International shocks and public finance strategies (India, Pakistan)

International shocks such as wars and commodity price fluctuations produce financial shortfalls for regimes. In such circumstances, regimes may employ accommodational, domestic, and international strategies to obtain financial resources. Accommodational strategies frequently involve “money creation” and are relatively minor adjustments. Domestic strategies entail a higher domestic tax burden. International strategies represent attempts to obtain the required resources from foreign sources by external borrowing, foreign aid, and other means. The particular strategy chosen has consequences for state-building and development. Over a broad range of developing countries, a strong “political survival” assumption suggests that internationalist strategies will always be preferred. An alternative “political capacity” hypothesis predicts that domestic strategies will be chosen in stronger states. Regime type, “discount rates” of political leaders, central bank independence, and autonomous trends are important explanations of regime financial strategies generally. A major finding from the regression analysis of cross-national, multi-year data is that stronger states have better access to international financing and that all states usually avoid an increased tax burden. A case study examination of India and Pakistan confirms that policy-makers and observers see public finance strategies as intersubstitutable, and that policy-makers have historically preferred to delay or avoid politically costly choices altogether. The dominance of international strategies supports the political survival prediction over the political capacity one.