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Big Government, High Debt, and Fiscal Adjustment in Small States

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Author Info
Stephanie Medina Cas
Rui Ota

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Abstract

Using a new fiscal dataset for small states, this paper analyzes the link between country size, government size, debt, and economic performance. It finds that on average small states have larger governments and higher public debt. Although there are intrinsic factors that explain why governments are bigger in small states, those with smaller governments and lower public debt tend to grow faster and are less vulnerable. Large fiscal adjustments, primarily through expenditure restraint, can underpin growth, although sometimes other elements can also impact. Since better governance is associated with lower debt, fiscal adjustment should be supported by governance improvements.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 08/39.

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Length: 45 pages
Date of creation: 08 Feb 2008
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Handle: RePEc:imf:imfwpa:08/39

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Keywords: Governance ; Fiscal policy ; Public debt ; Exchange rate regimes ; Transparency ;

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This paper has been announced in the following NEP Reports: References listed on IDEAS
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    Other versions:
  3. Alesina, Alberto & Wacziarg, Romain, 1998. "Openness, country size and government," Journal of Public Economics, Elsevier, vol. 69(3), pages 305-321, September. [Downloadable!] (restricted)
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  6. Harvey W. Armstrong & Robert Read, 1998. "Trade and Growth in Small States: The Impact of Global Trade Liberalisation," The World Economy, Blackwell Publishing, vol. 21(4), pages 563-585, 06. [Downloadable!] (restricted)
    Other versions:
  7. Alesina, Alberto & Spolaore, Enrico & Wacziarg, Romain, 2005. "Trade, Growth and the Size of Countries," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 23, pages 1499-1542 Elsevier. [Downloadable!] (restricted)
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  8. Ratna Sahay, 2005. "Stabilization, Debt, and Fiscal Policy in the Caribbean," IMF Working Papers 05/26, International Monetary Fund. [Downloadable!]
  9. Yan Sun, 2003. "Do Fixed Exchange Rates Induce More Fiscal Discipline?," IMF Working Papers 03/78, International Monetary Fund. [Downloadable!]
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  11. Roberto Perotti, 1999. "Fiscal Policy In Good Times And Bad," The Quarterly Journal of Economics, MIT Press, vol. 114(4), pages 1399-1436, November. [Downloadable!] (restricted)
  12. Hans P. Lankes & Katerina Alexandraki, 2004. "The Impact of Preference Erosion on Middle-Income Developing Countries," IMF Working Papers 04/169, International Monetary Fund. [Downloadable!]
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