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. Following are the main objectives of fiscal policy in the developing countries. 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. Fiscal policy plays an increasingly important role in many developing countries. Accelerating the rate of economic development, 5. It should aim at curtailing conspicuous consumption and investment in unproductive channels. The principal objectives of fiscal policy in a developing economy are: ADVERTISEMENTS: 1. Privacy Policy 8. The main goal of fiscal policy in a newly developing economy is the promotion of the highest possible rate of capital formation. There are several peculiar characteristics of a developing country which necessitate the adop­tion of a special fiscal policy which ensures a rapid economic growth. In the period of boom, export and import duties should be imposed to minimize the impact of international cyclical fluctuations. 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 … Content Guidelines 2. “Arthur Smithies, fiscal policy aims primarily at controlling aggregate demand and leaves private enterprise its traditional field- the allocation of resources among alternative uses.”. Therefore, fiscal policy plays a leading role in maintaining economic stability in the face of internal and external forces. Fiscal measures like taxation and public expenditure programmes, can greatly affect the allocation of resources in various occupations and sectors. They also lack technical know-how. cyclical fiscal policy. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. This website includes study notes, research papers, essays, articles and other allied information submitted by visitors like YOU. To mobilise resources for economic growth, especially for the public sector; 2. As a result of rise in income, aggregate demand exceeds aggregate supply. Equitable Distribution of Income and Wealth: It is needless to emphasize the significance of equitable distribution of income and wealth in a growing economy. Therefore fiscal policy has an important role to play in mobilizing saving for capital formation through taxation and public borrowing. 32. D. The first and foremost objective of fiscal policy in a developing economy is to achieve and maintain full employment in an 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. Equitable distribution of income and wealth. Among developing countries, the decade of the 1990s was characterized by two major macroeconomic developments. Therefore, to reduce unemployment and under-employment, the state should spend sufficiently on social and economic overheads. Decisions on fiscal policy, especially if properly synchronised with monetary policy, can help smoothen business cycles, ensure adequate public investment and redistribute incomes. 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. 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. Share Your PPT File. Here it must be remembered that projects of social marginal productivity should wisely be selected keeping in view its practical implication. The study used Pooled OLS and Instrumental Variable Least Square methodology. Our mission is to provide an online platform to help students to discuss anything and everything about Economics. As it is true, the national income and per capita income of underdeveloped countries is very low. The first objective of the fiscal policy is to mobilize resources for the development of... (2) Acceleration of Economic Growth. The instability caused by external forces is corrected by a policy, popularly known as ‘tariff policy’ rather than aggregative fiscal policy. For attaining these objectives the study used data from 1990 to 2014. Above all, these countries suffer from deficiency of capital. Therefore, fiscal policy in under-developed countries has a different objective to that of advanced countries. This further gives rise to repeated wage-price spirals. They are caught up in a vicious circle of poverty. Generally following are the objectives of a fiscal policy in a developing economy: 3. Another seventh major objective of foreign policy is to protect the economy from inflation and damaging competition from foreign 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. Prof. R.N. 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. The price rise generated by demand pull reinforced by cost push inflation leads to further widening the gap. 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. Sixth objective of foreign policy in developing countries is to increase the rate of capital formation. Once a country comes out of the clutches of backwardness, it stimulates investment and encourage capital formation. These fluctuations cause variations in terms of trade, making the most favourable to the developed and unfavorable to the developing economies. 5. Higher taxes are imposed on luxury goods and lower on consumer goods. Macroeconomic policies, as traditionally measured, ... at the behavior of macroeconomic policy variables -- capturing fiscal… The rise in prices raises demand for more wages. To promote economic growth in the private sector by providing incentives to save and invest; 3. TOS 7. A more viable goal for macroeconomic policy in developing countries is avoiding procyclicality, ensuring the continuity of public services for the economy, and supporting the vulnerable. 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. 3. If this situation is not effectively controlled, it may turn into hyper inflation. 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. Macroeconomics : Fiscal Policy and Budget Deficit: Chapter 15 Fiscal policy means government's plan for expenditure, revenues and borrowing to finance fiscal deficits. In order to overcome these handicaps, a suitable fiscal and taxation policy is called for. The most important instrument of government intervention in the economy today is that of fiscal or budgetary policy. But a high rate of economic growth cannot be achieved and maintained without stability in the economy. 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. Report a Violation, Role of Fiscal Policy in Developing Countries, Role of Fiscal Policy for Mobilization of Resources in Developing Countries. 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. 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. Prof. Nurkse believed that “inflationary pressures are inherent in the process of investment but the way to stop them is not to stop investment. Besides public investment, private investment can also be encouraged through tax holidays, concessions, cheap loans, subsidies etc. These expenditures would help to create more employment opportunities and increase the productive efficiency of the economy. 1.6 Research hypothesis Hypothesis 1: There is a positive impact on the fiscal policies used in the Chinese economy. For an under-developed economy, the main purpose of fiscal policy is to accelerate the rate of capital formation and investment. Monetary Policy in Developing Economies Developing countries face problems in successfully implementing monetary policy. (iv) Public borrowing of non-inflationary nature. Capital goods and consumer goods fail to keep pace with rising income. The fiscal deficit management adopted in developing countries including Nigeria have been effective in solving the country’s current account deficit problem. There are vast and diverse resources, human and material, which are lying underutilised. Disclaimer 9. Content Guidelines 2. In the rural areas attempts can be made to encourage domestic industries by providing them training, cheap finance, equipment and marketing facilities. Image Guidelines 5. This item is … B. easier to conduct than in developed economies because politicians tend to be more socially-minded. 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. Expenditure on all these measures will help in eradicating unemployment and under-employment. One objective of foreign policy is the development of resources for private sector through borrowings. In nut shell, fiscal policy should be viewed from a larger perspective keeping in view the balanced growth of various sectors of the economy. should be used properly so that production, consumption and distribution may not adversely affect. Welcome to! 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. 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. There is a general agreement that economic growth and stability are joint objectives for underdeveloped countries. Before publishing your Articles on this site, please read the following pages: 1. A newly developing economy is encompassed by a ‘vicious circle of poverty’. Prohibited Content 3. Moreover, it should strengthen physical controls of essential commodities, granting of concessions, subsidies and protection in the economy. Share Your Word File 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. It is the most effective in the total quantum savings in an economy. In a developing country, economic instability is manifested in the form of inflation. 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. Disclaimer Copyright, Share Your Knowledge Objectives of Fiscal Policy in Developing Countries! A redistributive tax policy should be highly progressive and aim at imposing heavy taxation on the richer and exempting poorer sections of the community. Monetary policy alone will not do. Define Fiscal policy, discuss the objective of fiscal policy Introduction. Before publishing your articles on this site, please read the following pages: 1. Thus, these result in inflationary gap. The purpose of the paper is to examine the effect of fiscal policy variables on economic growth in South Africa. Capital formation, however, can also be facilitated by taxation, deficit spending and foreign borrowing. 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. Content Filtrations 6. It is also because private ownership dominates the entire structure of the economy. In a very rapidly developing economy it may be quite difficult to determine the neutral rate of interest for policy purposes. 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. These economies will be helpful for widening the size of the market, reducing the cost of production and increasing the social marginal productivity of investment. Generally, inequality in wealth persists in such countries as in the early stages of growth, it concentrates in few hands. Regional disparities can also be removed by providing incentives to backward regions. Policy as Regards Rate of Interest. Tax policy is … The principal objectives of fiscal policy in a developing economy are: 1. Such countries have weak infra­structure, i.e, they lack adequate means of transport and communications, roads, ports, highways, irrigation and power. In short, fiscal policy should try to remove the bottlenecks and structural rigidities which cause imbalance in various sectors of the economy. A developed country may adopt full employment or price stabilisation or exchange stability as a goal of the monetary policy. Objectives of Fiscal Policy in a Developing Economy (1) Mobilization of Resources. Desirable levels of prices: – The desirable level of prices can be achieved with the change in rate of taxes. In this way, public expenditure and public sector investment have a special role to play in a modern state. Besides, extreme inequalities create political and social discontentment which further generate economic instability. The papers carry the names of the authors and should be cited accordingly. Their population is increasing at an explosive rate which necessitates rapid economic development to meet the requirements of the rapidly growing population. TOS4. 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 properly planned investment will not only expand income, output and employment but will also step up effective demand through multiplier process and the economy will march automatically towards full employment. 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. Restraining Inflationary Pressure in the Economy: One of the important objectives of fiscal policy is … Hypothesis 2: There is a positive impact on the fiscal policies on the macro-economic activities of China. Therefore, redistributive expenditure should help economic development and economic development should help redistribution. 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. 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.”. To mobilise resources for economic growth, especially for the public sector; 2. Copyright 10. 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. It needs accelerated rate of capital formation. Share Your PDF File 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. 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 in developing countries is thus used to achieve which are different from advanced countries. Monetary Policy in Developing Countries This is a very incomplete summary of the Monetary Policy Workshop in London, October 22, 2011. In order to gear the economy, the government can push the growth of social infrastructure through fiscal measures. Therefore, a balanced growth is needed to breakdown the vicious circle which is only feasible with higher rate of capital formation. The potential of fiscal policy to promote these objectives is therefore of great interest to developing country policymakers. Fiscal policy refers to the taxation, expenditure and borrowing by the Government. It will increase capital formation in the country. Tax exemptions and tax concessions may help a lot in attracting resources towards the favored industries. To ensure equitable distribution of income and wealth so that fruits of economic growth are fairly distributed. 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). They can be controlled by various other ways of which the chief is the powerful method of fiscal policy.”.

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