5.1 Fiscal space is critical for diversification: Economic Report on Africa 2007
5.1 Fiscal space is critical for diversification: Economic Report on Africa 2007
shows that macro stability plays a role for the success of diversification efforts. At the
same time, a proactive fiscal policy, especially in terms of promoting public investment,
can support efforts towards diversification. In that respect, the results with
regard to fiscal balances and diversification suggest that a conservative economic
policy, or fiscal conservatism for that matter, may not be good for a country that
is planning to achieve a diversified economy. It should be noted that expansionary
fiscal policies are only as good for diversification as the absorptive capacity of
the economy and the requisite fiscal discipline that ensures that fiscal spending is
directed at building economic production capacities.
The success of an expansionary fiscal policy, assuming an optimal tax regime,
depends to a large extent on the way the deficit is financed. Financing options such
as domestic borrowing (assuming an illiquid money market) or using credit from the
central bank are likely to have the undesirable effect of putting pressure on domestic
interest rates. This situation would undermine the investments that are important to
diversification. Yet, where domestic money markets are liquid with minimal risk of
crowding out private investments, public investment expenditure can be expanded
through domestic borrowing that allows for higher fiscal deficits without any detrimental
effects on the economy.
51 Fiscal space is critical for diversification Economic Report on Africa 2007 - To learn more about this author, visit United Nations Economic Commission for Africa's Website.
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The positive but insignificant result for the impact of fiscal balance on diversification
shows that macro stability plays a role for the success of diversification efforts. At the
same time, a proactive fiscal policy, especially in terms of promoting public investment,
can support efforts towards diversification. In that respect, the results with
regard to fiscal balances and diversification suggest that a conservative economic
policy, or fiscal conservatism for that matter, may not be good for a country that
is planning to achieve a diversified economy. It should be noted that expansionary
fiscal policies are only as good for diversification as the absorptive capacity of
the economy and the requisite fiscal discipline that ensures that fiscal spending is
directed at building economic production capacities.
The success of an expansionary fiscal policy, assuming an optimal tax regime,
depends to a large extent on the way the deficit is financed. Financing options such
as domestic borrowing (assuming an illiquid money market) or using credit from the
central bank are likely to have the undesirable effect of putting pressure on domestic
interest rates. This situation would undermine the investments that are important to
diversification. Yet, where domestic money markets are liquid with minimal risk of
crowding out private investments, public investment expenditure can be expanded
through domestic borrowing that allows for higher fiscal deficits without any detrimental
effects on the economy.
51 Fiscal space is critical for diversification Economic Report on Africa 2007 - To learn more about this author, visit United Nations Economic Commission for Africa's Website.
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