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Trade Liberalization and the Fiscal Squeeze: Implications for Public Investment
Author(s) -
Khattry Barsha
Publication year - 2003
Publication title -
development and change
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.267
H-Index - 93
eISSN - 1467-7660
pISSN - 0012-155X
DOI - 10.1111/1467-7660.00312
Subject(s) - economics , debt , free trade , international economics , government revenue , liberalization , government spending , revenue , fiscal policy , panel data , investment (military) , monetary economics , tax revenue , macroeconomics , economic policy , politics , finance , market economy , welfare , law , political science , econometrics
This article examines the impact of trade liberalization on the level and structure of government expenditures across countries, with particular emphasis on low income countries. It develops the argument that the policies employed during trade liberalization have resulted in a fiscal squeeze as a result of declining tax revenues and rising interest expenditures. To surmount this fiscal hurdle, expenditures on physical capital, which have negligible political ramifications, have been reduced. Other more politically sensitive expenditures, such as spending on social capital, have been financed by incurring additional debt. However, additional debt has exerted upward pressure on interest payments, further exacerbating the fiscal situation. The statistical analysis carried out to examine the evidence uses panel data for eighty developing and industrialized countries over the period 1970–98 and employs a fixed–effects regression framework to account for country–specific characteristics. The results indicate that trade liberalization has indeed resulted in declining revenues and higher interest expenditures and that these factors have contributed to the observed decline in infrastructure spending.