POLICY RESEARCH WORKING PAPER 22 1.3

# Summary findings

Fiscal policy is central to a counltry's economic arld social objectives, from macroeconomic stability to sustainable growth and poverty reductioCn. BLut evalUations of a country's fiscal performance, over time or relative to other countries, are often conducted indepenident of other development objectives. disregarding the links between fiscal, monetary, and exchange rate policies.

A budget deficit of 4 percent of GDI', for example, may be acceptable in one country bLut not in another, because of different initial conditions and policy priorities. In the same country, a level of fiscal deficit may be acceptable one year bhtt not the next, depending on developments and clhanges in policy objectives.

Dinh argues for assessing fiscal performaiice ( I) as part of the entire framework of economic policy, (2) against a policy objective, (3) by taking into account both shortand long-term considerations, and (4) witlh an eye to the quality of adjustment (whether there are income inequalities or other social issues, for example) as well as its magnitude.

The approach lie proposes for assessitig couLntrv fiscal performance requires a minimum1 of data and takes into account flow and stock variables on internal and external debt. The approach addresses the shortcomin¢gs of conventional analysis by incorporatilig the debt dynamlics and other macroeconomic targets of growth, iiiflation, and external and internal debt. While its theoretical foundation is well known in the literature, this approach has not been adapted for assessing fiscal performlancce either over time or across countries, and he discusses practical issues arising from this adaptation. Dinh1 proposes two indicators to measure fiscal adjustment efforts: _*_ Fiscal solvency adjustment, which measures how far additional fiscal efforts must be taken to restore solvency to the fiscal sector.

Fiscal sustainability adjustmeint, which measures how far additional fiscal efforts inust be taken to maintain the ratios of internal and external debt to OUtpUt.

l)inh applies the proposed framework to evaluate - recent fiscal performance in three countries Argentina, India, and Zambia - each with a different income level and located oin a different continent. The countries were selected on the basis of recent World Bank economic work using the proposed approach or an equivalent. Dinh finds the proposed approach useful for identifying key fiscal issues, for assessing the adequacy and pace of fiscal adjustment consistent with the overall economic and social objectives, and for highlighting the tradeoffs between policy initiatives.

Sound fiscal policy is crucial for macroeconomic stability. When fiscal issues are under control, it is easier to coordinate other policies. When fiscal issues are part of the problem, the tradeoffs between policy outcomes become pronouniced, and economic management, including the management of capital flows, becomes much more difficult.

This paper is a product of Macroeconomics 1, Africa Technical Families. Copies of the paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Manorama Rani, roomJ 11-278, telephone 202473-2057, fax 202-473-81 79, Internet addrcss mrani(o worldbank.org. Policy Research Working Papers are also posted on the Web at http://wblnOO18.worldbank.org/research/workpapers.nsf/policyresearch?openform. The author may be contacted at hdinh(a ;worldbank.org. October 1999. (32 pages) _The Policy Research Working Paper Series disseninates the findings of wvork in progress to encouirage the exchange of ideas abo7ut developmentt issIues. An objective <f the series is to gct the findings_ **_out_** _quickly, ev_ **_len_** _if the presentations are less_ **_tbani_** _fully polished. The papers carrv the niames of the authors and shol70id be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do_ **_niot_** _iiec-essarily represent the view of the World_ **_Baik,_** _its Executive Directors, or the_ **_countries_** _they represent._ Produced **hy** the Policy Research Disseminationi Center