Front-Loaded or Back-Loaded Fiscal Adjustments: What Works in Emerging Market Economies?

Abstract

This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. This paper investigates the political and economic determinants of successful fiscal adjustment in 25 emerging market economies from 1980 to 2001. The results show that large and back-loaded fiscal adjustments have the highest likelihood of success. Fiscal consolidations based on expenditure cuts increase the probability of approaching and achieving fiscal sustainability but are insufficient to maintain it unless accompanied by revenue reforms. Adjustment episodes launched in countries where governments enjoy a parliamentary majority and do not face imminent elections, are found to be more successful. Fiscal consolidations undertaken under IMF-supported programs also have a higher probability of success. JEL Classification Numbers: C41, H30

Public Debt Reduction Efforts in South-East Asia – Which Strategy Works?1

“…In an analysis of 25 emerging market economies during the period 1980 to 2001, Clements et al (2004) investigate the variables that led to successful fiscal consolidation, i.e., an improvement of the general government primary budget balance. The authors consider the timing of the adjustment and find that fiscal consolidation, for which countries achieved the decline of the deficit during the second half of the period of deficit reductions, had the highest likelihood of success.…”