and Venezuela 164
Olav Bjerkholt and Irene Niculescu
Part III Design Issues at the Subnational Level 181
12 Subnational Fiscal Rules: A Game Theoretic Approach 183
Miguel Braun and Mariano Tommasi
13 Rules-Based Adjustment in a Highly Decentralized
Context: The Case of India 198
Kalpana Kochhar and Catriona Purfield
14 Fiscal Rules for Subnational Governments: Lessons
from the EMU 219
Fabrizio Balassone, Daniele Franco, and Stefania Zotteri
15 Rules for Stabilizing Intergovernmental Transfers in
Latin America 235
Christian Y. Gonzalez, David Rosenblatt, and Steven B. Webb
References 250
Author Index 268
Subject Index 271
List of Tables
1.1 Emerging markets: summary of fiscal policy rules 3
3.1 Selected regions: public debt (unweighted averages),
1993–2000 31
3.2 Cross-country estimates of credit rating equation, 1990–99 33
3.3 Selected regions: volatility of tax revenue, GDP, and terms
of trade, 1990–99 37
3.4 OECD and Latin America: impact of a shock in tax
revenue and GDP 38
3.5 Latin America and United States: volatility and cyclical
properties of exchange rates and interest rates, 1990–99 41
3.6 Latin America: annual decline in GDP growth 43
3.7 Estimates of cyclical comovement of the real exchange
rate and GDP 44
3.8 Correlation between the real exchange rate, the real
interest rate, and the import gap, 1990–99 45
3.9 OECD and Latin America: stress test on debt service capacity 46
4.1 Latin America and OECD: response of fiscal balance to
GDP growth, 1970–94 55
5.1 Crisis episodes: selected fiscal indicators of
vulnerability, 1994–99 68
7.1 Macroeconomic volatility in Latin America and the
euro area, 1970–2001 105
7.2 Public finances in Latin America and the euro area, 1997
and 2001 105
8.1 Brazil: public sector debt, December 2002 117
8.2 Brazil: general government debt, December 2002 120
8.3 Brazil: public sector debt, 1994–2002 121
8.4 Brazil: baseline scenario for public sector debt, 2002–11 126
8.5 Brazil: primary surplus required to stabilize the
debt–GDP ratio, 2002–12 127
9.1 Mexico: fiscal adjustment required under selected fiscal rules,
2002–30 143
10.1 Accession countries: fiscal elasticities, minimal benchmark,
and cyclically adjusted balance 151
10.2 Accession countries: output and fiscal indicators, 2000 152
11.1 Norway and Venezuela: selected indicators, 2000 171
12.1 Fiscal policy problems and their consequences 190
13.1 India: central and state government finances, 1998–2002 200
vii
viii List of Tables
13.2 India: maturity structure of central government securities,
1997–2002 202
13.3 Selected regions: volatility of tax revenue, GDP, and
terms of trade, 1990–99 204
13.4 India: macroeconomic assumptions, 2004–08 208
13.5 India: central government finances under the FRBM,
2003–08 209
13.6 India: general government finances under the FRBM,
2003–08 210
13.7 India: effect of elimination of growth-interest rate
differential on government debt under the FRBM, 2003–08 212
List of Figures and Box
Figures
3.1 Credit rating versus net debt–GDP ratio 31
3.2 Credit rating versus debt–revenue ratio 32
3.3 Volatility and VaR in debt service 36
3.4 Illustration of debt service dynamics 36
3.5 Illustration of the role of volatility 37
4.1 Selected regions: volatility of real GDP growth by decade 54
7.1 Public finance convergence in the euro area,
1993–2000 100
7.2 Composition of the fiscal adjustment in the euro area,
1993–2000 101
8.1 Brazil: public sector borrowing requirement and primary
deficit, 1998–2002 116
8.2 Brazil: net public debt, assuming constant exchange rate
and hidden liabilities, 1994–2002 118
8.3 Brazil: net public debt, assuming constant primary surplus
and interest rate, 1994–2002 118
9.1 Mexico: estimates of PSBR, 1991–2002 138
9.2 Mexico: fiscal adjustment required under structural
balance rule, 1991–2002 139
9.3 Mexico: public debt and financial absorption, 2002–30 141
9.4 Mexico: public debt under the balanced-budget rule, 2002–30 142
10.1 Accession countries: fiscal stance, 1990–2000 153
10.2 Volatility of government revenue, 1991–2000 154
10.3 Estimates of budget balance, 1990–2000 161
12.1 Outcomes under alternative policy choices 187
13.1 India: growth-interest rate differential, 1992–2003 199
13.2 India: nominal interest and inflation rates, 1991–2003 202
13.3 India: ratio of capital to current spending, 1991–2000 203
13.4 India: government deficit, investment, and growth, 1991–2002 205
13.5 India: government debt dynamics under the FRBM, 2003–08 211
14.1 EU member countries: internal stability pacts 229
Box
13.1 India: state-level fiscal responsibility legislation 206
ix
