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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