To mobilize resources for financing the development programmes in the pubic sector. 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. The rise in prices raises demand for more wages. The purpose of the paper is to examine the effect of fiscal policy variables on economic growth in South Africa. Disclaimer Copyright, Share Your Knowledge Tripathi suggests the following steps to raise the saving ratio which provides the required finance for developmental schemes: (ii) Increasing the rate of existing taxes. In nut shell, fiscal policy should be viewed from a larger perspective keeping in view the balanced growth of various sectors of the economy. Monetary Policy in Developing Countries This is a very incomplete summary of the Monetary Policy Workshop in London, October 22, 2011. 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). Content Filtrations 6. In such countries, even if full employment is not achieved, the main motto is to avoid unemployment and to achieve a state of near full employment. C. harder to conduct because taxes are difficult to collect. The four main components of fiscal policy are (i) expenditure, budget reform 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. Therefore fiscal policy has an important role to play in mobilizing saving for capital formation through taxation and public borrowing. cyclical fiscal policy. In short, fiscal policy should try to remove the bottlenecks and structural rigidities which cause imbalance in various sectors of the economy. In short, fiscal measures as well as monetary measures go side by side to achieve the objectives of economic growth and stability. Image Guidelines 5. D. It is the most effective in the total quantum savings in an economy. Therefore, fiscal policy plays a leading role in maintaining economic stability in the face of internal and external forces. To promote economic growth in the private sector by providing incentives to save and invest; 3. Fiscal policy refers to the taxation, expenditure and borrowing by the Government. Copyright 10. “Arthur Smithies, fiscal policy aims primarily at controlling aggregate demand and leaves private enterprise its traditional field- the allocation of resources among alternative uses.”. A newly developing economy is encompassed by a ‘vicious circle of poverty’. It adds to the existing literature on fiscal redistribution in developing economies by taking a global (as opposed to regional) developing-country perspective of fiscal redistribution. Prof. R.N. 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. The principal objectives of fiscal policy in a developing economy are: 1. Moreover, it should strengthen physical controls of essential commodities, granting of concessions, subsidies and protection in the economy. 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. Report a Violation, Role of Fiscal Policy in Developing Countries, Role of Fiscal Policy for Mobilization of Resources in Developing Countries. 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. Therefore, fiscal measures such as taxation, public borrowing and deficit financing etc. 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. The papers carry the names of the authors and should be cited accordingly. Capital formation, however, can also be facilitated by taxation, deficit spending and foreign borrowing. 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. 4. In order to overcome these handicaps, a suitable fiscal and taxation policy is called for. Here it must be remembered that projects of social marginal productivity should wisely be selected keeping in view its practical implication. 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. To curb the use of additional purchasing power, heavy import duty on consumer goods and luxury import restrictions are essential. Policy as Regards Rate of Interest. should be used properly so that production, consumption and distribution may not adversely affect. It should aim at curtailing conspicuous consumption and investment in unproductive channels. Prof. Raja J. Chelliah recommends that fiscal policy must aim at the following for attaining rapid economic growth: (i) Raising the ratio of saving (s) to Income (y) by controlling consumption (c); (iii) Encouraging the flow of spending into productive way; (iv) Reducing glaring inequalities of income and wealth. It is also because private ownership dominates the entire structure of the economy. 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. Generally, inequality in wealth persists in such countries as in the early stages of growth, it concentrates in few hands. In the period of boom, export and import duties should be imposed to minimize the impact of international cyclical fluctuations. But a high rate of economic growth cannot be achieved and maintained without stability in the economy. 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. 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 Before publishing your Articles on this site, please read the following pages: 1. Besides public investment, private investment can also be encouraged through tax holidays, concessions, cheap loans, subsidies etc. Prof. Nurkse believed that “inflationary pressures are inherent in the process of investment but the way to stop them is not to stop investment. Objectives of Fiscal Policy in a Developing Economy (1) Mobilization of Resources. 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. Resources need to be mobilised so that there can be funds for financing the development programs in the public sectors. 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. This website includes study notes, research papers, essays, articles and other allied information submitted by visitors like YOU. On the contrary, high taxation may draw away resources in a specific sector. As it is true, the national income and per capita income of underdeveloped countries is very low. Regional disparities can also be removed by providing incentives to backward regions. 3. 5. Equitable Distribution of Income and Wealth: It is needless to emphasize the significance of equitable distribution of income and wealth in a growing economy. To mobilise resources for economic growth, especially for the public sector; 2. There is a general agreement that economic growth and stability are joint objectives for underdeveloped countries. Privacy Policy3. The main goal of fiscal policy in a newly developing economy is the promotion of the highest possible rate of capital formation. In underdeveloped countries, the structure of rate of interest in … Fiscal policy plays an increasingly important role in many developing countries. Their population is increasing at an explosive rate which necessitates rapid economic development to meet the requirements of the rapidly growing population. Monetary Policy in Developing Economies Developing countries face problems in successfully implementing monetary policy. Fiscal measures, to a larger extent, promote economic stability in the face of short-run international cyclical fluctuations. 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. Prohibited Content 3. 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. Following are the main objectives of fiscal policy in the developing countries. Therefore, to reduce unemployment and under-employment, the state should spend sufficiently on social and economic overheads. Sixth objective of foreign policy in developing countries is to increase the rate of capital formation. 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. A developed country may adopt full employment or price stabilisation or exchange stability as a goal of the monetary policy. Restraining Inflationary Pressure in the Economy: One of the important objectives of fiscal policy is … Share Your PPT File. Monetary policy alone will not do. It will increase capital formation in the country. Fiscal policy aims at the acceleration of the rate of investment in the public as well as in private sectors of the economy. 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. Fiscal policy, in the first instance, should encourage investment in public sector which in turn effect to increase the volume of investment in private sector. In the rural areas attempts can be made to encourage domestic industries by providing them training, cheap finance, equipment and marketing facilities. Public expenditure, subsidies and incentives can favorably influence the allocation of resources in the desired channels. The study used Pooled OLS and Instrumental Variable Least Square methodology. 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. Expenditure on all these measures will help in eradicating unemployment and under-employment. 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. Capital goods and consumer goods fail to keep pace with rising income. The most important instrument of government intervention in the economy today is that of fiscal or budgetary policy. It should promote the economy as a whole which in turn helps to raise national income and per capita income. Besides, extreme inequalities create political and social discontentment which further generate economic instability. Without a liquid market in their government debt interest rate, information may be distorted and open market operations difficult to implement. Once a country comes out of the clutches of backwardness, it stimulates investment and encourage capital formation. To Accelerate the Rate of Economic Growth: Primarily, fiscal policy in a developing economy, should aim at achieving an accelerated rate of economic growth. 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. During the period of recession, government should undertake public works programmes through deficit financing. One objective of foreign policy is the development of resources for private sector through borrowings. For an under-developed economy, the main purpose of fiscal policy is to accelerate the rate of capital formation and investment. 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. (iv) Public borrowing of non-inflationary nature. 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