_Policy, Planning, and Research Working Paper Series_ 19

## growing faster than GDP.

* Available data make it difficult to draw firm conclusions about what increases in government input costs versus increases in level of public output contribute to the growth in public spending.

Numerous arguments can be raised to explain why the size of government relative to GDP has grown in most developing nations. Demographic factors, preferences for public provision of goods and services, and increasing unit costs of government production are all likely to have been influential. Development theorizing itself as well as the 'demonstration effect"of advanced capitalist and socialist economies may also have played a role.

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

# 45. How Much Do State-Owned Enterprises Contribute to Public Sector Deficits In Developing Countries - and **Why?**

## Govindan Nair and Anastasios Filippides

_State-owned enterprises in developing countries contribute substantially to pub- lic sector deficits partly because they tend to rely on capital-intensive production techniques_ and _subsidization (through price controls) of output. More attention must be paid to cost effectiveness and cost recovery._ Data for 1980-85 show that value added by state-owned enterprises (SOEs) in developing countries hovers at around one-tenth of GDP at market prices. In this i-hNy are comparable to SOEs in industrial countries.

In another respect they are different: their share of gross investment averages three times their share of value added. This reflects the relatively capital-intensive nature of SOE activities in developing countries, possible biases toward capital-intensive production techniques, and heavy subsidization (through price controls) of SOE output.

On the whole, SOEs in developing countries contribute substantially to public sector deficits, typically finance less than one-fifth of their investment, contribute far less to national savings than to national investment, and contribute heavily to the savings-investment imbalance in many countries. Countries differ in how they finance the SOEs' savings-investment gaps, but often the SOEs account for much of the outstanding external debt and at the same time draw heavily on govemment budgets.

- Some SOE expenditures particularly on investments in infrastructure - are crucial to a nation's development and to the alleviation ofpoverty. But reducing SOE deficits and keeping them from becoming a long-term drain on public finance will require more attention to cost effectiveness and cost recovery in SOE expenditures and more rigorous appraisal of SOE investments.

This is a background paper for the 1988 World Development Report. Please contact Lupita Mattheisen, room S13067, extension 33757.

## 46. The Management of Public Expenditures: An Evolving Bank Approach

## Robert Lacey

_The key to better_ management _of public spending, including_ investmentprogramming, _lies in the process by which pro-_ grams _are identified, prepared, approved, and implemented. Strengthening this process should lead to expenditure programs that are_ a more _appropriate size and_ are more attuned _to overall development goals._ The Bank is paying increasing, though still unsystematic, attention to the institutional dimension of public expenditure management. This implies analysis of the processes and procedures by which programs are put together with an assessment of the strengths and weaknesses ofthe institutions involved and the links between them. Advising governments on these aspects requires more expertise than most Bank staff members possess. The Bank should develop staff skills in this area through:

* Better coordination in the Bank of public expenditure reform issues.

* More intensive, systematic staff training, and more contact with academics and other outside experts through such vehicles as seminars.

* Closer collaboration and more systematic exchange of views between operational staff and the Policy, Planning, and Research complex, including incorporation of feedback from the seminars held by the Economic Development

## Institute.

* Acloserworkingrelationship with the IMF, especially the Fiscal Affairs Department.

> * Development of a well-designed program of operationally oriented, detailed case studies of specific country experiences (successes and failures) from which to draw lessons for future operations and country and economic sector work.

Addressing these issues may also have implications for the type of lending instrument the Bank uses. Reforms of public spending are usually dealt with through structural adjustment loans, backed up by technical assistance operations - but these may not always be suitable. If major policy decisions are required to bring about important longterm structural changes, a broader, more flexible lending instrument may be more appropriate.

One approach being explored is to finance a time slice of the country's public investment program (either on a sectorby-sector or aggregate basis, depending on the scope of the reforms to be introduced) to support not only more appropriate programs but also institutional and procedural reforms of the ways in which public expenditures are prepared and implemented. This approach could combine quick-disbursing balance of payments support with the longer-term approach needed to encourage institutional reform.

This is a background paper for the 1988 World Development Report. Please contact Lupita Mattheisen, room S13067, extension 33757.

# 47. Considerations for **the** Development of **Tax** Policy When Capital Is Internationally **Mobile**

## Robert F. Conrad

_For tax policy to encourage maximum investment of capital (both foreign and domestic) it is necessary to take into account the potential mobility of capital across international borders. Economic analysis of investment incentives should therefore incorporate the effects of variables such as source rules, nexus rules, attribution rules, foreign tax credits, and_ soon, _in addition to traditional variables such as legal tax rates and the revenue implications of the distribution of the tax base._