Interestingly, the overall benefits of fiscal expansion for growth and welfare improvement are consistent across the region, even in the set of countries which have a much lower level of income— low and lower middle-income countries. For instance, in Mozambique where actual annual income per capita remains below the US$200 threshold over most of the adjustment era, the predicted level of aggregate output under the hypothesized alternative fiscal expansion is equally uniformly higher, with the gap between actual and predicted widening significantly in outer years as well (see Figures 1 and 2 in Annex).

Although hypothetical, the potential benefits of counter-cyclical policies are significant and highlight the scale of lost output and opportunities for welfare improvement during the adjustment era. Furthermore, the consistency in the simulations of predicted output across countries is also telling. In this regard, it is not at all surprising that the World Bank’s report on a retrospective assessment of lessons learned from decades of economic reforms made a not-so-veiled critic of the systematic implementation of fiscal adjustments during the decades of structural adjustment in developing countries [World Bank (2005)].

As one of the key recommendations, the report stressed that “The goal of achieving macroeconomic stability does not imply a need to minimize fiscal deficits at all times.” Interestingly, the report went on even further to highlight the costs of fiscal adjustments for economic growth in an inter-temporal setting, essentially saying that a “lower fiscal deficit achieved today through off-budget contingent liabilities, or through cutting back public investments and thus reducing long-run growth and the future tax base, may mean a higher fiscal deficit in the future.”

# **V. Conclusion and Policy Recommendations**

This paper revisits the sacrosanct policy of fiscal adjustments widely carried out across Sub-Saharan Africa during the era of adjustments and macroeconomic stabilization. The renewed interest in this topic is partly motivated by the latest recourse to automatic stabilizers, most notably reflected in the enactment of historically large fiscal stimulus packages by numerous industrialized and emerging market economies in response to the global downturn triggered by the US subprime crisis. As a result of these countercyclical policies, fiscal deficits are projected to reach new record levels in most industrialized nations in 2009 [IMF (2009b), OECD (2009)].<sup>29</sup> Although partly attributable to the conjunction of lost tax revenues in a downturn and exceptional increases in government expenditures, these deficit projections are extremely large, even by developing countries standards. They are well beyond anything ever faced by countries in Sub-Saharan Africa, even at the height of chronic balance of payments crises and negative terms of trade shocks, which partly prompted the recourse to fiscal adjustment and macroeconomic stabilization. Yet still, this exceptional rise in public deficits, and correlatively public debt, in a large number of advanced economies is certainly not too much of a price to pay in order to avert a protracted recession, which could have taken a U or W-shaped, or worst still turned into a depression [Krugman (2009)].

It is against this backdrop that this paper revisits the growth and fiscal adjustment nexus in SubSaharan Africa. In particular, the paper assesses the dynamic of fiscal adjustment and growth in the

> 29 For instance, according to latest IMF figures, fiscal deficits expressed as a percentage of GDP are projected to exceed 12% and 11% in 2009 in the USA and UK, respectively. According OECD latest estimates, fiscal deficits are projected to reach historically large levels in other advanced economies.

20