Fiscal Policy’s Role in Economic Development
Key Objectives and Impact
Fiscal policy plays a crucial role in shaping the economic landscape of developing countries. Here’s a breakdown of its significance:
Resource Mobilization
To Mobilize Resources: The primary goal of fiscal policy in underdeveloped countries is to mobilize resources in both the private and public sectors. Due to generally low national and per capita income, and low savings rates, governments use fiscal policy to encourage forced savings. This boosts investment and capital formation, accelerating economic development.
Employment Opportunities
To Provide More Employment Opportunities: Because populations in less developed countries often grow rapidly, fiscal policy aims to create employment opportunities through significant government spending. Underdeveloped economies typically suffer from high unemployment.
Economic Stability
Promotion of Economic Stability: Fiscal policy in developing countries is vital for maintaining reasonable internal and external economic stability. Developing countries are vulnerable to international cyclical fluctuations, primarily exporting primary products and importing manufactured goods. A long-term perspective on fiscal policy is crucial to minimize these effects.
Inflation Control
To Check Inflationary Tendencies: Inflation is a major challenge in developing countries due to substantial investments in development. This often creates an imbalance between the demand for and supply of resources. Increased purchasing power, coupled with supply inelasticity (due to structural rigidities, market imperfections, and other bottlenecks), leads to inflationary pressures.
National Income and Distribution
National Income and Proper Distribution: Increasing national income and reducing income and wealth inequalities are critical. As Professor Raja J. Chelliah noted, a rise in per capita income doesn’t automatically improve welfare for all unless there’s equitable distribution. This typically means reducing existing income and wealth disparities.
Optimal Investment
Encourage Socially Optimal Investment: Fiscal policy is crucial for directing investment into strategic industries and public utilities. It also incentivizes private sector investment by assisting new industries and promoting modern production techniques. Investments in social and economic overheads increase social marginal productivity, boosting private investment and capital formation. An optimal investment pattern is essential for successful economic development.
Balance of Payments
Correct Balance of Payments: Many developing countries face unfavorable balance of payments situations. A key objective of fiscal policy is to address and correct this imbalance.