Macroeconomic Consequences of Fiscal Deficits in Developing Countries
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MACROECONOMIC CONSEQUENCES OF FISCAL DEFICITS IN DEVELOPING COUNTRIES: A comparative study of Zimbabwe and selected African countries (1980-2008) TAPIWA LEONARD JAISON MASHAKADA Dissertation presented for the degree of Doctor of Philosophy (Economics) at the University of Stellenbosch Promoter: Professor BW Smit Co-promoter: Professor S van der Berg Stellenbosch, March 2013 Stellenbosch University http://scholar.sun.ac.za DECLARATION I, the undersigned, hereby declare that the work contained is my own original work and that I have not previously in its entirety or in part submitted it at any university for a degree. Stellenbosch University http://scholar.sun.ac.za DEDICATION This thesis is dedicated to my late mother, Margaret Mhere, May Her Soul Rest In Eternal Peace. Stellenbosch University http://scholar.sun.ac.za ACKNOWLEDGEMENTS Although a few words do not do justice to their great contributions, I would like to thank my promoters – Prof Ben Smit and Prof Servaas van der Berg at the Department Of Economics, University of Stellenbosch, who encouraged me to press ahead with the studies despite my busy schedule at home. Special thanks are due to my promoters for their passionate desire to see me complete this doctorate, which admittedly consumed their energies, especially at times when progress appeared to be painfully slow. I remain forever indebted to them not only for the academic guidance, but equally for their assistance which at one stage enabled me to secure a university grant which greatly assisted me with my official registration as a student in order to continue with my doctoral studies. It would be amiss for me not to mention people who typed my thesis at various stages, including Constance Dube, Maria Cabral, Maria Chidyausai, and Cindrella Poitgieter, who at different stages were more than willing to do the data capturing for me. Many thanks go to my family for their encouragement and support. My sincere appreciation goes to all those whom I may not have mentioned by name but who nevertheless inspired me and contributed in one way or another to make this research possible. My profound thanks are also due to the management of the Roland’s Uitspan Guest Lodge in Stellenbosch for providing me with comfortable and affordable accommodation during my frequent stay at campus. Stellenbosch University http://scholar.sun.ac.za Finally, I want to thank God the almighty for blessing me with fit physical and mental health which enabled me to work on this study and complete it during my lifetime. Stellenbosch University http://scholar.sun.ac.za TABLE OF CONTENTS TABLE OF CONTENTS ...................................................................... i LIST OF TABLES ............................................................................ iii ABSTRACT .................................................................................... iv CHAPTER 1 .................................................................................... 1 INTRODUCTION ........................................................................... 1 1.1 Introduction .................................................................... 1 1.2 The Problem .................................................................... 2 1.3 Hypothesis ..................................................................... 10 1.4 Objectives ...................................................................... 10 1.5 Methodology ................................................................... 11 1.6 Justification for the study ................................................. 12 1.7 Delimitation of Scope ....................................................... 13 1.8 Summary and Conclusion ................................................. 13 CHAPTER 2 .................................................................................. 15 MACROECONOMIC CONSEQUENCES OF FISCAL DEFICITS: Review of Theoretical Literature ................................................. 15 2.1 Introduction ................................................................... 15 2.2 Fiscal Deficits: Definitions and Conceptual Issues ................. 16 2.3 Schools of thought on fiscal deficits ................................... 31 2.4 Fiscal deficits and macroeconomic implications .................... 43 2.5 Summary ....................................................................... 58 CHAPTER 3 .................................................................................. 60 MACROECONOMIC CONSEQUENCES OF FISCAL DEFICITS: Empirical Evidence .................................................................. 60 3.1 Introduction ................................................................... 60 3.2 Budget deficits and crowding out ....................................... 60 3.3 Budget Deficits and Growth .............................................. 62 3.4 Budget Deficits and Inflation ............................................. 64 3.5 The Twin Deficits ............................................................. 70 3.6 Budget Deficits and Exchange Rates ................................... 75 3.7 Budget Deficits and Interest Rates ..................................... 80 3.8 Summary ....................................................................... 82 CHAPTER 4 .................................................................................. 84 FISCAL DEFICITS AND ECONOMIC PERFORMANCE: The Experiences of Selected African Countries .......................................... 84 4.1 Introduction ................................................................... 84 4.2 Sub-Saharan Africa ......................................................... 85 4.2.1 General overview of macro-economic performance in Sub- Saharan Africa before structural adjustment programmes .. 85 4.2.2 General-Economic Performance of Sub-Saharan Africa under Structural Adjustment Programmes (1980-1999) .............. 91 4.2.3 Sub-Saharan Africa’s Economic Renaissance (1999 – 2008)99 4.3 Ghana ......................................................................... 107 4.3.1 Introduction .............................................................. 107 4.3.2 Political history .......................................................... 107 4.3.3 Government finances .................................................. 108 4.3.4 Budget Deficits and Economic Mismanagement ............... 116 4.3.5 Conclusion ................................................................ 127 i Stellenbosch University http://scholar.sun.ac.za 4.4 Morocco ....................................................................... 129 4.4.1 Introduction .............................................................. 129 4.4.2 Fiscal Expenditure ...................................................... 130 4.4.3 Budget Deficits and Economic Performance .................... 134 4.4.4 Conclusion ................................................................ 139 4.5 Zambia ........................................................................ 139 4.5.1 Introduction .............................................................. 139 4.5.2 Fiscal Expenditure ...................................................... 140 4.5.3 Budget Deficits and Economic Performance .................... 143 4.5.4 Conclusion ................................................................ 156 4.6 Botswana ..................................................................... 157 4.6.1 Introduction .............................................................. 157 4.6.2 Public Finances .......................................................... 157 4.6.3 Conclusion ................................................................ 166 4.7 Summary and Conclusions .............................................. 167 CHAPTER 5 ................................................................................ 169 The Experiences of Zimbabwe (1980 – 2008) ................................ 169 5.1 Introduction ................................................................. 169 5.2 Political Background ....................................................... 170 5.3 Overview ..................................................................... 172 5.4 The Genesis of Budget Deficits in Zimbabwe (1980-1988) ... 179 5.4.1 Growth with Equity ..................................................... 179 5.4.2 Transitional National Development Plan (TNDP): 1982-1984 ............................................................................... 184 5.4.3 Short Term Stabilization (1985-1988) ............................ 186 5.4.4 Macroeconomic Implications ........................................ 189 5.5 Fiscal deficits and macroeconomic consequences during the period of market based reforms (1989-1996) .................... 196 5.5.1 Introduction .............................................................. 196 5.5.2 Economic Structural Adjustment Program (ESAP), 1990-1995 ............................................................................... 199 5.5.3 Implications for Macroeconomic Stability ....................... 203 5.6 Fiscal deficit and implications on macroeconomic performance during the period of failed controls (1997-2003) ................ 205 5.7 Fiscal deficit and implications on macro-economic performance during the period of political chaos (2004-2008) ................ 212 5.7.1 Acceleration of the budget deficit: quasi-fiscal operations during the era of political chaos (2004 – 2006) ............... 216 5.7.2 Impact of bad governance and political blunders