Domestic Resource Mobilization in Developing Asia: Four Policy Issues

In a neoclassical world, intertemporal utility maximization ensures that each household plans its consumption expenditures optimally over its life cycle. Saving is simply the residual between that optimal consumption stream and the household’s income path. Under such ideal conditions, there are no policy issues. In the real world, however, there are at least four major obstacles to this utility-maximizing outcome: (i) financial market imperfections, often aggravated by government; (ii) misguided fiscal policies, particularly with respect to deficit financing; (iii) overpopulation, since children can provide a substitute for saving for old age in some societies; and (iv) foreign debt buildup, since each developing country faces an upward sloping supply of foreign saving. This means that unrestrained foreign borrowing can result in a country-specific risk premium that is too high from the social welfare viewpoint…