# **I. Introduction**

Until the outbreak of the 2008 global economic and financial crisis, which triggered the implementation of historically large fiscal stimulus packages in most advanced economies, fiscal adjustments—instances of sharp government budget deficits reduction—were the cornerstones of macroeconomic stabilization and growth. In effect, over the last three decades, fiscal deficit reductions have been at the heart of structural adjustment programs implemented in the majority of developing countries, confronted with either balance of payments crisis or internal disequilibria [IMF (1987), Stiglitz (2002)].<sup>2</sup> In Sub-Saharan Africa where episodes of large fiscal and current account deficits abounded, the implementation of these deficit-reducing programs was particularly overwhelming, especially in the 1980s and 1990s.

In most countries, these programs are primarily underpinned by a systematic implementation of contractionary policies characterized by expenditure switching and reducing measures. In part, these policies of drastic cuts in government spending are carried out to curtail public deficits and mitigate the macroeconomic costs of negative shocks [Rodrik (2006), Chang (2008)].<sup>3</sup> While they resulted in a reduction of government deficits in numerous countries, they were also accompanied by significant economic costs, not least because the narrow tax base in the region limited the prospects for expanding the revenue side of government budgets, and attempts to raise revenues through higher taxes negatively affected investments and long-run economic growth.

In practice, the economic costs of these deficit-reducing programs are broader and deeper across Sub-Saharan Africa. At the macroeconomic level, they are most notably illustrated by the dramatic fall in public investments and extremely high volatility of growth [Akyuz and Gore (2001), Artadi and Sala-i-Martin (2003)].<sup>4</sup> At the same time, their social costs are equally felt by the majority of the population. A mid-term review of these programs in the 1990s suggested heightened social costs, which included a rapid deterioration of living standards and acceleration of poverty following rising unemployment rates in the face of public sector downsizing and retrenchment, and cuts in the delivery of basic social services [World Bank (1990)].<sup>5</sup> In effect, poverty rates increased dramatically in the 1980s, and have since persisted, with most countries in the region caught in poverty traps [Azariadis and Stachurski (2008), Fofack (2008)]. Despite the relative success at jugulating fiscal deficits and achieving macroeconomic stability within the framework of these programs, poverty rates remain extremely high in the region, with most countries expected to miss the first Millennium Development Goals of halving poverty by 2015 [Berg and Qureshi (2005)].<sup>6</sup> At the same time, income inequality has risen to record levels in the region [Sala-i-Martin (2002)].

2 Despite the transition from Structural Adjustment Programs (SAP) to Poverty Reduction Strategy Papers (PRSP) in the late 1990s, fiscal adjustments remain the central piece of development assistance supported under the World Bank Poverty Reduction Support Credit and IMF Poverty Reduction and Growth Facility.

3 Deficit reduction is part of a set of policies which have underpinned structural adjustment programs. These policies have come to be commonly known as the Washington Consensus [Williamson (2000), Rodrik (2006)]. 4 In a trend reversal from sustained rates of investments in the immediate post-independence, public investments reached the all-time low average of 7.5% of GDP in the 1990s [Akyuz and Gore (2001)].

5 The establishment of a new unit under the name “Social Dimensions of Adjustment in Sub-Saharan Africa” within the World Bank in the 1990s is motivated by the high economic and social costs of these programs. 6 In contrast, the reduction of poverty has been significant in other regions of the developing world, and most notably in the East Asia region [Berg and Qureshi (2005), Easterly (2007)].

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