Invariably, these experiments assume higher fiscal deficits, either as a result of increased government expenditures or reduced fiscal revenues (i.e. lower tax collection). Alternatively, widening government deficits as a result of fiscal expansion is reflected either in increased private capital accumulation, public investments or recurrent expenditures. The potential benefits of increased public investments under this hypothetical fiscal expansion are compared with the alternative increase in public consumption. However, simulations also consider the hypothetical option of fiscal expansion based on reallocation of savings from reduced net lending—a scenario that may be consistent with debt relief under the enhanced HIPC initiative.

These hypothetical scenarios are then contrasted with actual outcome. Note that the decades of fiscal adjustments were characterized by a protracted economic recession and sustained decline in real per capita income in the region [Artadi and Sala-i-Martin (2003), World Bank (2005)].<sup>26</sup> Graphically, this poor economic performance throughout the period of program implementation is reflected in the trend of real per capita income (actual distribution) and widening income gaps with the predicted output growth derived from transfer functions under the alternative. The case of Cameroon is investigated as an illustrative example in Figures 2—4.

The widening income gap between actual and predicted output is consistent across scenarios. Under the first simulation (model (A)), the transfer function has both government revenues and expenditures as independent variables. The predicted output from this representation is based on the hypothetical assumption of 5 percent uniform and consistent reduction in government revenues (i.e. lower taxes) throughout the reference period matched by a cut of the same order of magnitude in government expenditure with the proceeds fully reallocated to private capital accumulation. In this regard, it is a fiscally neutral scenario. The drop in revenue is entirely allocated to private capital accumulation in the form of savings from taxes.

After estimating the predicted value of aggregate output under the hypothesized scenario, we then calculate the new growth rates using this predicted series. In turn, we apply these growth rates to recalculate the predicted income measured in per capita GDP terms, assuming that predicted and actual output are exactly equal at the origin. The results are depicted by Figure 2 below (panel A). This figure shows a marked deviation between actual and predicted output in constant 2000 US dollars. In effect, under this hypothetical scenario, the income gap increased more than fivefold, with Cameroon’s predicted per capita income attaining levels enjoyed by emerging market economies.

Notwithstanding the trend consistency of aggregate output under this alternative, the overall impact of expenditure reallocation on output growth is slightly lower when transfers from expenditure cuts are not accompanied by a similar reduction in government revenues in the form of tax cuts. In fact, when the rise in private investment exclusively emanates from a reduction in public spending at a constant rate of 5 percent, the predicted output gap is much lower than the alternative hypothesis which combines both revenues from tax cuts and indirect transfers through government subsidies (Panel B in Figure 2).

> 26 There is a growing consensus on the poor performance of economic reforms and adjustment programs in SubSaharan Africa. A World Bank study assessing the impact of these programs concluded on the following note “Despite good policy reforms, debt relief, continued high levels of official assistance, promising developments in governance, and relatively supportive external climate, no take-off has ensued”[World Bank (2005)].

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