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Globalization and the Fiscal Autonomy of the State

By J. Mohan Rao | Political Economy Research Institute | March 1, 1999

Abstract: Public finance in less developed countries is the focal point - both as source and destination - of many of the dilemmas and conflicts posed by development. Revenue mobilization for the allocative, distributive and stabilization functions of the state is severely constrained by the narrowness and instability of the tax base. The latter, in turn, is the result of political constraints rooted in socioeconomic inequalities, economic constraints arising from the structures of production and trade, and administrative constraints reflecting a weakly developed state apparatus. As a consequence, public infrastructure and human development expenditures, which are among the most effective vehicles available for reaching the poor and promoting growth at the same time, persistently fall short of socially desired levels.

While fiscal constraints do not always reflect the need to finance current and capital outlays for development, public investment is often the first victim of fiscal troubles. Moreover, states must typically resort to modes of taxation and budget financing that violate accepted canons of economic efficiency and `good’ macroeconomic policy. For much the same reasons - political, economic and administrative - social transfers through the budget must also rely on inefficient and leaky buckets. Hence, from both the expenditure and revenue sides, public squalor exacerbates private squalor. Overcoming fiscal constraints is both cause and consequence of a cumulative process of internal integration. The intra-national division of labor, as Adam Smith observed, is limited by the extent of the market: specialization is a public good producing external benefits that are jointly consumed.

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