Macroeconomic consequences of fiscal deficits in developing countries : a comparative study of Zimbabwe and selected African countries (1980-2008)

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Stellenbosch : Stellenbosch University
Fiscal deficits, which are the end result of fiscal indiscipline and lack of fiscal space, have been the focus of fiscal and macroeconomic adjustment in developed and developing countries. Developments in the euro zone between 2007 and 2011, have reminded policy makers about the macro-economic dangers posed by government debt. The nasty experiences of Portugal, Italy, Greece and Spain forced policy makers in Europe to introduce painful austerity measures. Up to this day, the eurozone debt crisis threatens the survival of the European Union. Although most African countries were not directly affected by the contagion of the euro zone debt crisis, they too had their own structural problems of unsustainable fiscal deficits and bad governance which caused macroeconomic imbalances. This study examines the macroeconomic effects of fiscal deficits and the contribution of bad governance to macroeconomic instability in Zimbabwe. In chapter one the problem and methodology of the study are introduced. The key questions are basically whether deficits are harmful or neutral? Linked to this is of course, the political economy of these deficits, especially the method of financing them and how this affects the macro-economic equilibrium. In order to investigate these issues, this study uses a qualitative and comparative methodology which juxtaposes Zimbabwe’s experiences with those of other developing countries, namely Ghana, Morocco, Zambia and Botswana. These countries are chosen as they collectively depict both cases of good fiscal management (Botswana and Morocco) on the one hand, and bad fiscal management (Ghana and Zambia), on the other. This methodology adequately captures political economy issues which are not capable of being estimated without running the risk of lack of validity and spurious inferences given the softness of data under hyperinflationary conditions that occurred in Zimbabwe prior to 2009. In chapter two the study examines various theoretical propositions on the relationship between the fiscal deficit and selected macroeconomic variables. The traditional theory postulates that the fiscal deficit has a negative impact on macroeconomic performance whereas the Ricardian Equivalence Theorem posits that the impact of the deficit is neutral. Keynesians argue that deficits arising from public expenditure on investment as opposed to consumption actually crowd-in rather than crowd out private sector investment. In theory, there is a close connection between a monetized deficit and inflation. A positive theoretical relationship is also found between the twin deficits (that is, the trade and fiscal deficits). However, the relationship between the budget deficit, interest rates and exchange rate is ambiguous. In chapter three we find that the majority of empirical studies support the view that budget deficits are generally inflationary when they are financed by printing money. A causal link is also found between the budget deficit and trade deficit. However, empirical evidence on the relationship between the deficit, exchange rate and interest rates is largely ambiguous. The comparative politico-economic and fiscal experiences of Ghana, Zambia, Morocco and Botswana in chapter four are used to provide the trajectory for the Zimbabwean case study in chapter 5. The review of the experiences of Ghana and Zambia showed that fiscal indiscipline resulted in high fiscal deficits which led to the deterioration of macroeconomic performance whereas in Morocco and Botswana, fiscal discipline resulted in low fiscal deficits and improved macro-economic performance. But central to the politico-economic performance of these countries, was the issue of bad governance and how this worsened the impact of fiscal deficits. In chapter five the experiences of Zimbabwe confirm the view that fiscal deficits are harmful to the economy. Many years of fiscal indiscipline and bad governance, led to macro-economic instability that resulted in record hyperinflation levels in 2008. Finally, the study concludes that, cumulative fiscal deficits in Zimbabwe since 1980, precipitated macroeconomic instability and fiscal unsustainability. Prolonged fiscal and quasi-fiscal deficits, which were largely financed by printing money, triggered hyperinflation and macroeconomic disequilibria. The lack of fiscal probity and the profligacy of the state, corruption, macroeconomic mismanagement and dirigistic policies, all rolled into one, caused the unprecedented economic meltdown and eventual economic collapse in Zimbabwe. The study finds that fiscal indiscipline in Zimbabwe, other than causing macroeconomic instability, also contributed to an unprecedented humanitarian crisis, never witnessed in a country not waging a war. Going forward, the study recommends a battery of policy measures in the area of institutional, fiscal and macro-economic adjustment in order to control and manage the deficit in Zimbabwe.
Thesis (PhD)--Stellenbosch University, 2013.
Dissertations -- Economics, Theses -- Economics, Budget deficits -- Africa, Budget deficits -- Zimbabwe, Fiscal policy -- Africa, Fiscal policy -- Zimbabwe, Budget deficits -- Economic aspects -- Africa, Budget deficits -- Economic aspects -- Zimbabwe