Limited Fiscal Space Research Articles

Indonesia's economic and environmental resilience in the face of climate change: Analysis and implementation strategies

Backgorund: Climate change is a significant threat to Indonesia, an archipelago that is vulnerable to the negative impacts of this phenomenon. This study aims to identify the effects of climate change in Indonesia and evaluate mitigation and adaptation strategies needed to improve economic and environmental resilience. Based on climate change projections, increases in surface temperature, changes in rainfall patterns, sea level rise, and changes in water salinity have negative impacts on various sectors such as agriculture, fisheries, infrastructure, and public health. Method: The research method includes secondary data analysis from various official sources and a study of relevant literature, with an analytical descriptive approach to identify critical challenges and necessary strategies. Findings: The results show that limited fiscal space and the need for budgetary reform are significant challenges that need to be addressed through the introduction of a carbon tax, budgetary incentives for green technologies, and the removal of fossil fuel subsidies. In addition, mobilization of non-budget funding sources is needed to support green projects, with strategies such as the development of public-private partnerships, access to international funds, and technical capacity building. Conclusion: In conclusion, implementation of the recommended mitigation and adaptation strategies can increase Indonesia's resilience to climate change, reduce its risks and negative impacts, and ensure the sustainability of economic and social development. Novelty/Originality of this study: This research provides practical guidance for policymakers to develop effective strategies to deal with climate change

An Exploration of the Relationship Between Public Infrastructure and Economic Growth in Northeast India: A Panel Data Approach

In this article, we have used a panel data approach to explore the relationship between public infrastructure and economic growth in Northeast India using data from all eight states from 2004–05 to 2018–19. The findings reveal that all public infrastructures do not contribute productively to economic growth. Certain infrastructure sectors, such as agriculture-related and healthcare-related infrastructure, affect the growth prospects of the northeastern region of India. One plausible reason could be the current level of some public infrastructure, which is not developed sufficiently enough. Therefore, India must address the infrastructural gap in its northeastern region in order to leverage the region’s trade potential and establish it as the country’s growth engine. To meet the infrastructure demand with limited fiscal space, the government needs to foster an environment that encourages public–private partnerships in infrastructure. Sharing benefits with private participation could be another way to attract private investment in the infrastructure sector of the region. JEL Codes: C23, H54, O47, R53

Covid Lockdown and Employment in the Philippines

The COVID-19 pandemic has severely impacted employment worldwide, mainly due to social distancing measures – hard lockdowns especially. Using difference-in-differences (DiD) analysis on Philippine Labor Force Survey (LFS) data, which exploits (1) the preemptive and selective application of a hard lockdown within the country; and (2) the conduct of the LFS coinciding with the imposition of the hard lockdown in April 2020, this study finds that the hard lockdown has a significant impact on employment apart from the general impact of the pandemic. The hard lockdown’s effect falls mainly on the intensive margin (weekly hours worked) rather than on the extensive margin (number of employed) per se. While employment and hours worked were generally down during the pandemic, the hard lockdown reduced weekly hours worked by an additional 18 hours. The most heavily affected workers are young male workers with low to medium educational attainment levels; and workers in sectors with low telework potential: Manufacturing, Construction, and Transportation. These results may inform the scope and form of government assistance given the limited fiscal space; and highlight the importance of developing digital skills and technologies to minimize the adverse employment impacts of hard lockdowns.

The Impact of High Government Debt on Economic Development in Somalia

This study focuses on the impact of high government debt on economic development in Somalia. The specific objectives of the study encompass: to examine the impact of high government debt on Somalia's economic development, to explore the strategies that can be used to mitigate the negative impact of high government debt on economic development in Somalia and to evaluate the role of international financial institutions in managing high government in Somalia. This study employed descriptive research design and quantitative research method to investigate the impact of heavily-indebted on rebuilding economic development in Somalia. The study employed purposive sampling technique to select the participants of the study. The sample size of the study was 80 participants. To collect data from the respondents which they entail: Government officials, Economic analysts, representatives from financial institutions, Business owners and entrepreneurs, representatives from Non-governmental organizations (NGOs) and Academics (researchers and scholars). The study adopted close-ended questionnaire instrument data collected from the respondents of the study was entered, coded, sorted, organized and analyzed using Statistical Package Software Science (SPSS) version 28. The key findings of the study on the impacts of high government debt on Somalia's economic development entail: limited access to credit, increased debt servicing costs, inflation and currency depreciation, reduced investor confidence, limited fiscal space, vulnerability to external shocks and social unrest. The strategies the can be used to mitigate the negative impact of high government debt on economic development in Somalia include: promotion of financial literacy, strengthening regulatory framework, encouragement of diversification of the economy, Improving infrastructure and access to financial services, implementation of debt management strategies, fostering a conducive business environment and seeking external assistance and debt relief. And the role of international financial institutions in managing high government debt in Somalia entail: providing financial assistance, negotiating debt relief, offering technical expertise and supporting capacity-building. The study recommended that the Federal Government of Somalia should improve fiscal management and should work with international financial institutions and creditor countries to negotiate debt relief and restructuring agreements to reduce the burden of debt payments and boost economic development.

Making Tourism Sustainable? Environment and Resort Tourism in Negril, Jamaica, 1970s–2002

Based on newspaper accounts, official documents and reports by international donors, this article sets out the growing awareness about the environmental impact of resort tourism in Jamaica and action proposed and undertaken to put tourism on a more sustainable path, from the 1970s till the adoption of a Masterplan for Sustainable Tourism Development in 2002. Through a case study of the resort town of Negril, it will argue that the Master Plan was the culmination of action and lobbying by industry stakeholders and environmental groups, a global and regional shift towards sustainable tourism and pressure from international donors. It will also make the case that, throughout the period, the Jamaican government struggled to balance the economic and environmental sustainability of tourism because of the centrality of tourism to the national economy and its limited fiscal space.

Is there still a role for direct government support to firms in developing countries?

Should governments in developing countries directly support firms with policies such as grants, subsidized loans, and training and consulting programs, or should they instead just aim to enact sensible regulatory and macroeconomic policies and not attempt to engage in industrial policy? While industrial policy has gained renewed attention in developed economies, it faces considerable skepticism in developing countries scarred by previous experiences and facing limited fiscal space. I discuss the rationale for government involvement, and then lessons from a recent research agenda in development economics on how to target these programs, on whether they induce firms to undertake additional activities, on avoiding political capture, and on how these interact with competition. This work shows that these policies can deliver some of their promised benefits, but that there is still much to learn and the need for systematic and serious attempts at prospective impact evaluation as new policies are launched.

Health expenditure and health outcomes in Latin America and the CaribbeanGastos em saúde e resultados de saúde na América Latina e no Caribe

To determine the effect of public and private health expenditure on health outcomes in Latin American and Caribbean countries from 2000 to 2019. A health production function was used, wherein life expectancy at birth and infant mortality rate were considered as indicators of health outcomes. Panel data econometrics were applied, using data from a 33-country sample for the period from 2000 to 2019. According to estimates, a 1% increase in public health expenditure is associated with a 0.019% increase in life expectancy, and a 1% increase in private health expenditure increases life expectancy by 0.023%. At the same time, a 1% increase in public health expenditure reduces the infant mortality rate by -0.168%, whereas the effect of private health expenditure on infant mortality is not statistically significant. The results provide evidence of the effect of public health expenditure in reducing infant mortality and increasing life expectancy, while private health expenditure has a positive effect only on the latter metric. The findings have important political implications for the countries of the Region in the post-pandemic context of limited fiscal space.

Coping with extreme events: on solving decentralised budgetary crises

ABSTRACT Extreme events create both macroeconomic and budgetary problems for decentralised governments. Decentralised governments are unequipped for macroeconomic stabilisation policies and have very limited fiscal space. At a practical level there are three options to replace lost funding from an extreme event: decentralised governments can anticipate and save for these budgetary rainy days themselves, they can issue debt, or the central government can step in and provide aid when such extreme events occur. This paper examines the impact of these options on the unemployment rate. Using the 2008 financial crisis as an extreme event and employing a panel data approach, it is found that both grants and rainy day funds during the crisis reduced future unemployment on the margin relative to periods outside of the crisis; the same is not true of debt. It is also found that grants and rainy day funds are substitutes: greater grant funding implies a somewhat smaller effect of own savings on future unemployment.

Conflicting Choices: Lump Sum Transfer or Periodic Cash Transfer. Evidence from Sindh, Pakistan

Evaluating the long-term impacts of social assistance programs is usually not possible as pure control groups dissolve into treated ones. This paper makes use of data where the treated and control groups remained mostly unmarred. We examine two types of Pakistani social assistance i.e., lump sum transfer (LST) versus unconditional cash transfer (UCT) and determine which is more effective in enhancing household income after a decade. The UCT has continued over time thus enabling us to see if there is any cumulative effect of this in comparison to the onetime LST received to the treatment group. The setup of initial randomization of beneficiaries to treatment and control status has not received any form of researcher intervention and thus continues to induce random variation. For evaluation, a cross-sectional survey is conducted in a district of the Sindh province of Pakistan. Propensity Score Matching is employed across recipient and control households to evaluate the treatment effects. The matching is done for households receiving LST and UCT and also between LST and non-recipients of any assistance. The empirical analysis suggests that the LST permanently increases the total household income. The difference in the household incomes of LST and UCT recipients, in the long run, is large and significant. The same is true for LST recipients and non-recipients of any form of assistance. Sensitivity analysis indicates no hidden bias. Considering limited fiscal space availability, understanding which type of social assistance can be more effective for social mobility, is an important public policy decision.

Unlocking the flow of finance for climate adaptation: estimates of ‘Fiscal Space’ in climate-vulnerable developing countries

ABSTRACT We study the availability of fiscal space in climate-vulnerable developing countries. These countries require urgent climate adaptation and transition investments. However, their governments describe being bypassed for international financial support due to ‘limited fiscal space.’ We suspect that many governments are not close to a point of long-term insolvency but are unable to maneuver fiscally because of what has been called a ‘financial death trap.’ We apply a measure of fiscal space based on an endogenous debt limit reflective of a country’s record of fiscal adjustment consistent with long-term solvency. We find that for many countries, the distance between the endogenous debt limit and forecast public debt ratios – i.e. fiscal space – is fairly ample. Our findings imply that climate-vulnerable countries should be afforded a second look by international financial institutions using a long-term lens, of which this measure of fiscal space is an example. By illuminating the difference between long-term insolvency and short-term liquidity crises, the endogenous debt limit measure could be part of a multi-pronged strategy to unlock greater flows of adaptation finance. It could lower the cost of capital or be useful in the efficient allocation of adaptation financing among countries given current shortfalls. Actions to obviate the financial death trap are also warranted. Climate ambitions will be derailed if otherwise solvent and able governments are unable to access finance for urgent climate adaptation investments.

The role of COVID‐19 in worsening the debt sustainability in developing economies – The case of Ghana and Kenya

AbstractThe SARS‐CoV‐2 coronavirus pandemic has raised public debt sustainability issues, especially for Heavily Indebted Poor Countries (HIPC). Developing countries with limited fiscal space have had to take on significant external debts to help deal with the negative effects of the pandemic. This has led to further increases in the debt levels of these countries, with the potential to trigger a debt default. Addressing these issues, this study uses a framework for fiscal policy and public debt sustainability analysis. The results confirm the impact of the SARS‐CoV‐2 coronavirus pandemic on the debt levels of Ghana and Kenya. This study recommends the creation of domestic fiscal buffers and fiscal space toward the attainment of long‐term debt sustainability, contrary to the popular view of offering debt relief to these countries.

Climate risks: nexus between green financial policies and fiscal space

ABSTRACT Aimed at preserving firm-level and macro-financial stability against climate-related physical and transition risks, green financial policies are often viewed as complements to fiscal policies. While the latter are aimed directly at an economy-wide state-led green transformation, the former are targeted specifically towards the financial sector. In this context, this article makes two contributions to the climate change/green finance literature. First, it creates a green financial policy intensity index which measures the cumulative number of such policies rolled out by countries from 1995 till 2021. Second, it empirically examines the nexus between the uptake of these policies and fiscal space. Our findings suggest that higher physical and transition climate risks are associated with more green financial policies being undertaken, but only for countries with limited fiscal space or a high fiscal deficit.

MANAGEMENT OF PUBLIC-PRIVATE PARTNERSHIP IN SPORTS INFRASTRUCTURE: VULNERABILITIES

Ukraine’s needs in sports infrastructure and limited fiscal space require effective management of state investments in order to stimulate economic development, provide quality services and stimulate economic activity. The implementation of infrastructure projects for the satisfaction of public services in the process of public-private partnership (hereinafter – PPP) is widespread in the world, because it shifts the emphasis of state dominance in the sphere of creation and distribution of services, increases the efficiency of the use of public funds due to competitive management, risk distribution and responsibility. PPP can serve as an effective solution for the creation (improvement, reconstruction) of sports infrastructure, in the absence of the possibility of financing such objects from the state budget. The main interest of the private sector in the implementation of sports infrastructure projects is mainly the use of such facilities, while the public sector (which often owns such facilities) is mostly concerned with the economics of maintaining the facilities and additional revenues to compensate for budget cuts. Therefore, in conditions of limited state resources, cooperation between the state and private partners can serve as the key to successful improvement of the sports infrastructure. The article examines the problematic issues of public-private partnership management in sports infrastructure, taking into account national and international experience. The positive and negative experience of PPP implementation in the field of sports is analyzed using the examples of Singapore, Great Britain, China, India, Lithuania and others, and ways of improving the management of such projects are summarized. Risks in PPP projects and their main carriers have been clarified, in particular, legal, political, operational, financial, environmental, market and other risks have been identified. Draft laws on improving PPP regulation in Ukraine were studied, and attention was also paid to problematic management issues. It was concluded that in order to create an effective partnership between the public and private sectors, it is important to have a strategic view on public investment priorities, a stable regulatory framework for PPPs, and clear selection criteria and opportunities for effective PPP management.

Guinea-Bissau

Guinea-Bissau is a fragile state with significant development challenges, including limited fiscal space, debt vulnerabilities and poor governance. After years of political turmoil and delayed reforms, in 2021 the authorities started the implementation of an ambitious fiscal consolidation program to ensure debt sustainability while creating fiscal space to address developmental needs. A Rapid Credit Facility (RCF) disbursement of SDR 14.2 million (50 percent of quota) was approved in January 2021 to provide urgent financing to support critical spending in health. A nine-month SMP with three quarterly reviews, approved in July 2021 ended with satisfactory performance building track record of policy implementation towards an Extended Credit Facility (ECF) arrangement. The August 2021 SDR 27.2 million allocation and the reforms underpinned by the SMP have helped address the adverse impact of the pandemic, while improving the transparency of government spending, and mitigating debt vulnerabilities.

Can the New Left Deliver Change in Latin America?

The intense Latin American electoral cycle of 2020–22 coincided with deteriorating socio-economic conditions in the wake of the COVID-19 pandemic and increasing frustration with the status quo. Anti-incumbent sentiment coupled with demands for more inclusive and fair economic models prompted a pronounced shift to the left in the region, although with many different shades of ‘pink’. But an increasingly polarised and fragmented political and social environment is testing the ability of new governments to deliver change, as shown by the popular rejection of a new constitution in Chile. A more limited fiscal space is also constraining these governments’ effectiveness. Nevertheless, political alignment among countries with important stakes in global climate-change mitigation and thwarting drug trafficking could produce more cohesive foreign-policy stances and increased regional leverage.

Impact of Election Expenditure on Agricultural Service Delivery Expenditure in Zambia, 2000-2021

Purpose: This paper examined the public expenditure changes between elections and agriculture service delivery. The aim was to determine how the relationship trend related to agriculture growth. Early analyses assumed that elections act as a signal for preferential public expenditure. Thus, in Zambia, agriculture would be a priority as the government claims over 70% of citizens, directly or indirectly earn from the sector.
 Methodology: Times series secondary data was analyzed for descriptive statistics from 2000 to 2021.
 Findings: The evidence is that agriculture public expenditure was lower than CAADP targets in this period. Agriculture research as a service received the lowest funding. The trend also revealed that there were very sharp increases in election expenditure in both the preceding year and in the year of elections. In most election years this was close to 2% of total national public spending over the study period. These election spending spikes may have induced cyclical fiscal shocks, difficult to recover from, resulting in limited fiscal space and a reduction in agriculture spending. The electoral cycle induced fiscal shocks, over time, may have also led to a downward trend in agriculture growth. The authors identify this phenomenon as the ‘functionality burden of democracy’.
 Recommendation: Based on the findings the study recommends that agreed policy objectives in agriculture and CAADP commitments must become a national mission. This would mean that the agriculture goals are shared at all levels including family, schools, private sector, civil society and the media.

On the importance of fiscal space: Evidence from short sellers during the COVID-19 pandemic

Using the exogenous shock of the COVID-19 pandemic, we study how informed market participants incorporate fiscal space into their trading decisions. At the onset of the pandemic, short-selling activity shifted towards companies with low financial flexibility but only in countries with limited fiscal space. Among such companies, short sellers specifically targeted those that generate their revenues mainly in the domestic market. These short sellers entered their positions before the market crash, thereby generating significant abnormal returns. We find no evidence of either herding behavior prior to the market crash or a long-run performance reversal of short sellers. These findings support the notion that short sellers help to promote price efficiency in times of crisis, where governments with budgetary constraints are unable to provide sufficient stimuli to their economies.

The Indonesian Economy in Turbulent Times

The year 2022 got off to a relatively optimistic start for Indonesia’s economic managers. Notwithstanding the serious health and social outcomes inflicted by the Covid pandemic, the government had successfully minimised the economic fallout. It could reasonably contemplate a period of sustained economic recovery and rising prosperity in preparation for the 2024 national elections. However, the outlook began to deteriorate in the face of heightened global economic volatility and uncertainty: the economic and geostrategic ramifications of the Ukraine War, a sudden slowdown in the global economy, rising interest rates, historically high and volatile prices for some key commodities, international trade and transport disruptions, uncertainty about China’s current economic trajectory and persistent if (so far ) manageable Covid challenges. Nevertheless, the Indonesian economy is continuing its steady post-Covid progress: the return to 5% growth in late 2021 continued through to second quarter 2022, inflation remains moderate and living standards are slowly recovering. However, there are potentially major macroeconomic challenges on the horizon. In fiscal policy, there are many demands on the budget, yet there is limited fiscal space, and much of the increased budget revenue this year is again being allocated to subsidies. In monetary policy, there is concern that, as in many countries, the monetary authorities could be ‘behind the curve’ of rising inflationary pressures. In his 16 August 2022 speech, President Joko Widodo (Jokowi) emphasised the importance of the industrial sector and of ‘downstreaming’ as a means of accelerating industrial growth. Against this backdrop, and the sector’s sluggish growth for much of this century, the paper also surveys recent patterns of industrialisation and prospects for the future.

Revisiting the debate on health financing in Low and Middle-income countries: An integrative review of selected models.

Universal Health Coverage (UHC) as a health policy goal is gaining added currency in the policy agendas of many Low and Middle-Income Countries (LMIC) following the onslaught of the coronavirus (COVID-19) pandemic. The goal of UHC is to ensure that every citizen has access to quality healthcare services that they need without suffering financial hardship. Whereas most industrialised countries have achieved UHC through the implementation of various traditional health financing mechanisms, most LMIC have not made significant progress in providing financial protection against the costs of illness for majority of the population due to limited fiscal space and or lack of political commitment to raise government revenues and increase fiscal space for health. While the onslaught of COVID-19 refreshes the call for reform of countries' health financing policies to reflect the healthcare needs of the population, the debate about the type or combination of health financing models to employ in LMIC has yet to reach a consensus. This review critically analyses five health financing models to ascertain their appropriateness in providing financial risk protection against the cost of illness, especially in this era of COVID-19. Given the limited fiscal space for health in LMICs, we argue that one viable pathway towards achieving UHC is the adoption of an adaptive mix of diverse pooling mechanisms. Moreover, because the creation of fiscal space is context-specific, and UHC is a political issue rather than technical, securing strong political support is necessary for improving the governance and institutional frameworks for health and ensuring sustained economic growth to respond to the fiscal demands of health systems.

Public Debt and Economic Growth in the Aftermath of the Covid-19 Economic Crisis

The Great Financial Crisis (GFC) of 2008 to 2010 increased the size of the public debt and decreased the fiscal space. The problem stems from the fact that fiscal resources are limited. Many OECD countries had used a substantial part of their limited fiscal space. Researchers suspected that higher levels of public debt in the future could slow down GDP growth. The first attempts to detect the tipping point at which GDP growth stalls or loses steam were made right after the GFC. However, the discussion was left open. The Covid-19 crisis required the further use of unprecedented amounts of fiscal stimulus resources to stabilise the economic situation. The objective of this paper is to establish whether new data of elevated public debt levels in relation to GDP confirms that higher levels of debt to GDP have an impact on future GDP growth and future financial stability. Debt and GDP data from OECD countries for the years 2000 to 2026 was used in order to carry out multilinear regression analysis, establishing the relationship between debt and future GDP growth. The results provide compelling evidence that the accumulation of higher debt levels slows down GDP growth, and require more fiscal resources in the future to stabilise the economic situation, compared with countries with lower accumulated public debt levels. Hence, higher inflation will require even more resources to service the debt.