Subnational Fiscal Policy in Large Developing Countries: Some Lessons from the 2008-09 Crisis for Brazil, China and India
In response to the Great Recession of 2008, many national governments implemented fiscal stimuli packages in 2009 and 2010 to prevent further declines in aggregate demand and to jump start their economic recovery. Where subnational governments resp...
| Main Authors: | , |
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| Format: | Policy Research Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, D.C.
2013
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2013/04/17580907/subnational-fiscal-policy-large-developing-countries-some-lessons-2008-09-crisis-brazil-china-india http://hdl.handle.net/10986/14447 |
| Summary: | In response to the Great Recession of
2008, many national governments implemented fiscal stimuli
packages in 2009 and 2010 to prevent further declines in
aggregate demand and to jump start their economic recovery.
Where subnational governments responded with fiscal
contraction, as in the United States, the impact was muted;
where states/provinces also expanded expenditures, as in
China and India, the impact was magnified. Increases in
recurrent expenditure, which were made in Brazil and India,
acted as short-term stimulants; additional public
investment, as in China, appears to have had a more lasting
impact on growth. Large developing countries typically
exhibit high interregional inequality in levels of
development and global integration, resulting in
differential magnitude and timing of the crisis impact. For
example, coastal states in India were affected more severely
and quickly than landlocked states; revenue moved in
opposite directions in the two types of state in 2009. Where
fiscal stress varies widely across subnational entities,
central transfers alone cannot prevent pro-cyclicality of
subnational fiscal response to a recession. There is need
for flexibility in subnational borrowing within a
sustainable fiscal framework. Many Indian states were able
to maintain or accelerate their spending thanks to the
additional borrowing permitted in 2009 and 2010. In
comparison, limited borrowing capacity and lack of
flexibility in federal grants restricted the contribution of
Brazilian states to fiscal stimulus. Legal prohibition of
subnational borrowing induced China's provinces to
finance additional investments through extra-budgetary
borrowing by nongovernment entities, with significant fiscal
risks on account of contingent liabilities. |
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