The Deficit-Growth Connection: Some Recent Evidence from Developing Countries

Abstract

During and after the Great Depression J. M. Keynes argued for government budget deficits as one of the remedial measures to fight economic downturns and to cure unemployment in industrialized countries. In developing countries, too, policymakers have argued that deficit financing would be an effective tool to promote economic growth given the large amount of unemployed and underemployed manpower and other resources that typically exist in these countries. Such fiscal policy, it is maintained, would help these countries invest in much-needed infrastructure and other economic development projects. In contrast, it is also conventional wisdom in most developing countries that larger budget deficits have coincided with wasteful government spending, large bureaucracies, and other counterproductive economic policies. In fact, international lending and economic aidgiving agencies such as the World Bank and the International Monetary Fund (IMF) have pressured the less developed countries' (LDCs') governments to restructure their economic policies by cutting wasteful spending, reducing deficits, privatizing, and opening up their economies. Such measures have been demanded almost as a precondition for obtaining external credit or other kinds of external economic assistance.