It’s a pleasure to be here today to discuss the important role of fiscal policy in promoting growth and addressing inequities in developing countries -- as well as helping the World Bank Group achieve its core mission of ending extreme poverty and boosting shared prosperity.
In recent years, we have learned important lessons about how fiscal policy can help reduce poverty and inequality, particularly during times of economic and financial turbulence. Today, I will focus my remarks on how the Bank is using these lessons to achieve our mandate. I hope that my remarks will contribute to a robust debate over the course of this important conference.
The aspect of fiscal policy that has traditionally received most attention is the need to maintain fiscal sustainability so as to ensure macroeconomic stability. This remains fundamental.
An important reason why developing countries showed such resilience during the recent crisis is that they entered it with substantial fiscal buffers. For example, Mozambique’s public debt as a share of GDP fell from 131 percent in 1999 to 42 percent in 2008, opening up space for countercyclical fiscal stimulus as the country entered the crisis. Peru cut its public debt from 42 percent in 2000 to 25 percent in 2008, allowing the government to counter the downturn with an increase in public expenditure that helped the country avoid recession.
On balance, four years ago developing countries had the fiscal space they needed to avoid the severe cuts in infrastructure and social spending often forced upon them in previous crises. Many countries’ counter-cyclical spending on social safety nets, health and education helped ensure that the poor were not as hard-hit by this crisis as they had been in the past.
Indeed, our preliminary estimates suggest that extreme poverty continued to fall in developing countries during the crisis, although less quickly than previously.
This is impressive news. Developing countries need to be recognized for it.
Still, this is not a time to rest on the achievements of the past. Now is the time to start rebuilding buffers that in many cases have been exhausted. Strong growth across the developing world offers policymakers the opportunity to rebuild buffers without resorting to painful consolidation.
There’s another issue that also deserves a closer look: the quality of fiscal policy. Beyond ensuring macroeconomic stability, governments can use fiscal instruments and policy mixes to deliver poverty reduction and shared prosperity. We have ample research showing that well-managed spending on public goods such as infrastructure, public education and health has a positive impact on growth. Indeed, these types of interventions have been at the core of World Bank Group business for many years. But we have also learned that the returns on these investments can vary significantly from country to country.
Project selection, resource allocation and implementation are crucially important to achieve strong returns on public investment. Country leaders and my colleagues at the Bank Group are working hard to make progress on this front. This is part of what we have begun to call the science of delivery in development. I believe that we can reap enormous gains from managing public investment in a smarter, more strategic way.
Sometimes, growth is not as inclusive as it should be. Government programs can play a critical role to correct this failure. In Brazil, for example, there is very high inequality in market incomes, but the fiscal system reduces income inequality significantly through conditional cash transfer programs, like Bolsa Familia. When I visited Brazil recently, I had the opportunity to see first-hand how these programs work and the vital support they provide to poor families. We are learning from such experiences so we can share them with other countries. Just a couple of weeks ago, I took part in a meeting with the heads of all UN agencies. Together, we reviewed our programs in Tanzania, which after a decade of high growth has not reaped the expected gains in reducing poverty. But now, after learning about experiences in Brazil and elsewhere, Tanzania is considering a conditional cash transfer program.
If we want fiscal policy to help reduce poverty, we need tools to better understand the impact of programs on different segments of society. We should ask ourselves several basic but important questions: How progressive is a government's current tax and transfer system? Who benefits the most from public services? What are the most effective ways for tax and expenditure policies to help reduce poverty and inequality? And how can governments implement these policies in ways that promote sustained growth?
The answers to these questions can shape better policy. But changing policy is never simple. We need a strong knowledge base that shows what has worked and what has failed in a range of situations. We need creative communications campaigns that clearly explain the benefits of policy change to communities. Take one important example -- fossil fuel subsidies. We know that these subsidies are threatening fiscal sustainability in many countries, that they are regressive, and that they are bad for the environment. And yet the political economy of removing fuel subsidies remains complicated. We need to analyze these dynamics and find pragmatic solutions. Let me recognize Christine for the work that the Fund is doing in this area.
I also want to emphasize the special importance of fiscal policy and public financial management in resource-rich developing countries, many of which are low-income. Resource revenues are booming in these countries, due both to elevated commodity prices and large new mineral discoveries. But as recent World Bank research has shown, commodities tend to have low labor intensities and hence contribute little to job creation and poverty reduction. Under these conditions, markets alone may not produce the outcomes countries want.
Properly managed, however, these revenue windfalls can dramatically accelerate poverty reduction and the building of shared prosperity. Chile offers an encouraging example with how it has managed its copper wealth. But mismanaged resource wealth has negative effects on development: by reducing competitiveness, increasing incentives for graft, and often heightening the risk of conflict. This vicious cycle, known commonly as the “resource curse,” often contributes to prolonged economic stagnation and rising poverty.
Questions of fiscal policy are often technically difficult, as well as politically sensitive. That's why I am delighted that all of us have come together today: experts from the World Bank Group, our partners at the IMF, policymakers from developing countries, officials from donor organizations, distinguished academics and others who can contribute to the dialog. The time is right to take a hard look at the evidence and discuss how we can better use fiscal policy to achieve our shared goal of ending extreme poverty and creating shared prosperity. Thank you very much.