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Guest post by: International Monetary Fund Become an Author

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There are many economic, social, and environmental challenges along
the path to sustainable development, and there is no panacea to address
them all. Rather, accelerated development will require progress in multiple
policy areas, with the right policy mix and focus varying from country
to country. Countries may also need to make difficult choices regarding
trade-offs between competing policy objectives. Achieving more sustainable
development will thus require a concerted effort from developing
countries, the international community, and the international financial
institutions.
Developing Countries
Sound fiscal and macroeconomic policies are essential. Sustainable
growth and poverty reduction are possible only with prudent macroeconomic
and, in particular, fiscal policies.
Tax and expenditure policies should also be designed to minimize adverse
incentive effects, which can hinder economic growth. Tax policies
should seek to raise revenue in a way that least distorts labor supply, consumption,
saving, and other decisions. Expenditure policies should not
deter the active participation of the poor in the labor market and the
process of economic development.

Higher spending on poverty reduction is not sufficient to achieve better
social outcomes. Increased spending must be accompanied by steps to
strengthen the efficiency and targeting of these outlays. There is significant
scope to make existing spending more effective in fostering development
by reallocating it to inputs that are most needed, such as textbooks
and medicines. There is also scope to increase the share of outlays that
most directly benefit the poor, such as those for primary education and
preventive health care. To ensure that economic reforms do not hurt the
poor, countries will need to integrate PSIA into their policymaking
processes with a view to both modifying the design of their economic policies
and implementing well-targeted social safety nets.
Fiscal policies must also provide appropriate incentives for the efficient
and sustainable use of natural resources. Harmful subsidies and inappropriate
tax policies that lead to the excessive exploitation of natural
resources should be phased out. The prices of energy products should reflect
their social costs, and subsidies for pesticide and fertilizer use—
which contribute to overfarming of land—should be eliminated and replaced
with government expenditure programs that more directly benefit
small farmers. At the same time, industrial countries should implement
similar policies to ensure that the world’s environmental resources are not
overexploited.
A strengthening of governance and public expenditure management
systems is also needed. Countries need to move ahead to address their
most serious deficiencies in public expenditure management; HIPCs, in
particular, must work together with the international community to help
implement their action plans to improve their capacity to track povertyreducing
spending. For many countries, a useful step toward strengthening
transparency would be to adopt the IMF’s Code of Good Practices on
Fiscal Transparency.
It will also be necessary for countries to monitor the actual delivery and
impact of poverty-reducing programs on human and natural resource development.
Within the context of the PRSP process or other country-owned
poverty strategies, countries should continue to monitor the impact of
poverty-reducing spending on social indicators that measure human development.
Improved and more detailed data on social indicators, combined
with more disaggregated data on poverty-reducing spending by program,
will facilitate a more solid understanding of the relationship between government
spending and social outcomes. In this regard, improvements in PEM systems—and the concomitant ability to track poverty-reducing
spending—will also improve understanding of the complex link between
government spending and sustainable development. There are welcome
signs that PRSPs are increasingly reflecting recognition of the role that
proper use of natural resources can play in reducing poverty.

Fiscal Dimensions of Sustainable Development
Prepared for
World Summit on Sustainable Development
Johannesburg, August 26–September 4, 2002

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