Fiscal instability has been one of the major obstacles to sustained growth in developing countries. Because expenditure needs often outpace revenue capacity, structural budget deficits emerge and frequently lead to excessive monetary expansion. This is one reason why many developing countries have experienced recurring economic crises during their growth process.
In contrast, Korea maintained a conservative fiscal stance throughout most of its high-growth era. Despite the absence of explicit fiscal rules such as a balanced-budget rule, policymakers consistently adhered to an implicit principle of “spending within revenue.” What explains this remarkable fiscal discipline? We argue that the answer lies partly in a fragmented budget structure that created strong check-and-balances. and partly in the careful design of the central bank’s quasi-fiscal activities.
Fiscal instability has been one of the major obstacles to sustained growth in developing countries. Because expenditure needs often outpace revenue capacity, structural budget deficits emerge and frequently lead to excessive monetary expansion. This is one reason why many developing countries have experienced recurring economic crises during their growth process.
In contrast, Korea maintained a conservative fiscal stance throughout most of its high-growth era. Despite the absence of explicit fiscal rules such as a balanced-budget rule, policymakers consistently adhered to an implicit principle of “spending within revenue.” What explains this remarkable fiscal discipline? We argue that the answer lies partly in a fragmented budget structure that created strong check-and-balances. and partly in the careful design of the central bank’s quasi-fiscal activities.