Fiscal policy and financing for development in developing countries.

Summary This thesis asks the question of how fiscal policy could be used for development financing. It identifies and explores the channels through which developing countries can effectively mobilize resources (domestic and external) for development financing. To do so, we conduct policy-oriented research (using appropriate statistical and econometric tools) and make policy recommendations to developing countries. The first part of this thesis focuses on the issue of external resource mobilization in developing countries (Chapter 1 and Chapter 2). In Chapter 1, we analyze the effects of government spending on interest rate spreads in emerging countries. We show that developing countries could have better access to international financial markets by increasing their public investment and reducing their current expenditure. Specifically, spending on human capital (education and health) and other public infrastructure significantly reduces credit spreads. They should also improve the quality of governance since financial markets reward well-governed countries with better borrowing conditions. In Chapter 2, we examine the strength of fiscal policy rules in terms of improving developing countries' access to international capital markets. We find that the adoption of fiscal rules reduces interest rates on sovereign bond holdings and therefore improves access to financial markets. We explain this result through the credibility channel of fiscal policy: credible governments are rewarded in international financial markets with low interest rates and high sovereign debt ratings. Our results provide evidence that the adoption and proper implementation of fiscal policy rules is a substantial way for policymakers to improve developing countries' access to international financial markets. The second part of this thesis focuses on what developing countries could do to improve domestic resource mobilization (Chapter 3 and Chapter 4). Indeed, we explore the relationship between the adoption of fiscal rules and the reduction of income inequality (Chapter 3) and find that the adoption of fiscal rules reduces income inequality. These countries will be able to finance their development in a sustainable way (through reducing inequality) by adopting fiscal rules. In addition, we assess the effects of combating illicit financial flows on tax revenue mobilization (Chapter 4). We find that countries that comply with the Financial Action Task Force (FATF) Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) Recommendations (cooperative countries) raise higher amounts of tax revenue than countries that do not comply with the FATF Recommendations (non-cooperative countries). Therefore, developing countries will be able to raise more tax revenue by implementing policies to prevent illicit financial flows. At the same time, they need to build good institutions.