The Perennial Quest for Fiscal and Policy Space in Developing Countries

Abstract

A standard lament in the development literature is that many low- and middle-income countries are in an invidious position because of a lack of ‘policy’ and ‘fiscal’ space. This has been compounded by the food and energy price shocks that prevailed between 2007 and 2008 and the severe global recession that emerged in 2008 and continued throughout much of 2009. The consequence of the lack of fiscal and policy space in the developing world is that ‘there are large asymmetries in global economic policies — counter-cyclical policies are pursued by developed countries, while most developing countries pursue pro-cyclical policies’.1 Others concur. As is noted in the Global Monitoring Report of 2009: ‘… most developing countries faced with sharply declining growth and consequent major social disruptions lack the resources to mount any fiscal response, and will in fact experience a further erosion of their fiscal space as public revenues fall and external financing dries up’.2