The Day After Tomorrow: Fiscal Quality

This article was written by Otaviano Canuto, the World Bank Vice President for Poverty Reduction and Economic Management, and Marcelo Giugale, the Sector Director of Poverty Reduction and Economic Management for the Latin America and the Caribbean Region.

This is the second in a series of blogs where we take a look at the issues and the countries that will be at the forefront of the development agenda, not now, not next year, but over the next 2 to 5 years--as we discuss it in more detail in the recently released book The Day After Tomorrow: A Handbook on the Future of Economic Policy in the Developing World.

Most advanced countries face a post-crisis period in which fiscal adjustment will be the norm. They need more revenues and less expenditure. Their priority is quantity. In contrast, developing countries came in and out of the crisis with relatively strong fiscal positions, and see a horizon of solvency, especially those that export commodities. This gives them an opportunity to improve the functioning of fiscal policy--their priority is quality. There are several reasons to believe that many of them will seize the opportunity.

First, fiscal policy may start leaning more "against the wind," that is, may become more countercyclical. This is not just because of the proliferation of "medium-term budget frameworks," "fiscal rules," and "fiscal responsibility laws," many of which were in place before the crisis. There are also the political rewards that accrued to leaders that had previously accumulated funds and could spend them at the outset of the global recession. Think Chile's former President Bachelet. Imitation is likely.

Second, independent fiscal agencies will be more common. At least in democracies, they will increasingly become the credible, neutral parties that monitor compliance with fiscal norms, cost out initiatives, evaluate impact, and validate forecasts--credit rating agencies do some of this, but lost credibility during the crisis. So imagine developing-country versions of the US Congressional Budget Office and add nosy NGOs galore.

Third, more commodity revenue will flow into sovereign wealth funds. Their value will not be only financial; they will also foster a culture of transparency and professionalism in other areas of the treasury. One of those areas will be the management of the state's non-financial assets. Why insist on transparency in, say, an oil-driven wealth fund if the state-owned oil company operates in secrecy?

Fourth, more governments will adopt performance-based management, initially through results-based budgeting. The technology to define, measure, and disseminate standards has improved. So it is easier to hold governments accountable, especially at the sub-national level where governors and mayors are in closer contact with their constituents.

And fifth, the process of decentralizing fiscal decision-making down to states and municipalities is mutating into "devolution" from the state to the citizen. The logistical mechanisms to transfer cash directly to the poor (from debit cards to cell phones) are now in place in many developing (and developed) countries. It is just a matter of time before those mechanisms will be used for other public services and for all social strata. This kind of state-citizen relationship will improve the quality of fiscal outlays--better targeting, smarter design, less duplication, more progressivity.

To access The Day After Tomorrow: A Handbook on the Future of Economic Policy in the Developing World, please visit: It can also be read online and purchased (World Bank Publications; ISBN 978-08213-8498-5; $35) at, through bookstores, and through the World Bank's network of international distributors

This blog was originally posted on the World Bank Insititute Growth and Crisis website.