In nut shell, fiscal policy should be viewed from a larger perspective keeping in view the balanced growth of various sectors of the economy. The main objectives of fiscal policy in the case of developing countries are: •Increasing rate of investment •Encouraging a socially optimum pattern of investment •Reducing inequalities in income and worth •Reducing unemployment •Controlling inflationary tendencies Three stances of fiscal policy Fiscal policy refers to the taxation, expenditure and borrowing by the Government. Therefore, a balanced growth is needed to breakdown the vicious circle which is only feasible with higher rate of capital formation. Once a country comes out of the clutches of backwardness, it stimulates investment and encourage capital formation. Fiscal policy plays an increasingly important role in many developing countries. In this context, Prof. Keynes made the following recommendations to achieve full employment in an economy: (a) To capture the excessive purchasing power and to curb private spending: (b) Compensate the deficiency in private investment through public investment; (c) Cheap money policy or lower interest rates to attract more and more private entrepreneurs. Besides, extreme inequalities create political and social discontentment which further generate economic instability. D. For an under-developed economy, the main purpose of fiscal policy is to accelerate the rate of capital formation and investment. It is the most effective in the total quantum savings in an economy. The tax policy should be such that can be focused towards effective deployment of all available resources and can be used in the implementation of other development efforts. Share Your PPT File. Objectives of Fiscal Policy in Developing Countries! Our mission is to provide an online platform to help students to discuss anything and everything about Economics. Fiscal policy is the use of government revenue collection (mainly taxes) and expenditure (spending) to influence the economy fiscal policy deals with taxation and government spending and is often administered by an executive under laws of a legislature. Moreover, it should strengthen physical controls of essential commodities, granting of concessions, subsidies and protection in the economy. Therefore, in developing economies, inflation is a permanent phenomena where there is a tendency to the rise in prices due to expanding trend of public expenditure. As it is true, the national income and per capita income of underdeveloped countries is very low. In the period of boom, export and import duties should be imposed to minimize the impact of international cyclical fluctuations. Define Fiscal policy, discuss the objective of fiscal policy Introduction. But a high rate of economic growth cannot be achieved and maintained without stability in the economy. To ensure equitable distribution of income and wealth so that fruits of economic growth are fairly distributed. It should aim at curtailing conspicuous consumption and investment in unproductive channels. Copyright 10. It needs accelerated rate of capital formation. Prohibited Content 3. It should promote the economy as a whole which in turn helps to raise national income and per capita income. The monetary policy in a developing economy will have to be quite different from that of a developed economy mainly due to different economic conditions and requirements of the two types of economies. To promote economic growth in the private sector by providing incentives to save and invest; 3. SIGNIFICANCE OF THE STUDY This study will throw more light into the fact that fiscal deficit siphon funds from the private sector investment retarding growth and ultimately reducing the standards of living. The economists now hold the government intervention through fiscal policy is essen­tial in the matter of overcoming recession and inflation as well as of promoting and accelerating economic growth. In modern times, the objectives of fiscal policy are as follows: (i) Best possible provision of Resources: One of the main objectives of fiscal policy in developing countries is to mobilize economic resources.It should be formulated so as to secure use and optimum allocation of economic resources like money, men and material. Macroeconomic policies, as traditionally measured, ... at the behavior of macroeconomic policy variables -- capturing fiscal… On the contrary, high taxation may draw away resources in a specific sector. Before publishing your Articles on this site, please read the following pages: 1. In fact, fiscal policy is a powerful instru­ment in the hands of the Government by means of which it can achieve the objectives of develop­ment. A redistributive tax policy should be highly progressive and aim at imposing heavy taxation on the richer and exempting poorer sections of the community. A developed country may adopt full employment or price stabilisation or exchange stability as a goal of the monetary policy. Macroeconomics : Fiscal Policy and Budget Deficit: Chapter 15 Fiscal policy means government's plan for expenditure, revenues and borrowing to finance fiscal deficits. Therefore, to reduce unemployment and under-employment, the state should spend sufficiently on social and economic overheads. Accelerating the rate of economic development, 5. Before publishing your articles on this site, please read the following pages: 1. should be used properly so that production, consumption and distribution may not adversely affect. Therefore, redistributive expenditure should help economic development and economic development should help redistribution. To promote economic growth in the private sector by providing incentives to save and invest; 3. Capital formation, however, can also be facilitated by taxation, deficit spending and foreign borrowing. In this way, public expenditure and public sector investment have a special role to play in a modern state. Resources need to be mobilised so that there can be funds for financing the development programs in the public sectors. For attaining these objectives the study used data from 1990 to 2014. Restraining Inflationary Pressure in the Economy: One of the important objectives of fiscal policy is … “These principles encapsulate the key characteristics of any sound … cyclical fiscal policy. These expenditures would help to create more employment opportunities and increase the productive efficiency of the economy. C. harder to conduct because taxes are difficult to collect. Such countries have weak infra­structure, i.e, they lack adequate means of transport and communications, roads, ports, highways, irrigation and power. The objectives of fiscal policy are also to encourage capital formation in the country.Saving and investments are low in most of the developing countries like Bangladesh because their national income low, Therefore, fiscal policy can be used to increase the level of savings, investment, and capital formation.Consumption can be reduced and savings can be increased through appropriate fiscal and taxation policy. Public expenditure, subsidies and incentives can favorably influence the allocation of resources in the desired channels. Fiscal policy must be designed to be performed in two ways-by expanding investment in public and private enterprises and by diverting resources from socially less desirable to more desirable investment channels. Therefore, fiscal policy must be designed to be performed in two ways-by expanding investment in public and private enterprises and by diverting resources from socially less desirable to more desirable investment channels. Another seventh major objective of foreign policy is to protect the economy from inflation and damaging competition from foreign countries. To restrain inflationary forces in the economy in order to ensure price stability; and. The study by IMF staff, Evolving Monetary Policy Frameworks in Low-Income and Other Developing Countries, aims to provide guidance to this group of countries, and uses the same set of principles that characterize effective monetary policy frameworks in countries with scope for independent monetary policy. This item is … Capital goods and consumer goods fail to keep pace with rising income. Equitable distribution of income and wealth. (iv) Public borrowing of non-inflationary nature. A newly developing economy is encompassed by a ‘vicious circle of poverty’. Tax exemptions and tax concessions may help a lot in attracting resources towards the favored industries. This website includes study notes, research papers, essays, articles and other allied information submitted by visitors like YOU. In most developing countries, an effective fiscal policy is: A. easier to conduct than in developed economies because there are fewer institutional checks and balances. Share Your PDF File Fiscal policy aims at the acceleration of the rate of investment in the public as well as in private sectors of the economy. In a very rapidly developing economy it may be quite difficult to determine the neutral rate of interest for policy purposes. The material builds on contributions from participants in the open discussion and in the presentations (for the latter, see in particular the material presented by Paolo Pesenti and Chris Adam). Here it must be remembered that projects of social marginal productivity should wisely be selected keeping in view its practical implication. For this, suitable fiscal policy of the government can be devised to bridge the gap between the incomes of the different sections of the society. In this connection it is significant to quote the views of Mrs. Hicks, who observed, “now that fiscal policy has been developed as an established economic function of a government, every country is anxious to gear its public finance in pursuit of the twin aims of stability and growth, but their relative importance is very differently regarded from one country to another… A steady rate of expansion will tend to reduce the violence of such fluctuations as may occur; a successful full employment policy will provide an atmosphere which is congenial for growth.”. In fact, fiscal measures of the government can induce the private entrepreneurs to take active participation for mobilizing resources at least in the long run. Therefore, fiscal policy plays a leading role in maintaining economic stability in the face of internal and external forces. The principle objectives of fiscal policy in a developing economy are as under: To mobilise resources for financing development; To promote economic growth in the private sector; To control inflationary pressure in the economy These fluctuations cause variations in terms of trade, making the most favourable to the developed and unfavorable to the developing economies. Content Filtrations 6. So, for the purpose of bringing economic stability, fiscal methods should incorporate built-in-flexibility in the budgetary system so that income and expenditure of the government may automatically provide compensatory effect on the rise or fall of the nation’s income. Image Guidelines 5. Similarly, luxurious items, which are consumed by the higher section, may be subject to heavy taxation. Therefore, fiscal policy in under-developed countries has a different objective to that of advanced countries. Privacy Policy3. Tax policy is … Capital assumes a central place in any development activity in a country and fiscal policy can be adopted as a crucial tool for the promotion of the highest possible rate of capital formation. They also lack technical know-how. The first objective of the fiscal policy is to mobilize resources for the development of... (2) Acceleration of Economic Growth. The item Tax systems and policy objectives in developing countries: general principles and diagnostic tests represents a specific, individual, material embodiment of a distinct intellectual or artistic creation found in International Bureau of Fiscal Documentation. In the early stages of economic development, the government must try to build up economic and social overheads such like transport and communication, irrigation, flood control, power, ports, technical training, education, hospital and school facilities, so that they may provide external economies to induce investment in industrial and agricultural sectors of the economy. The most important instrument of government intervention in the economy today is that of fiscal or budgetary policy. Above all, direct curtailment of consumption and socially unproductive investment may be helpful in mobilization of resources and the further check of the inflationary trends in the economy. There are several peculiar characteristics of a developing country which necessitate the adop­tion of a special fiscal policy which ensures a rapid economic growth. Plagiarism Prevention 4. Sometimes, the policy of protection is a useful tool for the growth of some socially desired industries in an under-developed country. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. Above all, these countries suffer from deficiency of capital. Disclaimer Copyright, Share Your Knowledge Content Guidelines 2. In short, fiscal policy should try to remove the bottlenecks and structural rigidities which cause imbalance in various sectors of the economy. Hypothesis 2: There is a positive impact on the fiscal policies on the macro-economic activities of China. As a result the level of saving is very low in these economies. Share Your Word File Monetary Policy in Developing Countries This is a very incomplete summary of the Monetary Policy Workshop in London, October 22, 2011. The first and foremost objective of fiscal policy in a developing economy is to achieve and maintain full employment in an economy. Objectives of Fiscal Policy: Fiscal policy refers to the government programmes of making both automatic and discretionary changes in taxation, public expenditure and borrowing in order to achieve the intended goals of economic growth, full employment, income equality … developing countries, stimulus may be less effective because monetary transmission is weak and fiscal space and fiscal multipliers are often small. In order to gear the economy, the government can push the growth of social infrastructure through fiscal measures. Thus, these result in inflationary gap. Objectives of Fiscal Policy in a Developing Economy (1) Mobilization of Resources. They can be controlled by various other ways of which the chief is the powerful method of fiscal policy.”. The fiscal deficit management adopted in developing countries including Nigeria have been effective in solving the country’s current account deficit problem. There is no doubt that the Government bud­getary or fiscal policy must be sound, keeping in view the needs and requirements of a developing economy. There is a general agreement that economic growth and stability are joint objectives for underdeveloped countries. “Arthur Smithies, fiscal policy aims primarily at controlling aggregate demand and leaves private enterprise its traditional field- the allocation of resources among alternative uses.”. Decisions on fiscal policy, especially if properly synchronised with monetary policy, can help smoothen business cycles, ensure adequate public investment and redistribute incomes. The objective of fiscal policy is to maintain the condition of full employment, economic stability and to stabilize the rate of growth. There are vast and diverse resources, human and material, which are lying underutilised. Content Guidelines 2. BIN 3020 7 Objective 4: To identify how fiscal policy will be improving people’s life in China. This Policy will help to raise the level of aggregate savings in the economy and create capital for bringing about a qualitative improvement in it. In an environment of low growth in the advanced economies, developing countries have a strong incentive to seek out new domestic engines for efficiency and productivity growth, as well as for greater equity in development. Prof. Nurkse believed that “inflationary pressures are inherent in the process of investment but the way to stop them is not to stop investment. To curb the use of additional purchasing power, heavy import duty on consumer goods and luxury import restrictions are essential. Objectives of Fiscal Policy in Developing Countries: In developing countries, taxation, Government expenditure and borrowing have to play a very important role in accelerating economic development. To mobilise resources for economic growth, especially for the public sector; 2. 1.6 Research hypothesis Hypothesis 1: There is a positive impact on the fiscal policies used in the Chinese economy. During the period of recession, government should undertake public works programmes through deficit financing. In short, fiscal measures as well as monetary measures go side by side to achieve the objectives of economic growth and stability. One objective of foreign policy is the development of resources for private sector through borrowings. The rise in prices raises demand for more wages. Desirable levels of prices: – The desirable level of prices can be achieved with the change in rate of taxes. The potential of fiscal policy to promote these objectives is therefore of great interest to developing country policymakers. Expenditure on all these measures will help in eradicating unemployment and under-employment. The main goal of fiscal policy in a newly developing economy is the promotion of the highest possible rate of capital formation. In other words, fiscal policy should aim at rapid economic development and must encourage investment in those channels which are considered most desirable from the point of view of society. The instability caused by external forces is corrected by a policy, popularly known as ‘tariff policy’ rather than aggregative fiscal policy. Welcome to EconomicsDiscussion.net! Prof. R.N. Therefore, fiscal measures such as taxation, public borrowing and deficit financing etc. Fiscal policy in developing countries is thus used to achieve which are different from advanced countries. Fiscal measures like taxation and public expenditure programmes, can greatly affect the allocation of resources in various occupations and sectors. 4. Sixth objective of foreign policy in developing countries is to increase the rate of capital formation. Underdeveloped countries are encompassed by vicious circle of poverty on account of capital deficiency; in order to break this vicious circle, a balanced growth is needed. Their population is increasing at an explosive rate which necessitates rapid economic development to meet the requirements of the rapidly growing population. While we could all think of many other challenges to the conduct of monetary policy, let me stop at these three: keeping inflation low, stable and predictable; avoiding the episodes of financial instability that occur periodically even when inflation is under control; and the special challenge of continuing to make good monetary policy in the face of an unsupportive fiscal environment. To reduce inequalities and to do distributive justice, the government should invest in those productive channels which incur benefit to low income groups and are helpful in raising their productivity and technology. 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