**_Policy,_** _Planning,_ **_and Research Working Paper Series_**

16 ture targets. Then the entire set of public expenditure issues should be looked at **si-** multaneously. If total expenditure is allowed to be the outcome of the aggregation of sectoral bids, the overall expenditure is almost certain to be unsustainable.

* The responsibility for reconciling expenditure bids with agreed overall targets mustbe decentralized. Sectoralministries should be given ceilings within which to prepare their estimates.

* Itisvitalthatrecurrentanddevelopment expenditure programs be considered simultaneously in each sector, since a country's ability to sustain the recurrent costs arising from new investment may be doubtful. In restructuring recurrent budgets, it is important to establish "norms" for the level and distribution of expenditure to provide properly for key services.

* In the long run, the budgeting and planning process should be made public in order to educate public opinion about economic alternatives, build a consensus, and spread responsibility for public spending choices.

* Monitoring development projects and programs requires explicit information on actual expenditures of individual projects and the entire program, including simple breakdowns by implementing agency, sector, source of finance, and so on. For investment programs, it must be possible to relate expenditure information to a financial plan for each project. The use of standardized project profiles for all approved projects is an invaluable technique.

* The financial woes of developed countries increase the value of external aid and the leverage exercised by aid agencies. To minimize friction with aid agencies, governments should exercise careful aid management by monitoring project preparation and implementation, working to minimize project problems, and encouraging dialogue between the govemment and aid agencies.

This is a background paper for the 1988 World Development Report. Please contact Rhoda Blade-Charest, room S13060, extension 33754.

# **36. Social** Security Finance in **Developing** Countries

## Douglas J. Puffert

_Social security systems in developing countries can provide a pool of investment capital to spur economic growth. But many systems now showing surpluses may become insolvent because of poor management._ Socialsecuritysystemsusuallycoverless than 10 percent of the population of developingcountries. Yetinanumberofcountries, these systems make up a large proportion of public sector revenues and expenditures.

Most social security systems in developing nations are running substantial surpluses. If the systems are to meet future obligations, reserve funds and surpluses should be invested in safe assets with real positive rates of return.

But many countries lack well-developedfinancial marketsand good domestic opportunities for productive investment. The government usually controls social security systems - and often uses the surpluses to finance government deficits.

Economists are divided over how social security systems affect private saving and capital accumulation, which leads to long-term growth. They also disagree on the inefficiencies which social security systems introduce into labor markets.

It is clear, however, that investing social security funds in government securities increases the risk of the social security system's insolvency.

Governments facing fiscal difficulties find it tempting to expand the money supply and drive up inflation. This cuts government obligations to social security reserve funds by reducing the real value of the investments in government bonds.

There is also constant pressure for many governments to increase benefits without increasing contributions. Although such action is expedient, it often proves unsustainable. A govemment's ability to resist such pressure thus has a direct bearing on the long-term success of the system.

One system that stands out as sound, with wisely invested reserves, is the regulated private social security system in Chile.

This is a background paper for the 1988 World Development Report. Please contact Rhoda Blade-Charest, room 813060, extension 33754.

## **37. Black Market Premba, Exchange Rate Unification and** Inflation **In Sub-Saharan Africa**

## Brian Pinto

_The black market premium on foreign exchange is an implicit tax on exporters. Therefore, eliminating the gap between the official and black market exchange rates without raising taxes or cutting government spending could raise inflation substantially._ The links between exchange rate and fiscal reform are developed for countries where the black market premium on foreign exchange is exceptionally high, often exceeding 100 percent, as has been recently observed in Africa. Exchange rate reform is motivated by the allocative goal of stimulating exports through real depreciation. By interpreting the premium as a tax on exports, it is argued here that this goal is equivalent to reducing the premium, or unification of official and black market exchange rates.

Unification also has fiscal implications. In the common case of government's being a net buyer of foreign exchange from the private sector, there is a trade-offbetween the premium (tax on exports) and inflation (tax on domestic money) in financing the deficit. Therefore, unification could raise the inflation substantially as the lost revenue from exports is replaced with a higher tax on money. This will occur even if real government spending remains constant, unless there is a fiscal response to compensate for the loss of export revenues.

The analytical ideas are illustrated with the unification experiences of Ghana, Nigeria, Sierra Leone, Zaire, and Zambia. In order to avoid costly surges in post-unification inflation as recently observed in Sierra Leone and Zambia, exchange rate reform may have to be slowed down to accommodate fiscal reform. This applies especially when the premium is high, with significant revenue and redistributive implications, and policy credibility is low. Even so, discrete maxi-devaluations might be preferable to accelerated crawls. Based on the country experiences, some guidelines are suggested for the transition to unified rates. Lastly, a changed emphasis in policy conditional-