Policy Coherence for Development

Abstract

Listen

Translate article

Fiscal legitimacy — the trust people place in their government’s fiscal policy — matters for economic development and democratic governance because it affects the quality of a country’s fiscal policy. Many countries in Latin America suffer from a vicious circle in which poor-quality fiscal policy hinders the generation of tax revenue and the effectiveness of public expenditure, thereby weakening fiscal and democratic legitimacy, which in turn undermines the quality of fiscal policy. Brazil and Mexico illustrate: Brazil collects and spends much, Mexico collects and spends little, but neither performs well in terms of fiscal quality. In the 1990s, fiscal reform in Latin America focused with some success on insulating fiscal policy from politics, but many reforms ultimately failed because they did not take local political realities into account. Today, politics is returning to the front of the debate on fiscal and especially tax reform, with the link between fiscal policy and democratic governance beginning to gain the attention it requires. Decision makers need to exploit the linkages between fiscal policy and democratic governance to successfully implement fiscal reform and address Latin America’s urgent social challenges. Local think tanks can contribute by stimulating a debate on policy options and so play a crucial role in enhancing transparency, but they require financial autonomy to ensure their intellectual independence.