Even amongst economists, fiscal policy is not a subject which generally sets the imagination alight, or inflames the passions. Yet the subject is so fundamental to understanding the dynamics of how a modern economy works that a proper understanding of development should really start here. In the 1930s, John Maynard Keynes was aware of this, and put fiscal policy centre-stage in his theory of how to maintain high levels of employment and growth. Over time, however, there have been considerable shifts in the relative importance assigned to fiscal policy. Since the 1970s, and the ascendancy of monetarist approaches to macroeconomic management, demand-management (and by extension, fiscal policy) fell into disrepute-fiscal policy became increasingly relegated to a matter of 'prudent financing' and balancing the budget. Fiscal responses to economic problems became less and less imaginative. In particular, for a time redistribution through fiscal policy was put firmly off the agenda. The simultaneous moves to persuade countries to lower their tariff barriers perhaps put the final nail in the coffin of demand management-as the Mundell-Fleming model reminds us, manipulating fiscal policy with the intention of avoiding the worse fluctuations in the macroeconomic cycle becomes much more hazardous in the context of an open economy. For developing countries, the situation was all the more severe because of the fiscal profligacy and extraordinarily high levels of indebtedness, which made a harsh adjustment inevitable in the 1980s and 90s.
Against such a backdrop, this collection of papers reasserts the importance of fiscal policy for development policy. The book represents a key contribution to the literature on the subject and as the title suggests, the text stresses the role of fiscal policy in promoting poverty, reconstruction and growth. However, the evidence presented is not particularly encouraging. In Chapter 2, for instance, Jha carries out an empirical analysis of 29 mainly low-income countries, and comes to the alarming conclusion that in 26 cases fiscal deficits will not be sustainable over the long-run. Similarly, in Chapter 3, Adam and Bevan study a group of 32 'successful' adjusters. Their analysis confirms what many critics of 'stabilisation' programmes alleged-the success in tackling high inflation left a legacy of low domestic resource mobilisation and an unsatisfactory situation of asset stocks (both government and private) that 'could threaten the countries' ability to enjoy sustained stabilisation' (p. 3). Although the overview presented by Adam and Bevan is generally convincing, this statement is surely understating the scale of the problem, with many developing countries now caught in the trap of having achieved an acceptable degree of stabilisation, but with far lower levels of domestic investment, and consequently growth, than in the period prior to adjustment.
In Chapter 4, McGillivray and Morrissey provide a very thorough review of the econometric evidence of the impact of aid on fiscal aggregates. Given the enormous dependence of low-income countries on aid to finance governmental expenditure, the chapter is clearly an important one. The authors stress that fungibility studies can be misleading, focusing as they do on a partial, static analysis of the composition of spending, often underpinned by empirically questionable assumptions. Arguably, however, their own findings are also somewhat inconclusive-they find that while there is little evidence that aid is redirected to consumption away from investment (an implication of fungibility studies), nor is there much evidence that aid induces significant increases in investment spending.
In Chapter 9, McKay reaffirms the importance of fiscal policy for both growth and distribution, the latter being 'an issue which has been insufficiently considered in most countries ' (p. 215). He points out that the lack of disaggregated datasets has generally prevented developing country governments