RICARDIAN EQUIVALENCE AND CROWDING OUT IN ASIA

Rising budget deficits in both developed and developing countries have drawn considerable attention recently. Two aspects of these deficits have drawn particular attention. First, whether the effect of a given rate of government expenditure has a crowding-out effect on private expenditure. Second, whether this effect in any way depends on how the expenditures are financed, that is, whether by taxes or by government debt. This latter issue is discussed under the rubric of what is called the Ricardian equivalence proposition. Briefly, it maintains that under certain assumptions the effect of a given rate of government expenditure on aggregate demand is independent of whether these expenditures are financed by taxes or by debt issue. Hence the proposition 'equivalence'. Given the serious policy implications of this proposition, there has been considerable empirical work on this issue. But most of the work has been concentrated on the US and very little on the developing countries, which is rather surprising given the fact that these countries are experiencing large budget deficits too. The aim of this paper is to provide some evidence relating to ten developing countries. More specifically, using annual data for the period 1963-86, we test whether crowding-out and the Ricardian equivalence proposition hold for these countries.