The Economics of

1
The Economics of Fiscal Space

• Shanta Devarajan
• World Bank

2
Two tautologies

• Increasing the fiscal deficit to spend on
  productive expenditures may lower the debt-to-GDP
  ratio

3
Two tautologies (contd)
4
Two questions

• Which components of K1,K2,K3,G1,G2 are
  productive?
• Empirically estimate (Barro, Easterly and Rebelo,
  Devarajan-Swaroop-Zou)
• A priori classification (infrastructure, health,
  education are productive, defense is not)
• Problem Public spending on some components
  (such as health, education) are not necessarily
  aimed at growth

5
Bigger problem Public spending does not even
achieve health and education
Percent deviation from rate predicted by GDP
per capita Source Spending and GDP from World
Development Indicators database. School
completion from Bruns, Mingat and Rakatomalala
2003
6
Bigger problem Public spending does not even
achieve health and education
Percent deviation from rate predicted by GDP
per capita Source Spending and GDP from World
Development Indicators database. Under-5
mortality from Unicef 2002
7
Determinants of infant mortality in Malaysia
8
Grants for Primary Education in Uganda
Primary Education in Uganda (PETS)
US per
Student
3.5
3.0

• In 1995, survey of 250 primary schools in 19 of
  39 districts

2.5
2.0
1.5
1.0
0.5
0.0
1994
1995
1990
1991
1993
1999
Intended Grant Amount
Received by School (mean)
9
All India Teacher Absence Map (Public Schools)
State Teacher Absence ()
Maharashtra 14.6
Gujarat 17.0
Madhya Pradesh 17.6
Kerala 21.2
Himachal Pradesh 21.2
Tamil Nadu 21.3
Haryana 21.7
Karnataka 21.7
Orissa 23.4
Rajasthan 23.7
West Bengal 24.7
Andhra Pradesh 25.3
Uttar Pradesh 26.3
Chhatisgarh 30.6
Uttaranchal 32.8
Assam 33.8
Punjab 34.4
Bihar 37.8
Jharkhand 41.9
Delhi -
All India Weighted 24.8
Source Kremer, Muralidharan, Chaudhury, Hammer,
and Rogers. 2004. Teacher Absence in India.
10
India 2003 Doctor absence from primary health
clinics by state and reason
11
Two questions (contd)

• Is
• an appropriate rule-of-thumb? (Agenor, IMF)
• Rules v. Discretion

12
Implications for modeling exercise

• Analytical models
• Incorporate government failure (time-inconsistency
  )
• Empirical estimates of public sector inefficiency
• What to do about it?