Macroeconomic stabilization and pro-poor budgetary policy in the globalized economy

This paper argues that both from an efficiency point of view (maintaining support for an economic reforms promising rapid economic growth) and an equity viewpoint (shielding the poor from the worst effects of a downturn) it is important to append a pro-poor fiscal policy to an economic stabilization program. The paper outlines the basic contours of such a strategy and argues that although the fiscal deficit in many developing countries appears to be unsustainable, a policy package involving tax and expenditure reforms when the economy is not in crisis can help reduce the risk from high fiscal deficits. Furthermore, such tax and expenditure reforms can also be fine tuned to help the poor. The paper also discusses policy measures to shield the poor in anticipation of a downturn and also the contours of a pro-poor fiscal adjustment once it becomes necessary to have macroeconomic adjustment. Given the wide heterogeneity among developing countries, the paper makes policy prescriptions for specific contexts and countries. Finally, the paper considers some policy measures that can be taken at the international level to provide support to developing countries in their efforts to make pro-poor adjustment feasible.