ABSTRACT
This chapter aims to the pattern of fiscal policy, and whether it was successful in overcoming the political problems associated with moving from out of a low-tax, low-expenditure vicious circle in other words, in confronting the problems associated with raising taxes in an often fragile state. It focuses on the links posited in that diagram, explore the influence of democratic governance and institutional structure on the tax ratio, and trace the link from tax revenue through to public expenditure. The chapter discusses what is known as a 'new growth theory' relationship, in which the real exchange rate is the influence selected for special scrutiny. The real exchange rate is particularly crucial in the context of overcoming Dutch disease, a key element in the natural resource curse, and draws attention to the political economy determinants of competitiveness and exchange rate flexibility discussed above, notably the political leverage of aid donors and agricultural smallholders.
