CONFIDENTIAL
                                                                                EDS2006-0399
                                                                                  March 29, 2006
                                                                                   05:26:41 PM


Statement by Jiayi Zou, Executive Director for China
Date of Meeting: March 30, 2006

            Fiscal Policy for Growth and Development: An Interim Report


We welcome today’s discussion on Development Committee Meeting background paper “Fiscal
Policy for Growth and Development”. We thank management and staff for presenting us the
informative and well elaborated document. In general, we support the analysis and main findings
of the paper.

General comments
We share the views of the paper emphasizing the roles of fiscal policy in promoting growth and
poverty reduction to achieve MDGs which had been overlooked in many developing countries
by over-emphasizing the objective of macroeconomic and fiscal stability. In fact, growth can be
achieved by properly creating fiscal space without undermining macroeconomic and fiscal
stability. We welcome the Bank’s initiative to re-exam the role of fiscal policy. We think as a
knowledge bank, the Bank should take strategic look at the role of fiscal policy and ways create
fiscal space to help the developing member countries to address development challenges.

Growth and Stability
Growth and stability do not contradict each other; on the contrary, they tend to reinforce each
other in most cases. Without growth, macroeconomic and fiscal stability can not be sustainable;
on the other hand, growth can not be sustained without macroeconomic and fiscal stability.
Experience of some developing countries shows that economic stability via fiscal and monetary
tightening policy mainly is maintained at the expense of economic slowdown and diminishing
fiscal space, and proved not sustainable in the end. We support the Bank to take a comprehensive
approach in reviewing the relationship between growth and stability. We encourage the Bank to
draw lessons from past experience in dialogue with developing member countries, and move
away from Washington Consensus to a more systematic, scientific and practical doctrine.

Directions and Operational Implications
We support the four directions identified by the Bank at this stage: (1) fiscal policy should
incorporate both the stabilization and growth objective, (2) the composition and efficiency of
expenditure is a key to achievement of outputs and outcomes, (3) a growth oriented fiscal policy
must take account of initial fiscal and macroeconomic conditions, and (4) countries with weak
capacity should prioritize improvements to their fiscal institutions. In particular, we would like
to emphasize that fiscal policy and its role to promote development is a broad agenda, and there
is no one-size-fits-all prescription. The Bank should support developing member countries’ own
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efforts to formulate their fiscal policies base on their initial fiscal and macroeconomic
conditions.

The four directions can have important operational implications for both the Bank’s analytical
work in country programs and investment activities. We support the Bank to continue to work
on Public Expenditure Reviews (PER) to address the link between spending and outcomes,
identify public financing resources through fiscal diamond model, and enable the budget
management system to better serve policy objectives. Apart from that, we find it might be useful
if the Bank could incorporate PER findings into country’s Country Assistance Strategy. In
addition, by identifying a country’s potential fiscal space and growth constraints, the Bank can
play a catalytic role in directing private and public resource through its own investment projects
(including IFC and MIGA) into the weak sectors of developing member countries.

Governance
We concur with staff that governance and good institutions is important to public expenditure
efficiency and growth as well as fiscal space. We think strengthening governance in fiscal
management might be a good priority for developing countries to build overall governance
institutions given the importance of fiscal discipline and its impacts on public expenditure
efficiency. We encourage the Bank to continue to provide technical assistance and capacity
building for developing countries in this regard.

Further Steps
We support the Bank to continue the analytical work on fiscal policy for growth and
development. Since fiscal policy in a development context is a broad issue, we encourage the
Bank to integrate related internal analytical and research resources and work jointly with IMF on
this important subject for further investigation, especially materialized in pilot country case
studies. We expect the discussion of the full report early next year.




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